Tag Archives: real-estate

CONUNDRUM: TAKE INVESTMENT LOSS OR WAIT IT OUT?

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In the past month, I had conversations with a friend in San Francisco regarding his condo and with a different friend who invested some money shortly after the Figma IPO. While the asset class and personal situations are different, it dawned upon me, some of the decision considerations actually have similarities.

While most of the Bay Area real estate market post Shelter-in-Place since 2021 increased its market price, the segment for condos in San Francisco had been soft. He purchased the condo prior to Covid, and the value is about 5-8% below. He and family are considering a move out of the City just outside SF for a larger SFR house. However, he is reluctant to sell at a “loss” and prefers to wait until the market in SF improves a bit more so he can at least “break even” after selling expenses. 

Another “friend” jumped on the Figma IPO bandwagon. Figma is a cloud-based design and prototyping platform and it went big. IPO offering price of $33/share and skyrockets to over $140/share with valuation of over $60 Billion (with a B!) for a current unprofitable company. My friend bought it at $80/share thinking he is getting it at a “good price” with the big upside to the company and industry. It has recently been bouncing between $55-70/share and he’s not sure he has the stomach to weather the volatility. 

Having been in both those situations over the last 20 years personally and professionally, I get the conundrum on what to do. In my past life, I had been a VP of Biz Dev and Alliances for a couple high tech startups plus, I have degrees in finance. Still, there are no easy asnwers even for me, but I’m able to offer up an analytical framework and perspective on how to approach the dilemma..

Here are some considerations I would factor in from an economic and financial perspective:

  • Sunk cost: if currently seeing a loss, from a decision making perspective, you need to try and think of it as a sunk cost and make a decision based that if you were to keep holding on to it at whatever current market value, would that be a price/value today where you would actually invest in it if you didn’t already own it. For example, for Figma, it’s currently $60/share and you bought in at $80. However, what if you didn’t own Figma at all, and it’s trading at $60, would you consider purchasing shares at $60? If not, there should be strong consideration to sell. The same logic would apply to real estate from a pure investment perspective, but we know real estate is more than just a financial decision.
  • Opportunity cost: understand that with money tied up in that real estate or stock investment, you are now constrained with alternative investments. Could you reinvest that capital to a different stock or a different house that you believe may have more upside. For example, with respect to real estate, my friend who is leaning towards keeping his SF condo until the prices increase to not take a loss, what would be the option if he decided to sell at a slight loss? Let’s say if sold, and $500k of cash is freed up from the equity of the condo, could he then take that equity, purchase a different house outside SF; in this scenario, he would believe that if the SF condo market increased 5-10% over the next 2 years, what is the outlook for a different city or segment (house vs. condo) and could you predict higher or lower appreciation relative to the SF condo.

Now specific to real estate, there is a huge psychological and lifestyle factor much different than for pure financial investments:

  • Oftentimes, not selling the current property, limits the ability to purchase a different property especially in a “move-up” situation.
  • In a good situation where a person has the financial strength to purchase a different property without having to sell first, one must factor in being a landlord to lease, collect rent and property management.
  • Of course, selling at a lower price also is tough given emotional attachment if it’s a place you have lived in previously.

No easy answers for these scenarios, even more complicated when it comes to real estate. I am always here to help brainstorm the options and be able to provide pros and cons to different approaches so don’t hesitate contacting me.

OBSERVATIONS AND LEARNINGS FROM MY 2024 DEALS WITH 2025 TIPS

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2024 was a confusing and unpredictable year for residential real estate in the mid-Peninsula part of the SF Bay Area. Interest rates hovered around 6.5-7.5%, layoffs from large local high tech companies, while NASDAQ index reached a high water mark, and continued low property inventory. While Buyers in 2023 were very cautious, a segment of Buyers in 2024 returned to the market aggressively.

Year# of Sold$/square feetDays on Market
20231,2691,20119
20241,3781,28914
YOY %8.6%7.3%-26.3%

DIFFERENTIATED PROPERTIES WILL MOTIVATE CAUTIOUS BUYERS

I had a San Mateo townhouse listing at the high end of the range in a neighborhood where one could purchase a single family residence at the same price point. The complex was newer development, awesome huge floor plan of 4bd/3.5ba and 3+ car attached garage with low HOA and close to the freeways and public transportation. While it appealed to a very narrow range of qualified buyers who could purchase a 3bd/2ba single family residence, there also just wasn’t anything comparable like this unit available. We ended up with multiple offers when some thought it would sit on the market first before selling and sold for well above list price. The complex while a bit close to a freeway, there was no noise impact, so we highlighted it as a positive characteristic close to commuting options and downtown restaurants. We just need to find the “right buyer” and not marketing to the masses that many realtors typically default to.

LOCATION WILL ALWAYS BE THE KEY FACTOR

Location is always the key factor in any types of real estate market. The current market has many wary, nervous buyers. I often explain that a property floor plan and condition may be changed with some investment in time and money. A property’s location and lot cannot be changed, so when a property is located in a desirable location, which may include characteristics of the schools, neighborhood feel, flat lot, convenience, views, and/or some other amenities come on the market, I try to help buyers visualize the potential of a place with a future remodel given my experience in real estate development projects in the past. I listed a San Mateo house that was owned by the same family for many decades located just couple short blocks to one mid-Peninsula’s best parks, a nice lot, close to freeways, and a decent floor plan, but it needed some interior updates. We purposely listed it a bit below our target price range expectations with the goal of receiving 3-7 offers. Well, given the incredible location, the open houses were just packed and we received 17 offers, all above list price and the top 7 or so significantly above. The buyers and their agent told me the wife grew up nearby, grandparent taught at the local schools, and they often visited the park with their young kids so the house location checked off every box for them. Needless to say, very happy Sellers and Buyers.


MARKETING AND POSITIONING KEY TO EXTRACTING VALUE

The headline applies to being able to extract maximum value for a popular listing as well as being able to sell a more challenging one. One of my earlier transactions of 2024 was in an unique development in South SF that was only about 30 years old with a large floor plan, high vaulted ceilings and tucked away in one of the higher end communities in the city. The price point is at the very top of the city so it would appeal to a different type of SSF buyer. While it was a single family residence, it was a planned unit development with an HOA not as common in area as it would be in Southern California or East Bay. The way we positioned the unit is that it is considered newer construction when most of the city houses were between 60-90 years old, we updated the interior with some new finishes, and we accentuated that the “value” for a large house with amazing floor plan close to both SF and South Bay is rare for the price point and $/square feet. I advised my Seller that the sweet spot Buyer profile is someone who may be already living in the neighborhood who either owns a smaller place or is renting. Lo and behold, several of the most seriously interested buyers were all living in the neighborhood and it was sold to a wonderful young family who owned a smaller place and wanted to upgrade.

CASH/LIQUIDITY IS KING (OR QUEEN)

I have talked about mortgage interest rates many times over the last 10+ years of this blog. In 2024, the first half saw rates finally starting to come down, but then mortgage rates started rising again. Many of my friends asked if the higher rates affected the Bay Area real estate market. Of course it did for some segment, but not as much as you may think. 1) Move up buyers slower to purchase due to their current very low <3% rates that would make the move up purchase to a larger home and possibly more expensive neighborhood at a 7% rate tougher pill to swallow – constraining inventory. 2) Qualifies for lower mortgage amount particularly for 1st time buyers, and 3) Mentally harder to purchase when prices of attractive properties were increasing making the rent vs. buy equation less attractive.

All 3 of the negative impact were in play, but not as much as you may think. Supply is still low. Buyers delayed purchasing from 2023, but we saw Buyers realize in 2024 that mortgage interest rates would not decrease materially any time soon to its previous 3-4% range. Many of my clients are in the high technology sector with the NASDAQ index reaching historic highs. Those employees with stock options and RSU were able to cash out of some of them for larger down payments; thus, diminishing the impact of higher rates/payments. All but 1 transaction I completed in the last 2 years had larger down payments from 30-100%.

2025 UNCERTAINTY IN THE BAY AREA AND TIPS

The start of the year, inventory remains very low. The high technology industry saw some layoffs and hiring freezes in Silicon Valley so people are cautious. Low supply and cautious demand but with highly qualified buyers, means the most attractive properties priced appropriately are seeing huge numbers of offers. Contrast that with properties that have some major negative characteristic and/or location and priced too high may sit on the market.

I continue to provide the following perspective to my first time buyers. It is very difficult to perfectly time the market. To the extent one has the financial capacity and job stability to make the leap of faith, buying real estate is BOTH a financial investment decision AND a lifestyle choice that is challenging to quantify. The question I pose is do you consider it riskier to be “out of the market” or “in the real estate market” if your plans are to remain in the SF Peninsula area in at least the medium term?

As always, reach out to Peter to brainstorm real estate. In meantime, please “like” my Facebook page to stay updated on my latest blog posts, and upcoming listings https://www.facebook.com/PeterTaoProperties.

2023 OBSERVATIONS OF SF PENINSULA REAL ESTATE STORYLINES

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Please “like” my Peter Tao Real Estate Facebook Page to get notification of my upcoming thoughts on the 2024 SF Bay 2024 real estate trends.

There was quite a bit of uncertainty at the start of 2023 about where real estate markets would go. One word, Supply and Demand….wait, that is three words. My most popular article Microeconomics for Real Estate I wrote in 2013, exactly 10 years ago, continues to get dozens of viewers every day due to being highly ranked in the Google SEO algorithm. To overly simplify, there is low supply amidst moderate demand for the following reasons:

DEMAND

While there are a good number of (potential) buyers out there, some percentage of them are unsure what to do given economic factors, such as interest rate, stock market and their own employment. There are highly qualified buyers interested, some are motivated while some are taking a cautious approach. There is moderate demand, although lower than post pandemic and prior to the current interest rate/inflationary spike.

SUPPLY

The move-up and down-size Buyers have significantly decreased due to the higher interest rate situation. Most owners have rates locked in at 2.5-4% with a lower property tax basis (in California). To purchase a larger home would mean to get a mortgage at 6.5-8% with a higher property tax basis; it would be a large financial step-up than in recent times. This dynamic puts a constraint on the supply side of the local real estate market.

PRICING MOVEMENTS

In a typical supply and demand curve, usually a low supply and moderate demand situation would create some price increases. In a “hot” “sellers market” which we’ve seen in many of the years over the last 8+ years, prices are increasing across all segments of the real estate market in the SF Peninsula market – condo, single family, multifamily, various cities, neighborhoods, starter, luxury. In 2023, we saw a real segmentation of pricing and demand – a flight to “quality”. By “quality”, single family residences that had some positive combination of nice move-in condition, good location, zones to popular schools, usable nice lots/backyard were the ones that saw multiple offers with some price increases from 2022.

Unlike past years in a really “hot” market, even with lower supply of listings, there were many properties that did not sell right away, sat on the market and/or went through price cuts. Because there were a lot of careful buyers out there, many buyers were more conservative in how they approached purchasing and preferred to wait for more attractive properties rather than making offers on a property that may have some major negative characteristic.

STRONG DEMAND EXAMPLE

The “Hallmark” neighborhood within Belmont Woods in Belmont up saw every (only 6 total) SFR sold in 2023 at $3.0 million and higher. See summary chart:

ADDRESSBDBASQ. FT.LOT SIZESOLD PRICECOMMENTS
23 Somerset Ct.43.53,02021,9003,300,000Big views, at trails
2884 Wakefield Dr.42.52,22017,3523,100,000Terraced sloped lot
2558 Somerset Dr.43.02,6727,0403,200,000Move in
2609 Somerset Dr.42.52,76011,9153,420,000Needs work, big flat lot
2741 Waltham Cross43.53,42710,2413,608,888Renovated, with pool
2759 Waltham Cross42.51,82012,2353,000,000Original, big flat lot
2023 Closed Transactions for SFR within “Hallmark” submarket of Belmont Woods, Belmont, CA

Hallmark has always been popular, but why has this pocket of homes in particular withstood macroeconomic conditions more so than most neighborhoods?

  • Typically above average size lots, some with views
  • Near waterdog park and cross country trails, wide streets with sidewalks
  • Neighborhood built from late 1960s to 1970s so floor plans of houses tend to be very appealing with vaulted ceilings so spacious interior feel w/curb appeal
  • Highly-regarded Belmont-Redwood Shores school district
  • 4 of the houses sold for multiple offers; 2 of the houses actually did not sell right away and went through price cuts due to being aggressively overpriced when first listed. Pricing appropriately is still extremely important in any market. 

SOFT DEMAND EXAMPLE

There have been numerous articles regarding the city of San Francisco and the challenges since the pandemic. While the SF condominium segment was particularly affected in 2021-2022, we did see SF condos as a whole stabilize in 2023 given the low inventory environment. A neighborhood still recovering though is West part of South of Market (“SoMa“). A few fundamental reasons:

  • Residences often work in financial district or start-up high tech area of South Beach and employees generally no working in offices yet
  • Mid-market corridor of SoMa which has been a economic redevelopment area lost many major high technology company tenants that employed many professionals
  • Pre-pandemic, SoMa saw a huge new construction boom of mid-rise condo projects saturating the western part of Sout of Market near mid-market area with inventory/supply

We know the markets go up and down and areas see growth and weakness. A key question is timing. Could this neighborhood be a buying opportunity in the near future from an investment stanpoint or is it still too early? There are just so many variables and nuances to consider which is what makes real estate so intersting to me and why understanding the MICRO-markets and balancing it with understaning of the macro financial marketsso important

MY 2023 REAL ESTATE SUMMARY

Sales volume is down YTD 2023 vs. 2022; preliminary estimates I am hearing has volume decreasing up to 20% year-over-year decrease of total volume in various part of SF Peninsula. I am so thankful for my clients and friends who trusted me this year, and who also referred me to their friends and family to navigate an uncertain, nervous marketplace due to higher mortgage rates that really changes the dynamics of the market. I will once again be top 8 in my Coldwell Banker office of 150 licensed Realtors.

As always, the opinions written in my articles are my personal opinions. Please feel free to contact Peter at peter.tao@cbnorcal.com anytime to brainstorm anything real estate, Warriors, Niners, local dog parks, schools, and/or restaurants. 😀 My next article will be about my forecast for 2024 SF Bay Area real estate markets. Thus, to be stay up to date on my thoughts, upcoming listings and interesting real estate news, please “like” my Peter Tao Real Estate Facebook Page. Happy holidays!