SPRING 2012

POLICY CONTINUES TO DRIVE HOUSING PERFORMANCE

It is clear that policy will remain a driving influence over the housing sector. More traditional measurements of supply and demand remain useful indicators when forecasting the direction and velocity of values. However, it is public policy that determines how many homes are for sale and how many ready, willing and able buyers exist. Some Examples: Our last issue discussed the potential for bulk sales of Bank Owned Property to private investor groups; with strings attached. This strategy limits the amount of inventory available at a given time by requiring the investor groups to hold this inventory as rentals until such time as the market may absorb the inventory without deflating values. FHFA has since announced the program with the first investor bulk sale to occur in the near term. Forbearance for the unemployed is another new initiative scheduled to take effect March 1st, 2012. This Fannie Mae and Freddie Mac program allows unemployed borrowers to suspend mortgage payments for up to twelve months if they meet basic qualification standards. Obviously, this program will help families keep their homes while lowering the potential for more foreclosed property entering the market. Qualification standards for obtaining a government insured loan product now allow potential borrowers who experienced a short sale, foreclosure, or bankruptcy, to qualify for Federally insured financing three years after the event occurred. Historically low interest rates make real property a very attractive investment. With purchase money available in the 4% range, there has never been a more attractive time to buy. HAMP II is the Administrations new plan to allow homeowners, through the FHA, to refinance to today's historically low rates without regard for loan-to-value ratio. It is estimated that qualifying homeowners, who must be current on their mortgage payment, will save on average over $3,000.00 annually. We in the DC Metropolitan area benefit exponentially from policy and programs that address a National Housing concern. As the industry continues to recover, policymakers will withdraw. Real estate is a long term asset class. Those able should take advantage of the current incentives. There truly has never been a better time to buy.

Jason Carrier
Branch LeaderMcLean Office 6629 Old Dominion Dr. McLean, VA 22101 Office: 703-556-4222 [email protected] www.c21nm.com

800-727-6888

ASSESSING RISK; REWARDING ACTION

There remains some undercurrent of skepticism relating to trending of property values. The programs discussed above are targeted to increase the number of ready, willing, and able buyers while limiting the amount of inventory available at any given time. These incentives are intended to stabilize or improve values in distressed markets but are being applied on a National basis. The Washington DC MSA is no longer a distressed market. Historically, we are the last in and first out of recessionary cycles. While national news continues to define a housing industry in distress, factually, the Washington DC MSA found its bottom between one and three years ago and is outperforming every other statistical area in the country. Obviously, portions of our regional market are outperforming others, yet individual trends are consistently positive. Right now, Suburban Maryland represents a significant buying opportunity since its rebound clearly trails the Beltway markets and DC. Regardless of market segment, appreciation is again the reality in our region. Why? The graph to the lower right represents a National Housing Index which tracks home values in twenty of the largest MSAs in the country. The black line represents the long term trend of appreciating home values. From 2003 through 2007, we saw an irrational spike in prices leading to the correction that occurred from 2008 through 2011. The market over corrected based largely upon an ebb in consumer confidence, further complicated by a national media discussion of the most stressed markets in the country. Since values crossed below the long term trend, weve seen the return of a Real Estate Investor buying to hold rather than to flip. Almost a quarter of all home sales are now to non-owner occupants; Investors. Some conditions which make investing in real estate so attractive right now are policy driven. We detail inside this issue a single transaction which is occurring daily in all segments of our region. If you have the means, I encourage you to fully explore this strategy for your own portfolio!

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INVESTING FOR THE LONGER TERM

STRATEGIC SHIFT
When values fall below the long term trend line, we always see the return of the real estate investor. From 2007 through the early portion of 2011, the common strategy was The Flip. This model is featured prominently on Cable shows like Flipping Out, Flip This House, Flip That House and Flip Men. There are even plans at Bravo Network to air a Houston based show hosted by a former Survivor star. While it may look simple on TV, this is no business for the first time investor. A distressed property, typically a foreclosure, is acquired on the Courthouse steps. The acquirer has very limited information about the home; usually what they are able to learn from viewing the exterior of the home and peeking in the windows. While they are likely able to buy the property at a discount, there could be tens of thousands of dollars in needed repair before they can resell. Once in possession of the property, time becomes the enemy. The investor assesses what is needed to return the property to market- ready condition and acts as the General Contractor to complete the repairs and updates. When complete, the property is then remarketed at the new , higher value; hopefully allowing the investor to earn a profit. As an investor profile, these are the Day Traders of real estate. Flipping is a high risk, high reward strategy. Since no pre-purchase inspection rights are available, there are often latent defects which become costly repairs. Purchasers have to pay cash for these properties and fund all improvement from their own pocketbook. When you consider the necessary risk tolerance, capital requirements, legal and title expertise, general contracting experience and valuation competency, successful investors in this category are few and far between. As our market continues to improve, flip opportunities are becoming more limited. Without an oversupply of poorly conditioned foreclosed inventory, the steep discounts needed to make this strategy valid are not available. We are now experiencing the transition of these investors toward a Buy and Hold strategy. If Flipping is like day trading, then Buy and Hold is akin to buying Blue Chips for a newborn grandchild to fund their college education. The two strategies are at opposite ends of the risk curve. Unlike Flipping, the buy and hold strategy is a realistic opportunity for working families. It can even be accomplished inside a qualified retirement plan.

SO WHAT DOES AN INVESTOR SALE LOOK LIKE? SUBJECT PROPERTY

ML#: PW7703491 Status: SOLD Adv Sub: Jackson Ridge Condo Ownership: Condo, Sale Contract Date: 24-Oct-2011 Close Price: $141,000 Date Avail: Type: Townhouse Style: Contemporary BR/FB/HB: 3/2/1 Lot AC/SF: / SQFT-Tot Fin: 1,642 Lvls/Fpl: 3/1 Construction: Brick and Siding Basement: No, Parking: Garage # Gar/Cpt/Assgn: 1// Heat/Cool: Natural Gas/ Forced Air/Electric/Central A/C Water/Swr: Public/Public Sewer List Date: 06-Oct-2011 Update Date: 25-Nov-2011 LP: $164,900 DOMM/DOMP: 18/18 Total Taxes: $1,619 Close Date: 18-Nov-2011 Seller Subsidy: $ Ground Rent: Area: ADC Map Coord: 8F3 Yr Blt: 1995 HOA/CC Fee: /240.0 Tax Living Area: 1,642 Vacation Y/N: No ML#: PW7729720 Status: RENTED Adv Sub: Jackson Ridge Condo Ownership: Condo, Rent Date Avail: 01-Dec-2011 Type: Townhouse Style: Colonial BR/FB/HB: 3/2/1 Lot AC/SF: / SQFT-Tot Fin: 1,642 Lvls/Fpl: 3/1 Vacation Y/N: No Construction: Brick Basement: No, Parking: Garage, Other # Gar/Cpt/Assgn: 1// Heat/Cool: Natural Gas/Forced Air/Electric/Central A/C Water/Swr: Public/Public Sewer List Date: 18-Nov-2011 Update Date: 20-Jan-2012 LP: $1,650 DOMM/DOMP: 40/40 Total Taxes Ground Rent: Area: ADC Map Coord: 0000 Yr Blt: 1995 HOA/CC Fee: /0.0 Tax Living Area: 1,642

THE DOLLARS AND CENTS OF REAL ESTATE INVESTING

The property records above reflect the terms of the sale of a foreclosed property to an investor and the subsequent rental of the property by the investor. This transaction settled on November 18th, 2011 and the new tenant moved in during January, 2012. Immediately following foreclosure, the bank brought this property back to market ready condition with a fresh coat of paint, new carpet and appliances. When the investor took possession, the home was in move in condition. The prior owner, Bank of New York, acquired the property from the trustee on the courthouse steps for the defaulted loan amount, $242,159. The property was listed for $164,900 on October 6th and went under contract fourteen days later on October 24th. Twenty five days later, on November 18th, the investor settled on the property at a purchase price of $141,000; about eighty five percent of list price. The property was listed for rent that day offering a move in date of December 1st. Shortly thereafter, the home was rented for $1,650 per month. The entire process from foreclosure date to move in date took less than ninety days. Townhomes like this are particularly well suited for ownership by investors. There are hundreds of similar communities throughout the region. Developers locate these subdivisions within close proximity to public transportation, shopping, restaurants and entertainment. Typically, the communities offer amenities to include swimming pools, fitness centers, community clubhouse and security to appeal to young professionals and families. Exterior maintenance, to include lawn care, are usually covered within the monthly Association fee; in this case, $240 per month.

CASH FLOW, PRINCIPAL REDUCTION, AND OWNERS EQUITY 0VER TIME

COST OF ACQUISITION
Purchase Price: Down Payment: Closing Costs: Mortgage Amount: Mortgage Rate: Appreciation Rate: $141,000 $28,000 $4,230 $112,800 4.75% 5% Investor sales require a twenty percent down payment, in this case $26,200. Closing costs are typically around three percent of the purchase price. Their total initial investment was $30,430 and they obtained a thirty year fixed rate loan (at the incredibly attractive rate We will make the assumption this investor purchased this property on the day their first child was born with the intent to fund their childs college education by selling the property when the child turns eighteen. of 4.75%) of $112,800 to make up the balance of the purchase price. This investor felt as if this property would have a higher value eighteen years from now than it does today. In order to forecast a future value, they had to become comfortable with an appreciation assumption. After considerable debate, they concluded that an annual appreciation rate of five percent per year was a reasonable expectation over the long term perspective.

RENTAL INCOME, DEBT SERVICE, OPERATING EXPENSE

Annual Gross Income: The current rental rate of $1,650 per month will generate $19,800 annually in income. After factoring in a five percent vacancy rate, our investor plans for $18,810 in rental income in 2012. Their mortgage payment for the same period is $7,056 plus annual operating expenses to include maintenance, association fees, taxes and insurance of $4,459. This brings their total annual expense to $11,515. When you subtract the annual expenses from the Operating income, you achieve an annual cash flow of $7,296 for operating year 2012. The investor made a down payment of $30,430 (including closing costs) and obtained a mortgage for the balance of the purchase price. The rental income covers all expenses and pays the investor an additional $7,296 per year. Factually, this $30,430 investment returns $7,296 annually which equates to a 22% cash on cash return on investment. Banks are paying about 1%. This is not a made up case study; this transaction happened in the last ninety days and the same opportunity exists today. It will not exist forever. Vacancy Rate: Effective Gross Income: Operating Expenses: Net Operating Income: Cap Rate: Annual Rent Increase: Annual Expense Increase: Mortgage Term: Annual Mortgage Payment: Cash Flow: Cash On Cash Return: $19,800 5% $18,810 $4,459 $14,351 10.17% 5% 5% 30 $7,056 $7,295 22%

CASH FLOW
After expenses and debt service, this property provides a positive cash flow of $7,296 annually, or a little more than $600 per month. Using historical data as our guide, we assume prevailing rental rates will continue to increase by five percent a year. That means that each year, your rental income will increase, while expenses remain relatively flat. This investor can expect positive cash flow of about $10,000 annually in 2016, $20,000 annually in 2026 and $26,000 when the child turns 18 in 2030.

PRINCIPAL REDUCTION AND EQUITY BUILD

Each month, a portion of the mortgage payment goes toward principal reduction. By 2021, the loan has been paid down by $21,475 so there is remaining principal balance of approximately $91,054. After eighteen years, the remaining principal balance is $64,491. Over the same time period, the property has appreciated in value; we assumed an annual appreciation rate of 5%. In 2030, when the child turns eighteen, the property value is $340,000 with a loan balance of $64,491. If the owner chooses to sell, the net equity is $275,000. The total amount invested originally was about $30,000...the rest was funded through rental income.

CENTURY 21 NEW MILLENNIUM | REAL ESTATE NEWS

SUMMARY
If you are considering a real estate transaction, thorough analysis and competent representation are essential. We are in a transitioning market. There is potential for profit, as there is risk of loss. If we understand the underlying facts, we can continue to make good business decisions logically and without emotion. I am a real estate professional and accept responsibility for keeping my friends, neighbors, and business community informed as to all aspects of things affecting the real estate portion of their holdings. If your home is currently listed for sale, this is not a solicitation. If you have a real estate question, I will be happy to answer it, or find the answer. If you have a real estate need, I will appreciate an opportunity to compete for your business. Our team is very good at what we do...our results demonstrate that. Dont settle for less.

Jason Carrier
Branch LeaderMcLean Office 6629 Old Dominion Dr. McLean, VA 22101

Sincerely,

Jason Carrier

Office: 703-556-4222 [email protected] www.c21nm.com

5990 Kingstowne Towne Center Alexandria, VA 22315 www.c21nm.com