SPRING 2012

POLICY CONTINUES TO DRIVE HOUSING PERFORMANCE

Itisclearthatpolicywillremainadrivinginfluenceover thehousingsector.Moretraditionalmeasurementsof supplyanddemandremainusefulindicatorswhen forecastingthedirectionandvelocityofvalues.However,it ispublicpolicythatdetermineshowmanyhomesarefor saleandhowmanyready,willingandablebuyersexist. SomeExamples: Ourlastissuediscussedthepotentialforbulksalesof BankOwnedPropertytoprivateinvestorgroupswith stringsattached.Thisstrategylimitstheamountof inventoryavailableatagiventimebyrequiringthe investorgroupstoholdthisinventoryasrentalsuntilsuch timeasthemarketmayabsorbtheinventorywithout deflatingvalues.FHFAhassinceannouncedtheprogram withthefirstinvestorbulksaletooccurinthenearterm. Forbearancefortheunemployedisanothernew initiativescheduledtotakeeffectMarch1st,2012.This FannieMaeandFreddieMacprogramallowsunemployed borrowerstosuspendmortgagepaymentsforuptotwelve monthsiftheymeetbasicqualificationstandards. Obviously,thisprogramwillhelpfamilieskeeptheirhomes whileloweringthepotentialformoreforeclosedproperty enteringthemarket. Qualificationstandardsforobtainingagovernment insuredloanproductnowallowpotentialborrowerswho experiencedashortsale,foreclosure,orbankruptcy,to qualifyforFederallyinsuredfinancingthreeyearsafter theeventoccurred. Historicallylowinterestratesmakerealpropertyavery attractiveinvestment.Withpurchasemoneyavailablein the4%range,therehasneverbeenamoreattractivetime tobuy. HAMPIIistheAdministrationsnewplantoallow homeowners,throughtheFHA,torefinancetotoday's historicallylowrateswithoutregardforloantovalueratio. Itisestimatedthatqualifyinghomeowners,whomustbe currentontheirmortgagepayment,willsaveonaverage over$3,000.00annually. WeintheDCMetropolitanareabenefitexponentially frompolicyandprogramsthataddressaNationalHousing concern.Astheindustrycontinuestorecover, policymakerswillwithdraw.Realestateisalongterm assetclass.Thoseableshouldtakeadvantageof thecurrentincentives.Theretrulyhasneverbeena bettertimetobuy.

MeredithSterrett
6641AOldDominionDr McLean,VA22101 Office:7035564222 Meredith.sterrett@c21nm.com www.c21nm.com

(202)4414954

ASSESSING RISK REWARDING ACTION

Thereremainssomeundercurrentof skepticismrelatingtotrendingofproperty values.Theprogramsdiscussedabove aretargetedtoincreasethenumberof ready,willing,andablebuyerswhile limitingtheamountofinventory availableatanygiventime.These incentivesareintendedtostabilizeor improvevaluesindistressedmarketsbut arebeingappliedonaNationalbasis. TheWashingtonDCMSAisnolongera distressedmarket.Historically,wearethe lastinandfirstoutofrecessionarycycles. Whilenationalnewscontinuestodefinea housingindustryindistress,factually,the WashingtonDCMSAfounditsbottom betweenoneandthreeyearsagoandis outperformingeveryotherstatistical areainthecountry. Obviously,portionsofourregionalmarket areoutperformingothers,yetindividual trendsareconsistentlypositive.Rightnow, SuburbanMarylandrepresentsa significantbuyingopportunitysinceits reboundclearlytrailstheBeltway marketsandDC.Regardlessofmarket segment,appreciationisagainthereality inourregion. Why?Thegraphtothelowerright representsaNationalHousingIndexwhich trackshomevaluesintwentyofthelargest MSAsinthecountry.Theblackline representsthelongtermtrendof appreciatinghomevalues.From2003 through2007,wesawanirrationalspike inpricesleadingtothecorrectionthat occurredfrom2008through2011. Themarketovercorrectedbasedlargely uponanebbinconsumerconfidence, furthercomplicatedbyanationalmedia discussionofthemoststressedmarketsin thecountry.Sincevaluescrossedbelow thelongtermtrend,weveseenthereturn ofaRealEstateInvestorbuyingtohold ratherthantoflip. Almostaquarterofallhomesales arenowtononowneroccupants Investors.Someconditionswhichmake investinginrealestatesoattractiveright nowarepolicydriven.Wedetailinsidethis issueasingletransactionwhichis occurringdailyinallsegmentsofour region.Ifyouhavethemeans,I encourageyoutofullyexplorethis strategyforyourownportfolio!

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INVESTING FOR THE LONGER TERM

STRATEGIC SHIFT
Whenvaluesfallbelowthelongtermtrendline,wealwaysseethe returnoftherealestateinvestor.From2007throughtheearlyportion of2011,thecommonstrategywasTheFlip.Thismodelisfeatured prominentlyonCableshowslikeFlippingOut,FlipThisHouse,Flip ThatHouseandFlipMen.ThereareevenplansatBravoNetworkto airaHoustonbasedshowhostedbyaformerSurvivorstar.Whileitmay looksimpleonTV,thisisnobusinessforthefirsttimeinvestor. Adistressedproperty,typicallyaforeclosure,isacquiredontheCourthouse steps.Theacquirerhasverylimitedinformationaboutthehomeusuallywhat theyareabletolearnfromviewingtheexteriorofthehomeandpeekinginthe windows.Whiletheyarelikelyabletobuythepropertyatadiscount,there couldbetensofthousandsofdollarsinneededrepairbeforetheycanresell. Onceinpossessionoftheproperty,timebecomestheenemy.Theinvestor assesseswhatisneededtoreturnthepropertytomarketreadyconditionand actsastheGeneralContractortocompletetherepairsandupdates.When complete,thepropertyisthenremarketedatthenew,highervaluehopefully allowingtheinvestortoearnaprofit. Asaninvestorprofile,thesearetheDayTradersofrealestate.Flippingis ahighrisk,highrewardstrategy.Sincenoprepurchaseinspectionrights areavailable,thereareoftenlatentdefectswhichbecomecostlyrepairs. Purchasershavetopaycashforthesepropertiesandfundallimprovement fromtheirownpocketbook. Whenyouconsiderthenecessaryrisktolerance,capitalrequirements,legal andtitleexpertise,generalcontractingexperienceandvaluationcompetency, successfulinvestorsinthiscategoryarefewandfarbetween.Asourmarket continuestoimprove,flipopportunitiesarebecomingmorelimited. Withoutanoversupplyofpoorlyconditionedforeclosedinventory,the steepdiscountsneededtomakethisstrategyvalidarenotavailable. Wearenowexperiencingthetransitionoftheseinvestorstowarda BuyandHoldstrategy.IfFlippingislikedaytrading,thenBuyand HoldisakintobuyingBlueChipsforanewborngrandchildtofundtheir collegeeducation.Thetwostrategiesareatoppositeendsoftheriskcurve. UnlikeFlipping,thebuyandholdstrategyisarealisticopportunityfor workingfamilies.Itcanevenbeaccomplishedinsideaqualifiedretirement plan.

SO WHAT DOES AN INVESTOR SALE LOOK LIKE? SUBJECT PROPERTY

ML#:PW7703491 Status:SOLD AdvSub:JacksonRidge Condo Ownership:Condo,Sale ContractDate:24Oct2011 ClosePrice:$141,000 DateAvail: Type:Townhouse Style:Contemporary BR/FB/HB:3/2/1 LotAC/SF:/ SQFTTotFin:1,642 Lvls/Fpl:3/1 Construction:BrickandSiding Basement:No, Parking:Garage #Gar/Cpt/Assgn:1// Heat/Cool:NaturalGas/ ForcedAir/Electric/CentralA/C Water/Swr:Public/Public Sewer ListDate:06Oct2011 UpdateDate:25Nov2011 LP:$164,900 DOMM/DOMP:18/18 TotalTaxes:$1,619 CloseDate:18Nov2011 SellerSubsidy:$ GroundRent: Area: ADCMapCoord:8F3 YrBlt:1995 HOA/CCFee:/240.0 TaxLivingArea:1,642 VacationY/N:No ML#:PW7729720 Status:RENTED AdvSub:JacksonRidgeCondo Ownership:Condo,Rent DateAvail:01Dec2011 Type:Townhouse Style:Colonial BR/FB/HB:3/2/1 LotAC/SF:/ SQFTTotFin:1,642 Lvls/Fpl:3/1 VacationY/N:No Construction:Brick Basement:No, Parking:Garage,Other #Gar/Cpt/Assgn:1// Heat/Cool:NaturalGas/Forced Air/Electric/CentralA/C Water/Swr:Public/PublicSewer ListDate:18Nov2011 UpdateDate:20Jan2012 LP:$1,650 DOMM/DOMP:40/40 TotalTaxes GroundRent: Area: ADCMapCoord:0000 YrBlt:1995 HOA/CCFee:/0.0 TaxLivingArea:1,642

THE DOLLARS AND CENTS OF REAL ESTATE INVESTING

Thepropertyrecordsabovereflectthetermsofthesaleofa foreclosedpropertytoaninvestorandthesubsequentrentalofthe propertybytheinvestor. ThistransactionsettledonNovember18th,2011andthenewtenant movedinduringJanuary,2012.Immediatelyfollowingforeclosure,the bankbroughtthispropertybacktomarketreadyconditionwithafresh coatofpaint,newcarpetandappliances.Whentheinvestortook possession,thehomewasinmoveincondition.Thepriorowner,Bank ofNewYork,acquiredthepropertyfromthetrusteeonthecourthouse stepsforthedefaultedloanamount,$242,159. Thepropertywaslistedfor$164,900onOctober6thandwentunder contractfourteendayslateronOctober24th.Twentyfivedayslater,on November18th,theinvestorsettledonthepropertyatapurchasepriceof $141,000abouteightyfivepercentoflistprice.Thepropertywaslisted forrentthatdayofferingamoveindateofDecember1st.Shortly thereafter,thehomewasrentedfor$1,650permonth. Theentireprocessfromforeclosuredatetomoveindatetookless thanninetydays. Townhomeslikethisareparticularlywellsuitedforownershipby investors.Therearehundredsofsimilarcommunitiesthroughoutthe region.Developerslocatethesesubdivisionswithincloseproximityto publictransportation,shopping,restaurantsandentertainment.Typically, thecommunitiesofferamenitiestoincludeswimmingpools,fitness centers,communityclubhouseandsecuritytoappealtoyoung professionalsandfamilies.Exteriormaintenance,toincludelawncare, areusuallycoveredwithinthemonthlyAssociationfeeinthiscase,$240 permonth.

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

COST OF ACQUISITION
PurchasePrice: DownPayment: ClosingCosts: MortgageAmount: MortgageRate: AppreciationRate: $141,000 Wewillmaketheassumptionthisinvestorpurchased thispropertyonthedaytheirfirstchildwasbornwith $28,000 theintenttofundtheirchildscollegeeducationby sellingthepropertywhenthechildturnseighteen. $4,230 of4.75%)of$112,800tomakeupthebalanceofthe purchaseprice.

Thisinvestorfeltasifthispropertywouldhaveahigher valueeighteenyearsfromnowthanitdoestoday. $112,800 Investorsalesrequireatwentypercentdownpayment, Inordertoforecastafuturevalue,theyhadtobecome inthiscase$26,200.Closingcostsaretypicallyaround comfortablewithanappreciationassumption.After 4.75% threepercentofthepurchaseprice.Theirtotalinitial considerabledebate,theyconcludedthatanannual investmentwas$30,430andtheyobtainedathirty appreciationrateoffivepercentperyearwasa 5% yearfixedrateloan(attheincrediblyattractiverate reasonableexpectationoverthelongtermperspective.

RENTAL INCOME, DEBT SERVICE, OPERATING EXPENSE

Thecurrentrentalrateof$1,650permonthwill generate$19,800annuallyinincome.After factoringinafivepercentvacancyrate,our investorplansfor$18,810inrentalincomein 2012.Theirmortgagepaymentforthesame periodis$7,056plusannualoperating expensestoincludemaintenance,association fees,taxesandinsuranceof$4,459.Thisbrings theirtotalannualexpenseto$11,515.When yousubtracttheannualexpensesfromthe Operatingincome,youachieveanannualcash flowof$7,296foroperatingyear2012. Theinvestormadeadownpaymentof$30,430 (includingclosingcosts)andobtaineda mortgageforthebalanceofthepurchaseprice. Therentalincomecoversallexpensesand paystheinvestoranadditional$7,296peryear. Factually,this$30,430investmentreturns $7,296annuallywhichequatestoa22%cash oncashreturnoninvestment.Banksarepaying about1%. Thisisnotamadeupcasestudythis transactionhappenedinthelastninetydays andthesameopportunityexiststoday.It willnotexistforever. AnnualGrossIncome: VacancyRate: EffectiveGrossIncome: OperatingExpenses: NetOperatingIncome: CapRate: AnnualRentIncrease: AnnualExpenseIncrease: MortgageTerm: AnnualMortgagePayment: CashFlow: CashOnCashReturn: $19,800 5% $18,810 $4,459 $14,351 10.17% 5% 5% 30 $7,056 $7,295 22%

CASH FLOW
Afterexpensesanddebtservice,thispropertyprovides apositivecashflowof$7,296annually,oralittlemore than$600permonth.Usinghistoricaldataasour guide,weassumeprevailingrentalrateswillcontinueto increasebyfivepercentayear.Thatmeansthateach year,yourrentalincomewillincrease,whileexpenses remainrelativelyflat. Thisinvestorcanexpectpositivecashflowofabout $10,000annuallyin2016,$20,000annuallyin2026 and$26,000whenthechildturns18in2030.

PRINCIPAL REDUCTION AND EQUITY BUILD

Eachmonth,aportionofthemortgagepaymentgoes towardprincipalreduction.By2021,theloanhasbeenpaid downby$21,475sothereisremainingprincipalbalanceof approximately$91,054.Aftereighteenyears,theremaining principalbalanceis$64,491. Overthesametimeperiod,thepropertyhasappreciatedin valueweassumedanannualappreciationrateof5%.In 2030,whenthechildturnseighteen,thepropertyvalueis $340,000withaloanbalanceof$64,491. Iftheownerchoosestosell,thenetequityis$275,000. Thetotalamountinvestedoriginallywasabout $30,000...therestwasfundedthroughrentalincome.

CENTURY 21 NEW MILLENNIUM | REAL ESTATE NEWS

SUMMARY
Ifyouareconsideringarealestatetransaction,thoroughanalysisandcompetentrepresentationare essential.Weareinatransitioningmarket.Thereispotentialforprofit,asthereisriskofloss.Ifwe understandtheunderlyingfacts,wecancontinuetomakegoodbusinessdecisionslogicallyandwithout emotion.Iamarealestateprofessionalandacceptresponsibilityforkeepingmyfriends,neighbors,and businesscommunityinformedastoallaspectsofthingsaffectingtherealestateportionoftheirholdings. Ifyourhomeiscurrentlylistedforsale,thisisnotasolicitation.Ifyouhavearealestatequestion,Iwillbe happytoanswerit,orfindtheanswer.Ifyouhavearealestateneed,Iwillappreciateanopportunityto competeforyourbusiness.Ourteamisverygoodatwhatwedo...ourresultsdemonstratethat.Dontsettle forless.

MeredithSterrett
6641AOldDominionDr McLean,VA22101 Office:7035564222 Meredith.sterrett@c21nm.com www.c21nm.com

Sincerely, ToddHetherington

(202)4414954

6641AOldDominionDr McLean,VA22101 www.c21nm.com