Owning property with a non-spouse

As a real estate professional, I come into contact with individuals who are planning to purchase a property with another person not their spouse. This is an extremely tricky area because the partners could have a falling out or something happens to one of them to change their mind about their share of the ownership.

• One, a father told me that his son and his girlfriend were going to buy a home together. I suggested that his son and girlfriend needed a written contract or an agreement as they weren't yet married. The father's remark was something like "of course they will get married, I'll disown my son if he doesn't marry his girlfriend". Now, I was just trying to help and head off some potential problems that may have occurred due to their non-spousal relationship.

• In a second situation, I was working with a young professional women who wanted to purchase a commercial building to relocate her business to. Her other real estate investment was in a partnership with three other women. She suggested that the three others buy out her portion so that she could proceed with her business plans. When my client received a ridiculously low offer, she had no recourse other than to hire an appraiser and attorney to convince her partners of the proper valuation. No written contract was ever discussed or completed as they all were "good friends". This situation continued to unravel for over a year and even then still had each of the partners paying large legal fees to their own attorneys.

Attending a recent broker's tour meeting at the headquarters of the Silicon Valley Association of Realtors, I heard Nancy Chillag speak to these types of arrangements. Nancy Chillag is an attorney who has practiced law for over 20 years and specializes in construction law, representing both contractors and homeowners. What follows are my notes of her presentation. Hopefully, they will help you keep away from problems that do not have to even come up.

Nancy's first piece of advice is to always have a written contract.

Her second bit of advice was to ask some basic questions before getting into a partnership:

• Who's going to contribute what to the venture?
• How are negative cash flows going to be handled?
• How are repairs and maintenance expenses going to be handled?
• How is the non-payment by a partner going to be handled? By a loan from the other partner(s)?
• What type of situations will cause one or more of the partners to a buyout of the remaining partner? This is commonly referred to as a "buyout provision" as part of an exit plan. For instance, many corporations have a succession plan to prepare for the replacement of key executives.
• How will the value of the property be determined? One manner could be that each partner hires an appraiser and then the appraised amounts are averaged.

Of course, nothing in state law requires that an owner stay with another owner that he/she doesn't want. If the situation disintegrates enough, Nancy said that may call for a partition lawsuit where one partner sues to partition his/her share. Courts normally order a sale of the property and make it subject to their approval. A costly method to employ that often results in less interest by buyers as they don't want to get involved in someone else's legal web.

If you are considering a real estate investment with at least one non-spouse owner, get things taken care of in advance. Contact Nancy Chillag of Chillag & Associates in Menlo Park. Visit Nancy's website at www.chillag.com. She has also authored "Building by the Book: Legal Advice for Contractors" and "How to Survive a Remodel" a book I have in my library.

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January Silicon Valley Real Estate Market Update

This information summary and analysis uses MLS Listings Inc. (MLS) transactional data for December 2007.



For single family homes in Santa Clara County, December saw the fewest closings (closed escrow) of not only any December but any month going back to 1984, when the MLS first started publishing data! There were 488 closings in the month with 450 initiated sales (accepted offers) that indicates that closings in January will be lower still.


This lower closings record occurred in each of the counties I track closely: Santa Clara, San Mateo, Santa Cruz and Monterey.


Inventory of available homes was 4,031 in December compared to a high of 4,925 in late October. Since then, we've seen a higher than normal level of listings expire at the end of October and again at or near year-end. Normally, inventory of available homes decreases during the late fall months due to seasonal factors. I suspect that we'll see a jump in inventory either in January or February as at least some of those homes come back on the market for another try.


Days of Unsold Inventory (DUI) or the intersection of the inventory (supply) with the recent sales level (demand), shows Santa Clara County at 303, San Mateo County at 190, Santa Cruz County at 351 and Monterey County at 579. Clearly, these are all indicating a buyer's market condition as a reading of DUI above 90 depicts. For comparison, a seller's market will have a DUI of less than 45 and a balanced market will have a DUI between the two. However, real estate is local (down to the neighborhood level) and market conditions can vary within each county and even within cities by a large amount.



For instance, within Santa Clara County, the Mountain View, Los Altos and Palo Alto area has the best market climate in the county with a DUI reading of 83 while South County (Morgan Hill, San Martin and Gilroy) has the worst reading of 698 followed closely by a 662 reading for East Valley part of San Jose. In San Mateo County, the best market climate is in Foster City with a DUI reading of 70 contrasting with a 210 reading on its coast that includes Half Moon Bay and Pacifica. The following is a ranking of selected Santa Clara County cities or areas with their current DUI readings:

• Los Altos, Mountain View, Palo Alto - 83
• Cupertino - 94
• Almaden Valley - 120
• Los Gatos, Saratoga - 126
• Campbell - 128
• Cambrian - 148
• Sunnyvale - 152
• Willow Glen - 163
• Milpitas - 210
• North Valley - 263
• Downtown SJ - 275
• Evergreen - 303
• South San Jose - 446
• East Valley - 662
• Morgan Hill, Gilroy, San Martin - 698

The median price for single family homes in Santa Clara County was $799,000 in December and compares to the record high reached in April 2007 of $868,400. This is a decrease of $69,000 or about 8.0%. Much of the increase to the record price was the result of a mix shift from lower priced homes to higher priced homes. In other words, less transactions out of the total occurred in lower priced homes and a higher percentage occurred in higher priced homes, resulting in an increase in the median. This mix shift was predominately caused by the mortgage problem that started in February when lenders started to increase their scrutiny of and place a higher standard on underwriting loans for borrowers hitting entry-level homes the hardest.

Median prices for single family homes by county in December 2007 were:

• Santa Clara County - $799,000
• San Mateo County - $875,000
• Santa Cruz County - $546,000
• Monterey County - $520,000

Has this drop in median prices been felt evenly throughout the county? Absolutely not. With seller's markets in the northwest portion of Santa Clara County (Palo Alto, Los Altos, Mountain View), their characteristics are price appreciation along with good demand whereas those affordable priced home communities have characteristics like a buyer's market with price depreciation and very poor demand.



We call the "sweet-spot" of the market that price range which has the lowest DUI. For December the $1,000,000 to $2,500,000 range is the most brisk. Next comes the $750,000 to $1,000,000 range and then the $2,500,000 to $5,000,000 range. This is unusual because a normal market has the more affordable priced homes with the lowest DUI.



For condo/townhouses the picture is similar but slightly better with a DUI reading of 264. Real estate investors take heart as the DUI picture has degraded substantially to a reading of 529. This means under the current rate of sales of multi-unit properties, there are about 1.5 years of supply! Even though rents have increased about 10% during both 2006 and 2007, the demand is just not there making this the best time for an investment purchase since 1994. Lenders have substantially increased the borrower's requirements to obtain a loan for investor property purchases. Does this foretell a price drop? We'll have to wait and find out.



Why follow all this, spending time dissecting statistics, reviewing trends and investing time doing old-fashioned real estate analysis? Simply, with this information I am armed with the latest information to provide my clients an advantage when it comes time to make a change in the market. Newspapers and other sources tend to generalize too much (i.e., the national real estate market, the Bay Area real estate market, etc.) and you lose the fineness of being able to use information strategically to make better decisions.



This effort forms the foundation of more effective strategies I advise my clients whether or not to buy or sell or just wait!



If you have any comments or questions, please feel free to post them here or send me an email at tom.mcevoy@remax.net.



Thanks for reading!

Why you should consider me to help you buy your next investment property

Contemplating on making an investment in real estate? Would this be your first, second, fifth? Find out how an agent with financial, investment and business experience can advise you to purchase or ignore a real estate investment.



In order to make an informed decision, you must be able to decipher operating statements, cash flows, rent schedules, and the like. Or, work with an agent who has done this for companies as well as investors in real estate. I take an investment approach to helping my clients with real estate investments.



The old saying "garbage in, garbage out" is appropriate with investing in real estate. When you go about buying a home to live in you place an emphasis on "soft" things like quality of the neighborhood, schools, community benefits, the size of the house and lot, and features in addition to the price and loan rates to see if you're able to pay for it!



An investor looks at potential investment candidates in a different manner -- they look at how it will benefit them in a financial sense. You need an agent with analytical skills on your team to advise how one investment property will compare with another. And an agent who can and will compare a real estate investment with an altogether different investment!

In analyzing a real estate investment, one needs to project or forecast what different expenses will be in future years. Unfortunately, information provided by listing agents (remember garbage in!) mostly provide the expenses and perspective of the seller and their experience. That doesn't help you, the buyer, and can actually hurt you tremendously. Many investments were sold sight-unseen by merely showing an investor a page-full of numbers that the listing agent and/or seller made up! Many of these investments were located out of state and are not performing satisfactorily for their owners.

When I analyze a property on behalf of my client, I look at what will likely happen to the numbers in the future and how it will fit into the investor's current and future portfolio of investments. You need someone with experience in developing and populating what's called "proforma" operating statements before any decision can be made to complete the purchase.

After all operating expenses have been estimated, there needs to be careful analysis and consideration of the major ratios inherent in analyzing investment properties. Most notable would be an analysis of Gross Rent Multiplier (GRM) which is calculated by dividing gross annual rents by the list price. This can be compared to other similar investment candidates. Another such indicator is called the CAP rate which is short for capitalization rate. The CAP rate is calculated by dividing net operating income before taxes by the list price to arrive at a percentage or yield equivalent. I provide both these analyses and others as well as important scrutiny of the investment's "cost of capital" using real, current rates.

While searching for and analyzing investment candidates, you need an agent who will "get into the numbers" and provide advice that will eliminate emotions or "knee-jerk" decisions that so often occurs. It is part of helping the client make the best decision possible. This agent has told investors "no" many times and is not afraid of doing so again! My goal is to serve my client at the highest possible level.

You also need an agent who is adept at reading and following market trends to keep investors away from potential problems. I research market areas to determine to best time to enter or exit from them. For example, I have a client with investments in the Phoenix area who was thinking about selling. Luckily, when I queried them, they didn't have to sell. So I recommended they retain their real estate investments and keep them rented out. They want me to alert them when the market condition in that area is more favorable for them to sell.

I tell my clients "cheaper is not always better and more expensive is not always more valuable". You can quote me on that!

To learn more about me, please click on the My Background link under my photo in the right column.

Let me know if you just want to talk. You can always feel free to contact me with any questions or comments.

Thanks for reading!