San Francisco Investment Property

Yeah!!!  Good news for our very pricey market place.  It's incredibly challenging to find a single family home in San Francisco in the low-600's (there are more choices if we're talking condos); this $729+ number makes sense for our market.  Most of my 2009 buyers have been getting into the market because of FHA loans.  They are a complicated loan but provide an opportunity for buyers who have at least a 3.5% down payment.

Here are the details as provided by the S.F. Association of Realtors:

President Obama has signed a resolution passed last Thursday by Congress extending the current limits for Fannie Mae, Freddie Mac, and Federal Housing Administration (FHA) loans through 2010.

The conforming loan limits determine the maximum size of a mortgage that Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac can buy or guarantee. Non-conforming or jumbo loans typically carry a higher mortgage interest rate than a conforming loan, increasing the monthly payment and negatively impacting affordability.

Currently, as a result of the economic stimulus plan, the conforming loan limit is $417,000 for most areas in the U.S., but $729,750 in high-cost areas, including many in California.  The loan limits were set to expire at the end of this year, and could have been lowered to $625,500 for high-cost areas.  If the current loan limits had been reduced to $625,500 for high-cost areas, lenders likely would have had to adjust their loan underwriting standards to align with the new limits, to ensure the loans can be purchased or guaranteed by Fannie, Freddie and the FHA.

Higher conforming loan limits are especially critical for California, where more than 80 percent of all loans are financed by Fannie Mae, Freddie Mac or FHA, and will help maintain the positive signs we are emerging in California’s mortgage market.

While home prices in California have declined, the demand for housing has not. The market has been dominated by first-time home buyers who have faced a shortage of financing opportunities. The loan limits are set at 125 percent of local median home sales prices, up to a maximum of $729,750 in high-cost areas, including many regions in California.

Sales in move-up and high-end markets have been constrained this year; the loan limits extension will help qualified home buyers in these markets to move forward with their purchases.

This is best left for the exchange pro to explain:

In a typical 1031 Exchange, a property is sold and then replacement property is acquired.  On occasion however, it may be advantageous to do the opposite; acquire property first and then sell.

Acquiring replacement property first in a 1031 Exchange presents a few difficulties.  First of all, funds will need to be available for the down payment on the acquisition property (keep in mind nothing has been sold yet).

Second, the properties involved in an exchange can not be owned at the same time.  In theory, an exchange is going from one property to another – so title to the new property and the old property can not be held at the same time.  Luckily however, there is an option available that allows for the acquisition of the replacement property first; it’s called the Reverse Exchange.

Here’s how it works:

To properly structure a reverse exchange, an Exchange Accommodating Title Holder, or EAT (your Exchange Company), will go on  title to either the property being acquired (replacement) or the property to be sold (relinquished).

If the EAT is to go on title to the replacement property, problems may arise if the investor is financing part of the acquisition costs.  Many lenders balk at the idea of an EAT going on title to the property the investor is acquiring.

The lender issues can be as follows:
1.    The loan will be made to the EAT not to the Exchanger.
2.    The EAT will require the loan to be non-recourse.
3.    The EAT will require the Lender to waive its due on sale clause for transfer of the new property from the EAT to the Exchanger.
4.    The EAT will require the Lender to waive its requirement that the EAT sign any warranties or representations concerning the new property.
5.    The EAT will require the Lender to allow junior or subordinate financing on the new property.

If the lender decides not to loan on the property because of the constraints previously stated, the investor has two choices: find a new lender or structure the exchange with the EAT taking title to the relinquished property that is ultimately to be sold as a straw buyer.  Challenges with the EAT acting as straw buyer include:

1.    The EAT will require cash to buy the property.  The cash must come from the exchanger.
2.    The amount of cash advanced by the investor is the amount of estimated equity in the relinquished property
3.    There may be a due on sale clause on the debt of the relinquished property.
4.    A property tax re-assessment may be made at the time title transfers
5.    The exchanger may be burdened with an additional county transfer tax

Despite the complications, the reverse exchange can be a powerful tool for the investor provided they are aware of the obstacles and have plenty of time to work through the challenges.

So I'm very behind in my TV watching as a result of not having cable for several years.  Finally broke down a few months ago and signed up with Comcast.  I caught this fantastic series on KQED which has fascinating San Francisco history.  Here's a snippet of Sin, Fire, & Gold.  Now I need to figure out how to buy the DVD.

San Francisco parents are likely aware of these proposed changes.  Feel free to pass along any other details that you are aware of.

More details are below as per the San Francisco Unified School District's website passed along by Zephyr staff.

SFUSD website

The proposed redesign was originally supposed to be done in time for the 2009-2010 school year apparently, which obviously didn't happen.  They're then said it would be done for the 2010-2011 school year, but now the site is saying it'll launch it for the 2011-2012 school year.

There are several proposed ideas of how to redesign the system, but the one that seems to have the most traction at this point isn't neighborhood-specific (i.e. if you live in Noe Valley, you're assigned to a Noe Valley school), but rather a zoning system similar to the Berkeley School District.

Basically, what this entails is dividing the City up into Zones (Berkeley, for instance, has three zones, though many more neighborhoods) which would each be ethnically/socioeconomically diverse.  You would still rank your school choices as happens now, but are given priority to the schools that are in the zone where you live in order to help minimize what often happens now where there are some kids who have a 45 minute commute to school if they live in Silver Terrace and go to school in the Marina or live in Outer Sunset and go to school in Potero. It keeps kids closer to where they live, but still provides some choice and some balance at the schools.

Which way it will ultimately go is still not finalized though.

Tips from Leonard Spoto of Asset Exchange Company.  If you need a go to person to facilitate your exchange, Leonard is your guy!

Issue #1: Hidden Value in Failed Exchanges
Did you know that even if your 1031 Exchange fails you may be able to defer your tax liability for an additional 12 months?  Due to a wrinkle in the tax code, investors who open a 1031 Exchange account in 2009 but fail or cancel the 1031 Exchange and receive the sale proceeds in 2010 will be obligated to pay taxes on the transaction by April 15th of 2011.  That’s an additional 12 months of tax deferral!  What could you do with your tax dollars for an additional 12 months?
Keep in mind the taxpayer must have a bona fide intent to exchange.  Please contact Asset Exchange Company at 877-471-1031 if you would like to discuss this issue further.

Issue #2: Less than 180 Days to Exchange!
Most people automatically assume that they have 180 days to complete their 1031 Exchange.  In some instances this is not the case.  For clients who close escrow on their relinquished property after October 17th, the exchange must be completed on or before tax returns are filed.

The tax code states that the timeframe to complete a 1031 Exchange is 180 days or until taxes are due, whichever is sooner.

For a calendar year taxpayer, taxes are due on April 15th.  If escrow closes on the relinquished property after October 17th, the exchange period is less than 180 days.     However, the taxpayer can get the full 180 days, by obtaining an automatic extension of the due date for filing the tax return.

Here’s the latest e-newsletter from my fantastic accountant.  I highly recommend Pat Polo who I’ve been working with for the last 10+ years.  Not the least expensive but you don’t want to cut corners when it comes to having your taxes done correctly.

The end of the 2009 year will also spell the end of many tax breaks for both individuals and businesses. Some of these tax breaks are "temporary" credits and deductions that Congress typically extends for another year or two at the last moment. Other sunsetting provisions are relatively new, with no previous track record on their being extended. In either case, however, the unfamiliar economic climate in which our nation finds itself makes predicting whether Congress will find the funding necessary to extend any particular tax break this time around, beyond 2009, a matter of guesswork. The following is a list of important tax breaks expiring at the end of 2009.

A word to the wise: if you can take advantage of any tax break on this list before 2009 closes, do so. At this point, you cannot -and should not-- count on having any of them available in 2010.

Homebuyer tax credit. The first-time homebuyer tax credit expires sooner rather than later in 2009. That is, the credit expires November 30 - the credit provision requires that the residence be "purchased" by November 30, with "purchase" defined as taking place when title passes and the full purchase price is paid (that is, at the "closing") and not earlier when the contract of sale is executed and a down payment is escrowed. The credit is equal to 10 percent of the purchase price of a principal residence, up to $8,000. It applies to homes purchased after December 31, 2008, and before December 1, 2009.

Itemized state and local sales tax deduction. The ability to deduct state and local sales taxes in lieu of state and local income taxes is available until December 31, 2009, when the itemized state and local sales tax deduction expires.

Higher education tuition deduction. The higher education tuition deduction, permitting taxpayers to take an above-the-line deduction for qualified tuition and related expenses, will expire this year. The maximum deductible amount is $4,000 for taxpayers with adjusted gross income not exceeding $65,000 ($130,000 for joint filers). Taxpayers whose income exceeds that limit but does not exceed $80,000 ($160,000 for joint filers) may deduct up to $2,000 in qualified expenses.

Full e-newsletter here:  http://www.execusite.com/shwiffcpas/newsletter.html

Every citizen in Burlingame is urged to take the two-hour "Get Ready" course offered by Central County Fire to gain a basic understanding of how to prepare yourself, your family, your home and your workplace for a major disaster. The next class will be offered on November 4th from 6:30 to 8:30 p.m. Admission is free. To register, call the Central County Fire Department at 650-558-7600.

City of Burlingame website

If you're a S.F. resident one of the best emergency prep trainings I took many years ago was offered by NERT (Neighborhood Emergency Response Team).  The link will take you to their upcoming trainings.

For now, do your annual check of your emergency kit or put one together if you haven't already.  If you Google Emergency Preparedness Kits, there are several choices of companies where you can purchase one online if you'd rather not assemble your own.

Be safe!

A recent inquiry from one of my clients:

Hi V,

This one is interesting.  I just spoke with the list agent who does these types of auctions in southern cal.  This is not an REO (Real Estate Owned) or short sale.

There will only be 2 showings for the property prior to auction.  The $300K is the suggested starting bid price.  The buyer can have no contingencies when they do bidding meaning all inspections need to be done up front.  No loan contingency either which I think is very risky since we are dealing with challenging lender issues & if there are any issues with getting a loan than a buyer risks losing their initial deposit (which will be at least $5000 for this property).

It sounds like there are also HOA issues.  The entire board was just unseated due to fraud issues.  They also have a special assessment coming through but the amount is unknown.  The current HOA is very high!!  $525/mo

If I didn’t mention, with condo buyers as part of their contingency period, I recommend that they hire Jacquie Berry for HOA analysis.

It’s really important that the financials/reserves are analyzed in order to determine likelihood of future assessments and if there are any other red flags.

Typically this service along with a contractor’s inspection & possible pest will run about a $700-1000 which a buyer pays for.

This type of purchase is probably better for an all cash buyer.  List agent also mentioned that most buyers don’t get inspections!!  This is really risky and not what I’d recommend unless a buyer was a contractor.

Last detail per the website: A BUYERS PREMIUM OF 4% WILL BE CHARGED TO THE BUYER AS A CLOSING COST, DUE AND PAYABLE AT CLOSE OF ESCROW. THIS FEE IS PAID DIRECTLY TO US AUCTION ADVANTAGE AND IS NOT INCLUDED IN THE PURCHASE PRICE.

Let me know if there’s still interest and I’ll request the available disclosures.

In my constant quest to be eco-friendly both personally and professionally, I've been implementing a few environmentally friendly business practices.

Currently, I’m in the process of reducing the number of direct marketing pieces to a quarterly schedule, instead staying in touch monthly with friends and clients via email newsletters. 

I've also successfully been working with electronic systems for about 2 years, creating a paperless transaction for clients who are buying or selling real estate.  The response has been overwhelmingly positive from clients who appreciate being able to review documents online as well as securely sign the dozens of disclosures and reports electronically. 

Gone are the days of having to kill a forest to buy or sell a home.  It is technology which hopefully more of the real estate industry will embrace, especially considering that a typical transaction consumes 250-300 sheets of paper and can top 600 sheets with condo transactions.  Additionally, the quality of electronic files is far superior to hard copies which lose print detail with each printing and faxing.

Clients, at their leisure, can go online to review & sign reports and disclosures.  With their busy schedules of juggling work & family, they appreciate the convenience & efficiency of an electronic system.  Clients also receive all their transaction paperwork on a CD rather than a hard copy; a format which is more convenient to store then a two to three inch paper file as well as it being easier to locate specific documents on disk.  Clients also appreciate being able to contribute to being eco-friendly.

Title companies and lenders are also slowly moving towards the paperless transaction.

At the conclusion of a transaction, I also purchase carbon credits to further offset my carbon footprint.

If you’d like to learn more about paperless transactions, give me a call!

Image: FreeDigitalPhotos.net

I just signed a one year lease for my 3-bedroom rental at $3000/mo including a garage! 

The rent is finally back to the previous high when the last rental peak occurred during the dot.com heyday.  It took some time to rent (about 3 weeks), since I started out high at $3400/mo and made a couple of reductions. 

It’s a balancing act of getting top market rent and a top applicant within a reasonable period of time.  Since there’s no hard science to setting market rents, it’s easier to start out on the high side & get a sense of interest and make a reduction after a couple of showings if needed. 

Due to S.F. rent control, you have one chance to get top market rate for a rental.  Once that unit becomes occupied & if it stays occupied for several years, it’s typical to have your building expenses rise at a much quicker pace than the minute allowable S.F. rent increases which don’t keep up with inflation or building expenses.

Our 3-bedroom has always been the challenging unit to rent in my 10+ years of owning this multi-unit building.  It typically draws the roommate crowd which can bring inherent management challenges if the roommates aren’t the right mix.  It also doesn’t have a second bathroom which is a negative for many.  We’ve even considered splitting the unit into two smaller units. 

Based on prior experience, the ideal rentals to have are 1 to 2 bedroom units.  They typically bring in a higher price per square foot & there are more renters who can afford a 1-2 bedroom vs. a pricier 3-bedroom.  Since there is greater demand, these units tend to rent very quickly, even in a normal rental market.

My 1-bedrooms have almost always moved fairly quickly (within a week of hitting Craigslist) in my history of owning this property. 

I also recently rented a 1 bedroom for a client at $2000/mo with no parking included.  There was solid interest with about 10 groups through at the first showing. 

I failed to mention that both rentals are pet-friendly which tends to bring in more applicants since our S.F. pet friendly inventory is so low.  I’ll go into more detail in a future post about marketing to renters with pets.  This is a great niche market you may want to consider if you’re having trouble moving a rental.  There are specific guidelines to follow to ensure a successful residency with tenant’s who own pets.  I’m happy to share my systems if interested.

In addition to a strong rental market & being pet friendly, location of the rental property is also key.  These properties are on the Glen Park border, a neighborhood with excellent restaurants, close proximity to freeways 101/280, close in to City College of S.F. & S.F. State, walking distance to Glen Park BART, and just a few minutes south of Noe Valley.  This neighborhood is in demand and a slightly less expensive Noe Valley alternative.

If you’re considering investing in S.F.  rental property, I’m happy to be a resource. Even with the challenges associated with rent control, there are great opportunities with our rental properties. 

S.F. has a steady draw.  In my 10+ years of renting my units, I’ve seen a steady influx of people relocating from other parts of the country.   I’ve also noticed a tremendous number of techies who want to live in S.F. even though they have to make the long commute to Silicon Valley.  S.F. is a world class city & consistently is in demand!!

Until next time!