| As the media reminds us on an almost daily basis, | | | | station. Furthermore the statistics do not fully |
| many sectors of the real estate market are in | | | | reflect the willingness of banks and distressed |
| the midst of one of worst adjustments since the | | | | sellers to negotiate on a case by case basis in |
| Great Depression. This is evidenced by the most | | | | these markets. As an example, one of our |
| recent California Association of Realtors (CAR) | | | | investors is currently purchasing a SFR in Vallejo |
| publication on existing home sales which reported | | | | for $104,500. In this instance the property is being |
| a price decline in the median selling price of 35.3% | | | | acquired for a 65% discount relative to the implied |
| from a year earlier. During the worst 12 month | | | | valuation on June of 2007 (based on comparable |
| period during the Great Depression U.S. housing | | | | sales from First American Title Company). |
| prices fell by a less dramatic 10.5%. For investors | | | | Although this 65% discount is tantalizing it should |
| with high tolerance for risk, it may now be time | | | | not be a deciding factor in the decision to |
| to embrace the timeless proverb "buy low - sell | | | | purchase the property. |
| high" and start sifting through the wreckage for | | | | Using a discount to market value approach is a |
| bargains. And while bargains exist, they are not | | | | fools approach to valuation at this point in the |
| available universally across all locations or property | | | | current environment, because it assumes that |
| types. Investors must know where to look, have | | | | historical prices were rational. A discount to |
| proper guidance and understand the proper | | | | market value won't pay the mortgage and it does |
| methods for valuation. The sectors with the most | | | | not ensure that the home will be affordable to |
| opportunity are single family residential properties | | | | prospective buyers when an investor is ready to |
| (SFRs) in class B or B-minus locations of suburbs | | | | sell. Investors should alternatively use an income |
| outside major metropolitan areas. Properties in | | | | approach or an affordability approach to valuation. |
| many metropolitan markets have adjusted very | | | | For example, consider the Vallejo property |
| little, while towns in extended metropolitan areas | | | | discussed previously. From an income approach |
| (MSAs) have deteriorated acutely. | | | | (assuming a 30% down-payment), the cash on |
| Using the San Francisco MSA as an example, CAR | | | | cash return is about 11.6% per year and the cap |
| statistics released for June 2008 indicate a year | | | | rate is 9.54%. From an income standpoint this is |
| over year decline of 4.3% for San Francisco | | | | an attractive cash yield. It handily exceeds the |
| proper. Comparatively, the median selling price in | | | | national average money market rate of 2.99% |
| Vallejo, California, a suburb about 30 miles outside | | | | annual percentage rate and the 2.90% average |
| of San Francisco, has decreased a much more | | | | dividend yield for S&P 500 non-zero dividend |
| dramatic 37.3% year over year. Vallejo is still | | | | stocks. This additional return offers substantial |
| accessible to San Francisco via public | | | | compensation for the additional risk and |
| transportation including frequent commuter bus | | | | management responsibilities required for this |
| routes, Ferry access, casual car-pool access and | | | | investment. |
| BART access from the Richmond, California | | | | |