TIC sales update

The failure of yesterday's TIC auction at 3731 Fillmore Street leads one to ask many questions of its' meaning. Does it mean the highest bid was the true market value of the unit? Does it mean the auction was botched? Does it mean that TIC's are not well suited for auctions? Does it mean that the market is crashing all around us since even the lowest estimates of value prior to the auction were around $450,000, or 10% higher than the highest bid.

I've got my opinions, but I thought it would be constructive to get an update on how TIC's have been trending. In May of 2008 I ran the numbers for all TIC sales per year since 2002, but didn't include 2008.

So here's the update on total TIC sales per year (per the San Francisco MLS)

'02 = 154 sales of any sized TIC
'03 = 269 up 75% year over year
'04 = 395 up 47% y-o-y
'05 = 539 up 37%
'06 = 652 up 21%
'07 = 722 up 11%
'08 = 434 down 40%

Now before we jump to conclusions, condo sales are down 20% from 2069 in 2007 to 1665 in 2008.

Condo sales (per the San Francisco MLS)
'02 = 2119
'03 = 2313 up 9.2%
'04 = 2557 up 10.5%
'05 = 2442 down -4.5%
'06 = 2150 down -12.0%
'07 = 2069 down -3.8%
'08 = 1665 down -19.5%

You can also see by comparing the two charts that TIC sales absolutely exploded, so a bigger drop was probably due. TIC sales are still above the number sold in 2004, whereas condo sales haven't EVER been this slow (well, I'm using the MLS for my reporting and that has three flaws, one it is only Realtor represented sales, two, the current MLS only goes back so far. 1996 reported lower sales, but I'm not convinced that is accurate data. And three, it doesn't include FSBO or sales center sales at new construction buildings).

Single Family homes are down 8% from 2007 to 2008.

'02 = 3100
'03 = 3392 up 9.4%
'04 = 3321 down -2.1%
'05 = 3093 down -6.9%
'06 = 2718 down -12.1%
'07 = 2322 down -14.6%
'08 = 2136 down -8.0%

There may be other reasons that TIC sales have dropped further too. Buildings that have to enter the lottery to convert to condos have bloated that lottery. Only 200 conversions are granted per year. Compare that to the TIC chart above. 200 was great in 2002 and 2003, then half as good in 2004 and in 2007, TIC's sold not only had to compete with 522 more units than could qualify, but all the overage from the prior years. Thus the allure of TIC's an an investment that should increase in value with conversion has greatly decreased.

Winning the lottery probably became less important with the proliferation of fractional lenders and loans in 2007. But now the TIC lender market is contracting, and loans are at least 1% more expensive than comparable Condo loans.

Overall, the meaning of the failure of the auction at 3731 Fillmore to generate a much higher offer probably had more to do with TIC's suitability to auctions, and the confusion that occured leading up to and during the auction. Buyers don't buy when they are confused and ill informed.


Auction part 2 - the painfully slow bidding

This is the middle of 3 videos (How it Started is here, The anti climatic end is here). This one you hear their pitch for why anything up to $710,000 is a great buy since unit #1, the window immediately above the crowd, sold for $710k in October. That really won the crowd over as you can hear.

There were quite a few anecdotes indicating these guys really didn't know the San Francisco TIC market. One of the "dudes" (the auctioneers - there were about 4 of them with assorted other characters who seemed like groupies) was telling a Buyer how 6 unit TIC's were great because you could convert them to Condos... he said it like it was a piece of cake. Someone nearby jumped in and explained the lottery, and the "dude" seemed to back down.

At the end of the auction another "dude" said the City of San Francisco would have no choice but to green light all current TIC buildings to Condos conversion to generate revenue. Between the two comments, you had to wonder what else they were telling uneducated Buyers that they might believe. Is that what they told the Buyer of unit #1? (update/correction - the auctioneers only got involved recently AFTER the sale of #1 was long over, so they obviously didn't influence that sale) I sure hope not, but something has to explain why they'd pay $710,000 when the "free market", eg a rag tag group of bidders and spectators, says these units are only worth $410,000. (update, #1 sold with a parking spot, and they had Buyer representation by an agent with a South San Francisco address and a San Mateo web site - knowledge is power, local knowledge especially, and they didn't hire a local, and doubtful the agent had any TIC experience which is critical).

The other item they admitted to getting wrong was telling Buyers, in the days leading up to the auction, that Bank of Marin would do 10% down loans. The truth.... which they glossed over... is that they require 25% down unless you have a credit score of 740 or greater in which case you can get away with 20% down.

The auction story - How it started

With a Lender pre-approval letter or proof of sufficient cash for a cash purchase you got to sign up as a bidder and get a piece of paper with a hand written number on it to waive if you agreed to the next price.

This video is the auctioneer explaining that there is a "reserve" bid price (minimum they will accept giving them the right to reject any under-reserve offer), and that if you're not the highest bidder you probably won't find out what the reserve price was.

Approximately 75 people were there, many admittedly to watch the show. About 20 to 25 people got approved to bid. The 75 Buyers, tire kickers and agents toured the property, while the sign ups happened in the dining room of unit #2. Around 1:30pm they called everyone outside to explain how the auction was going to work.

The comedy of errors started early on, around 1pm, when one of the several members of the auctioneer group (the "dudes") said they would be auctioning all 5 of the remaining units off. Soon after another said that was a mistake and it would only be unit #2.

In walks Tim Brown of Brown & Co, and while I was on the street and can't verify, I believe they all got together and decided to auction the middle two units as well as #2. The confusion didn't help, and given the relatively small crowd, offering up 3 units wasn't wise. (update, Brown & Co. denies being involved with the auction. I don't doubt that since it was another business handling it, and Brown & Co would not have made the mistakes these guys made. They also claim to be against it, another easy thing to believe.)

You can see from the above video how things started. In addition there was an question and answer period explaining who the Lender was, what rate they were offering and now much down payment you needed. Apparently they had been telling potential bidders they could come in with as little as 10% cash.

There was so much confusion, and there were so many Buyers who were not represented by experienced TIC agents, that they pretty much crushed their chances of getting decent bids from the outset. Not that a TIC in a 6-unit building is a candidate for auctions, especially those on 4 to 5 days notice. This is no Single Family Home in the Sunset as the auctioneers found out the hard way.

By the way, among the many mistakes leading to confusion, they listed this TIC in the MLS as a Condo (update: corrected today, Feb 25th, the day after the auction, when it was withdrawn from the MLS). I'm not sure how many bidders showed up expecting their pre-approval letters to really mean something, and their hard won 5% interest rates to help them afford more, but if they did, 6.5% paying 1 point and having to put down 20% to 25% certainly would have been all the deal killer they needed. I just double checked the MLS again and no where does it mention anything about TIC's, fractional loans, or anything else.

How it started? Not well. It didn't end well either.

Auction results of 3731 Fillmore - not what they expected

Disappointment on all sides, and frankly this was a comedy of errors. Starting with an error of mine - mistakenly writing that the $710,000 October sale was for Unit #6 or the top floor western facing unit. It was actually #1, the first floor eastern facing unit. I just assumed that only the most desirable unit in the building could possibly sell for $710k. Instead, #1, which is probably the 2nd or 3rd least desirable unit got $710k. Something doesn't add up... but I'll get to that later.

Starting with the punch line first... the auction ended badly as seen and heard in this video which is the end of the auction (earlier episodes to come)

Listen for the male voice saying "any other terms that you're going to change on us" and then a "thank you", which he said sarcastically, and then waved and walked away angrily. Another "buyer" followed him also visibly unhappy with the process. That was in response to an announcement from the auctioneer that instead of selling one unit each to the top 3 bidders, the highest bid was so low, that he would now only speak to that one bidder.

Unfortunately there was a confidential "reserve" bid, which I suspect was close to $500,000. So with the highest bid at $410,000, the auctioneers changed their tune, but that was consistent with not meeting the reserve bid. The above video starts with that change.... something he could have explained better, that it was due to not meeting the reserve.

What happens next is anyone's guess.


Homes 4x more likely to be REO's than Condos in San Francisco

There are 44 Bank Owned REO's that are Single Family homes in San Francisco. Click here for the list (good for 30 days from the writing of this post).

But since there are only 570 Single Family homes listed For Sale in the San Francisco MLS, that's 7.7% of all homes. As I mentioned in an earlier post, only 2.7% of Condo, Coop, Loft and TIC listings are REO's with 23 out of 949 on the market.

Of course, part of the reason is that "District 10" or the southern most San Francisco neighborhoods are the hardest hit, and they are almost entirely Single Family home neighborhoods.

For an up to date list of all REO's in San Francisco you can either keep checking back here, or visit Automated-HomeFinder.com, enter your search criteria, and be sure to use the Comments section at the site to request REO's.

Not all REO's are deals

Of the 23 REO's in the list below, one that stands out appears to be an over priced 1 Bedroom. Granted, 1818 Broadway is in Pacific Heights, but an REO that is Asking over $1000 per SqFt? Yikes. Generally REO's are priced below market. Banks usually want the "inventory" moved quickly, so over pricing isn't an option.

This photo of the building is the only one in the Listing... but it's on lock box, so I may have to break out the trusty video camera for a little tour to get a look at the interior.

One of the reasons I think it's priced too high is my new listing, 3501 Laguna, is also a 1 bedroom but is larger and in what I think is a better location (it's across from two parks, Fort Mason and Moscone Rec), yet it is priced lower. The size difference is 768 SqFt vs. 630 SqFt and that usually makes a big difference in one bedroom apartment. But the size makes the $20,000 price difference (only 3% apart) look exorbitant since 1818 Broadway is 20% more expensive than 3501 Laguna in Price Per Square Foot.

So 1818 Broadway hardly seems to be your typical REO. Maybe they assume any offers will be 10% below their asking price, and I'm just guessing but a $600,000 price would make 1818 Broadway look far more attractive and likely sell quickly.

If there is any lesson here, it's to shop, shop and then shop some more. A dedicated Buyer can know the market better than most agents for "their market" and will develop a gut feel for what's a deal and what isn't. Unless I show up and find a place larger than 630 SqFt with nice outlooks that is also remodeled, I suspect this one isn't a deal. Time will tell.

Of course, over priced listings tend not to sell in San Francisco anyway, so 1818 Broadway could be a buying opportunity in that a Buyer can go in with a very low offer and try to push it through. My guess is not too many other Buyers will bother, so your one offer just may do it even if it's quite low.

Updated REO Condo list: San Francisco condos 2/22/09

Total number of San Francisco REO's (Real Estate Owned by a Bank) is 23 Condos, Lofts and TIC's actively For-Sale on the MLS. Click here for the current list of REO's. If the page doesn't open it means you're reading this past 30 of this writing, so please look to the top of this blog for a new list.

23 REO's out of 949 currently For Sale condos, lofts, coops and TIC's in the San Francisco MLS is a mere 2.4% compared to what I hear can be 30% or more in badly hit areas. With the government trying to get banks to do loan modifications, while several of the bigger banks with moratoriums on foreclosures, that number is likely to remain low for a while... albeit artificially low.


3731 Fillmore's Roof Deck & Apt #5

As I mentioned in the post below, while checking on the $293,888 1BR TIC at 3731 Fillmore that is to be auctioned on February 24th, I noticed 4 of the 5 other doors were open and vacant. #6 was sold last October. It's a top floor rear/west facing apartment. The other top floor unit is #5 facing Fillmore Street or East. I also noticed stairs to the roof and found an amazing roof deck.

Here's the roof deck walk through followed by a tour of Apartment #5

Another auction: 1BR Marina TIC apartment

Note the Video walk through below.

Listing price in the MLS was $298,888. 5 and 1/2 hours later is was dropped by $3,000 to $295,888. This morning, only 1 day later, it was dropped another $2,000.

Why such tiny drops you ask?

If you like, start the video walk through and read more below:

So why the price drops? Because price drops are re-emailed to Buyers who have been set up on email alerts for new and changed listings that meet their search criteria. Check out www.Automated-HomeFinder.com if you'd like to set up your own search, or speak to your Realtor who will do it for you. Other sites like CleanOffer and SF-MLS-Search.com also re-email new listings or price changes. So the strategy is to get it noticed by everyone with an active search in the area.

Any why so many drops so fast? Because they are planning to have an auction outside the property on Tuesday at 1pm which is a mere 6 days after entering it into the MLS.

I'll post yet another video because while there I notice that 4 of the 5 other apartment doors were open. So my guess is that after the auction they will bring on the other 4 apartments. Apparently back in Sept/Oct 2008 unit #6 (correction, it was unit #1, a 1st floor western facing unit) in the building sold for $710,000. They are marketing parking separately, so that might have included parking (update, they definitely did include parking per the above) whereas the $294k price on #2 does not include parking.

To speculate even more, I'll guess that the auction is designed to determine the true market value of these TIC units. #2 is probably the least desirable in the building, although not a bad apartment at all. #6 (#1 I meant) almost definitely set the high price because it went into contract before the financial crisis became national news. The auction of #2 without parking is likely to set the bottom price. Then all other units may then be brought to market with prices in between.

I haven't spoken to the listing agent, so the above is guesswork. I saw Brown & Co open house signs in the building, so who knows, maybe the Auction agent and Brown & Co are working together in some fashion.

Auction date and time: Tuesday February 24th at 1pm outside the building. See you there. And if you're interested in making an offer and are unrepresented by another Realtor, drop me a line at info AT sfishome DOT com

Video walk thru of 3501 Laguna

The SFisHOME Real Estate Group presents a YouTube video walk through on it's latest listing:

New SFisHOME Listing: 3501 Laguna St #104

3501 Laguna St #104 Open Sunday 1-4pm

If you want the ultimate in recreation and walkability, 3501 Laguna, across from 2 parks, and 2 blocks to the Bay is for you. Watch the photo tour or click on the "view detailed listing" link.


Short Sale "income" taxation treatment

I'm not an accountant or lawyer and this is not tax or legal advice. If you are going to attempt a Short Sale, in addition to hiring a competent Realtor, you should run your situation by an attorney and/or accountant.

However, one of the most common questions in Short Sales is whether or not the Bank is going to report the "forgiven" debt amount to the IRS, and whether or not the IRS will then treat it as income.

The good news is that the "Mortgage Debt Forgiveness Relief Act of 2007" means the IRS won't tax you on it. What is confusing to most is that the bank is likely to report it to the IRS, and that the IRS does see it as income, but now it's a special kind of income that is separated out and NOT taxed.

My layman's understanding of the process is that you need to attach the 1099 the lender provides after the sale which shows the amount of forgiven debt, and you need to file form 982 which essentially cancels it out.

Again, please don't rely on this article... use it to run by an accountant or lawyer. But the punch line is that until 2012 you should be forgiven the debt and NOT be taxed on it if you file correctly with the IRS.

One last piece of advice, make sure your bank doesn't file a deficiency judgement against you requiring you to pay the forgiven debt down the line.

Considering a short sale? Drop us a line at INFO at SFisHOME dot COM

Paying your mortgage off in half the time ala Money Merge Accounts

I'll give this short thrift because this post from "SearchLightCrusade" goes into incredible depth debunking Money Merge Accounts or MMA's.

But the bottom line is that when something sounds to good to be true, well then, it is. I actually dismissed the concept outright when I first heard about it for two reasons. For one is just it made no logical sense. How could you pay off your mortgage in half the time without paying anything extra? Secondly, if it was that good wouldn't EVERYONE already know about it and be doing it? Wouldn't Oprah include it on every "save money" show, and Suze Orman bring it up on every show?

The concept in a nut shell is that you set up either a HELOC (Home Equity Line of Credit) or get a special mortgage where you direct deposit your income into it, thus lessening the interest. You then pay your monthly bills out of that account at the end of their 30-ish day pay cycles. So instead of the bank floating your money for30days and making money off you, you float it and save the money. Finally, there is very expensive software that will read your budgeting and recommend when you pay extra payments.

It all sounds very convincing.... but to to skip to the punch line, the only part of this that really has a major impact are the extra payments, and you can do that on your own by either making a random extra payment, or paying every 4 weeks instead of every month (there are 52 weeks, not 48 in a 12 month year). And per the SearchLightCrusade post one extra payment per year on your mortgage pays it off 8 years earlier.

Paying an extra payment per year is free, and you don't need to shop for special mortgages or get a HELOC. Besides, these funny money schemes were mostly touted when everyone had access to easy money. All mortgages and HELOC's are much harder to get these days, AND usually the Money Merge Account ones are more expensive.

So take a free piece of advice.... if you want to pay off your mortgage early, make one or more extra payments per year. Your first extra payment can be the $3500 some of these slimy outfits want to charge you.


Good foreclosure news for some owners is bad for others

4 banks announced new moratoriums on foreclosures, Wells Fargo, Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase per this article.

This may be great news for Single Family homes, but could have horrendous unintended consequences for Condo buildings. As I wrote a few days ago, condo buildings that have more than a few foreclosures are at risk of spiralling out of control as unpaid HOA dues add up. Once all possible common area expenses are cut, and the building is short on cash flow, dues must be raised, or special assessments must be made to raise money from the "healthy" owners.

Unfortunately some of those owners will likely be at the financial edge of a cliff... with any extra expense could push them into foreclosure... and you can just picture the snowball effect and possible avalance of foreclosures.

The moratorium on foreclosures is only going to lengthen the time HOA's will not get paid by defaulting owners, and that will force HOA's to pursue foreclosures themselves to try shorten the time period that HOA dues go unpaid. Of course there are legal costs associated with pursuing foreclosures, and if the owner in question has no equity then none of that money will be recaptured. The additional downside is that foreclosed units usually sell for less than market value, thus creating a new and lower market value for all other units throughout the building. As owners watch values decline, even more may default and the beat goes on.

So good news for those in financial straights may only cause more to join them, especially in newer condo buildings where everyone is underwater already.


$8000 help buying your first home - or is it?

Word has it that the revised tax credit that will make it into the Stimulus package is $8,000 for first time home buyers. Unfortunately, for individuals making over $75,000 and couples making over $150,000, you can't qualify. In San Francisco that may eliminate the majority of would-be home owners from benefiting from the Stimulus package.

However, if you are earning less than $75k/$150k, and haven't bought a home in the past 3 years, the good news is that the $8,000 credit does NOT have to be paid back like last year's $7500 credit.

Of course $8,000 is still peanuts in San Francisco... but it's still $8,000 in your pocket, or available for other needs, like paying for Closing costs, your move, etc.

If you are house hunting, please drop me a line to ask about our free Buyer Agent services, and don't forget to use SF-MLS-Search.com for a map based home search, or www.Automated-HomeFinder.com to set up an email alert for properties meeting your criteria.


Fannie Mae REO search site

Looking for REO's? You won't find many in San Francisco, but in areas outside of the city there are plenty. Fannie Mae holds tons of them AND they may offer you special financing... like 3% down, or loans on up to 10 properties for investors.... up from 4.

More on the special financing options here.

And check out the Fannie Mae REO site here.

For an email alert service of any or all REO's in San Francisco enter your criteria at www.Automated-HomeFinder.com and use the "comments" section at that site to specify REO only.

Auctioned San Francisco property

I'm looking for more details on this story.... something I've always wanted a Seller of mine to take me up on... to auction their property. Well, someone did it this week... so far I'm just piecing the VERY interesting details together.

1206 32nd Ave was listed in the San Francisco MLS on Feb 6th, only 5 days ago, for $349,000. Two days later they priced dropped a mere $112 (not $112,000... ONLY one hundred twelve dollars) to $348,000. Most likely a clever ploy to get the listing re-emailed to everyone on an Listings email alert.

The MLS remarks read "Auctioned to highest bidder at the property Feb. 9th 4pm. Starting bid $349k" and in the agent-only remarks it read "Must sell by Monday February 9th 4pm. Auctioned to highest bidder at the property Feb. 9th 4pm." AND it read "Starting bid $349k Bring a pre-approval letter and blank CAR contract."

I just read on Trulia that 300 people showed up at the appointed time (2 days ago) and 135 were pre-approved. I have NOT heard about how the auction went... was it wild, tame, inside, outside, did it go straight up like a rocket, or slowly go up. But I did hear that it allegedly sold for $775,000.

I will not be able to verify that until it Closes Escrow and shows up in the MLS again as "Sold", but if it's true, that is $629 per SqFt which is the TOP of what last year's price per SqFt was in the area... and those FEW homes tended to be in much better condition. Of course a recent nearby sale went for $840,000, but that home was listed as being 400 SqFt larger with an extra bedroom and 1/4 bath.

But it sure looks like this home sold for it's maximum market value... not it's minimum. So if you are a Seller, this is an option worth a serious discussion. Call or email and we can discuss details of how this can work for your home. Full contact info at www.SFisHOME.com or email INFO at SFisHOME dot COM

Best deal in San Francisco?

On Jan 23rd I wrote that 279 Flourney, a San Francisco REO, looked like a great deal... and pointed out that "it still won't sell" priced at $389,900. Sure enough it was taken off the market and was just relisted 2 days ago for $349,900.

For more on the history of this home read my earlier post here.

Is the deal good enough to jump on now? Well that depends on what you want it for (owner occupy or as an investment) and of course whether the home and the area are for you.

If you are an unrepresented Buyer (meaning you haven't employed a Buyer's Agent - free until you buy in which case the Seller, in this case the Bank, pays my commission) I can get us into the home at anytime since it is on lockbox.

Looking for other homes and opportunities, check out www.SF-MLS-Search.com which allows you to do map-based searches and save properties or searches for email updates.


The Beacon has additional problems: COA vs HOA

Unpaid bills at The Beacon (250 & 260 King) made me think my prediction (read here) was far ahead of it's time, but instead the building has other problems. I'm not familiar with the issue until reading this post at SocketSite, a San Francisco real estate blog.

For what appears to be a pretty good explanation read the comment posted by "War" at on February 9 at 11:30 AM.

Apparently a new property management firm found an accounting error that showed that the Commercial Owners Association (COA) was paying less than it's intended share for common area expenses, with the Home Owners Association (HOA, or as the Beacon refers to it, the ROA) paying too much. Now the HOA or rather ROA wants this problem corrected and is only offering to pay the amount of things like the PG&E bill that they deem accurate.

Whatever the outcome, all I can say is "yeesh". A building that is seeing a nose dive in property values has yet another issue that could dramatically effect the building negatively. If the two Associations can't get this straightened out soon, and potential Buyers learn about it (which they should since it certainly seems to be a material disclosure) it will attract even fewer buyers and push prices down even further and faster.

The shine on this ugly penny? If you are a Buyer, and you like the location, it's bargain hunting time.

Keeping track of foreclosures and REO's in San Francisco

The San Francisco Chronicle's SFGate.com site has a very user friendly way of tracking how many foreclosures are happening throughout the Bay Area. You can drill down by zip code or map to get to San Francisco's numbers.

The San Francisco site is: http://www.sfgate.com/webdb/quarterlyforeclosures/?appSession=064672608671036

This is just a tracking tool, not a site that provides details on the properties being foreclosed upon. But if you are curious about foreclosure trends in San Francisco this site will answer your questions quickly and easily.


San Francisco in a better position than other major cities

After writing the below posts about an area of town, and a couple of buildings in particular, that I think will be far more susceptible to foreclosures, short sales and continuing price declines, it got me to wondering how San Francisco compares to other heavy condo cities. So I turned to Trulia's "market trend" pages and compared San Francisco to New York City and Miami. Unfortunately Trulia's numbers are for all residential properties, so this is not a condo comparison, but rather a very general market comparison, but it will suffice.

My suspicion is that both New York and Miami had run ups in real estate prices that far outstripped San Francisco. I moved to San Francisco in 1997 from New York City, and the year before moving here I had found a $120,000 1BR condo in NOHO (north of Houston rather that South of Houston SOHO in New York, but not quite the Village). As a brain washed New Yorker, I just assumed I was living in the most expensive City in the country. So when I arrived in San Francisco and ran into prices that were DOUBLE what I had seen in New York, I was utterly shocked.

Today, New York seems like it is twice as expensive as San Francisco, and if perception were right it would mean we doubled in price since 1997 while they quadrupled. Meanwhile, the stories I hear about Miami were all about fraud, massive speculation and general bubble hysteria driving prices straight up. New York is getting hit by the financial crisis more than any other city and is of course home to Bernie Madoff.

San Francisco has seemed tame in comparison. So I turned to Trulia to confirm my suspicions and discovered the following:

Since 2000 to today Miami's median price increased 108% from $113,000 to $235,000. New York skyrocketed an astounding 328% from $213,000 to $912,500. Meanwhile, San Francisco started out being almost twice as expensive as New York at $430,000 for a home in 2000, but is now about 30% cheaper at $630,000 which is a 47% run up in prices. Again, in sum, SF up 47%, Miami up 108%, NYC up 328%.

As the saying goes, the taller you are the harder you fall, and what goes up must come down, and in that regard New York and Miami are in far bigger trouble than San Francisco.

It occurred to me that San Francisco may have had a larger earlier run up given the dot com bubble that began collapsing in 2000. So I looked at 5 year ago numbers. Unfortunately Trulia didn't have New York numbers, but anecdotaly I know they were seeing massive runs up in the last couple of years. Meanwhile, Miami is still up 27% over 5 years ago, and San Francisco is up only 5%.

So how much further will San Francisco drop? Well I refer you to the below posts where I believe there are significant price drops still to be seen IN CERTAIN AREAS. But overall, since we did not rise nearly as far as other cities, don't expect us to fall as far. New York has only recently begun dropping, and they could be in for a long and painful fall, and no one is doubting that Miami is in a free fall with no end in sight.

In the better parts of town... expect San Francisco to remain resilient. San Francisco went from being twice as expensive as New York to 30% cheaper. What's more, HOA dues in San Francisco are often 1/2 to 1/4 the amount in New York, so your dollar goes a lot further here in SF. Finally, New York has the SOMA/South Beach/Mission Bay problem... there seems to be never ending sites for building straight up. But if you want to live in Noe Valley or Russian Hill, they won't let you build up, so for the most part the inventory will always remain the same, and well to do buyers will compete with each other for the best homes for an eternity. It's supply and demand supplemented with equally well off Sellers who refuse to sell low and can afford to be stubborn. So this "sorta" Buyer's market now isn't going to last forever, and San Francisco prices will not drop any where near the levels of New York, Miami or the rest of the Bay Area. And once the economy straightens out, and Buyers here still have jobs, and realize that Sellers aren't "blinking", prices will once again begin to climb... albeit slowly and steadily, not crazily.


Some Condo buildings may suffer more than others

The below post was primarily about Condo foreclosures in San Francisco in which I described a couple of buildings that could suffer more than others due to a snow ball effect of increasing foreclosures and declining prices. What I hadn't even taken into consideration are the effects of defaulting homeowners not paying their HOA dues. This New York Times article speaks to some unique aspects of New York City real estate, but the general issue is the same here in San Francisco.

Banks get the first crack at equity when a homeowner goes through a foreclosure or Short Sale, and in the buildings where owners have no equity, the HOA gets nothing back. As foreclosures mount, the HOA begins to get in trouble, and in many condo buildings that spend most of what comes in, it doesn't take long for the building to get in trouble. To save, repairs, cleaning, amenities, and anything else that can be cut gets cut, thus causing the building to deteriorate in other ways.

Worse, the HOA may have to raise a special assessment on remaining owners in order to make up any budget short falls, and that is unwelcome pressure on any owner who is barely squeaking by and could cause further foreclosures.

Older buildings tend to have many more owners with equity, so even if they were to get foreclosed upon, the HOA will collect delinquent dues with left over equity. So this really is a new building issue. In many newer buildings every foreclosure can have a major impact since no owner who gets foreclosed upon is likely to have any equity.

Once again I point you to the two buildings I mention in the below post... they have already been hit by foreclosures, so their HOA's may already be under pressure. And if they have resetting loans, or owners suffer job losses, or just need to move and can't afford to hang onto the condo, it could become one of the worst downward spirals in San Francisco.

The coming Foreclosure Wave in San Francisco

San Francisco has largely been protected from the catastrophic price drops that other Bay Area counties have been suffering. The arguments for San Francisco not suffering a similar downturn is partly that we have very restrictive zoning laws that don't allow any new construction over existing building heights in the majority of neighborhoods. However, the SOMA, South Beach & Mission Bay neighborhoods have been approved for thousands of new condos in dozens of buildings in the recent past and in the near future. So the supply and demand differential is far different in the south eastern part of town vs the northern parts of San Francisco.

However, a large supply, with more slated to come on the market, is only one part of the problem. The other is that the prices that Buyers of new or newer building condos paid made no sense. I expect to take some heat on that comment, not because it isn't true, but because it is easy to make that comment in hind sight. But you'll just have to trust me on this. I walked into many buildings dating back to 2004 and saw prices that matched those of the best properties in Pacific Heights and Russian Hill. In fact, as I watched only a handful of the most special properties in the north end of town reach $1,000 per SqFt, I seemed to be finding far more places asking $1,000 per SqFt in SOMA including condos that were eye to eye with Bay Bridge on-ramps, complete with 24/7 traffic noise and the resulting dirty windows.

One of the buildings that I predict will have a steady stream of REO's and Short Sales is The Beacon (250 & 260 King). Back in 2005 a colleague of mine was selling condo after condo in The Beacon, and it stumped me. I mean I like the location, especially since I'm a huge baseball fan, and because it's got phenomenal access to commuting (Caltrains and the 280 on-ramp) and it's got great access to shopping (Safeway & Borders among others in the building) and bars/restaurants (District across the way - although that hot bar wasn't even a gleam in the owners eyes when the building went on sale). But the building was original built as rentals, it was situated on leased land, none of the parking spots were deeded, there is no air conditioning in the condos... overall, there was nothing special about the building, only the location.

Yet prices were $800 per SqFt, above most of the condos I was visiting at the same time in the Marina, Cow Hollow, Russian Hill, Pacific Heights and so on. So I asked my colleague what was going on at the building that I was missing. I'll have to do a poor job of paraphrasing because I dismissed her comments at the time, but she claimed it was a great opportunity, a great building, and that the coming neighborhood amenities would cause prices to keep going up. I dismissed that because prices already seemed ABOVE where I would have expected them to be AFTER the neighborhood became what she was predicting.

The more I visited SOMA, South Beach and Mission Bay, the more I came to believe in my "new car" theory. That the Condo developers were pricing the condos like a hot new car... Buyers were buying them because they had the new car smell... and as soon as they drove the car off the lot it depreciated by 10%. You can always buy last year's model for a significant discount to the new model, yet there always seem to be plenty of people who just have to have the new car (although even that is changing in America today).

In real time (back then) the moment The Beacon came onto the market, 140 South Van Ness was last year's model. Then The Palms (555 4th St) came on the market and no one wanted The Beacon any more. When One Rincon Hill came on it was all the rage even as softness in the market started to become evident. Once The Infinity came on no one seemed to care anymore about One Rincon, and now phase 2 of The Infinity has just hit the market, so phase 1 is "last year's model" and any re-sales will be at least 10% below what the original Buyer paid.

The prediction for a coming wave of foreclosures and short sales is easy to make because it's already happening. There are 2 for-sale REO's in The Beacon right now (see the below post) and 1 each at 140 South Van Ness and The Palms. And virtually anyone who has ever bought in any of the three buildings, except maybe those who have purchased in the last couple of months (and even some of those are already under water) will be so far under water, that they will have to come up with money in order to Sell for many years to come.

Again, the 2004 to 2007 prices paid were basically "tomorrow's prices" and by tomorrow I mean some future expectation of the neighborhoods and market. The original owners at 140 South Van Ness are more protected because they bought in 2003, but the '05 and '06 buyers are already well under water. But at The Palms and The Beacon, the condos depreciated the moment they were "driven off the lot", and since then the market has dropped from 10% to 20% or more.

I expect it will be close to 10 years before they get back to their levels they paid. If I am right, then EVERY sale in all three buildings will be some sort of "distress" sale. Either a Short Sale or an REO, and anyone who can afford not to sell will eventually become a stress sale, or will add to a growing number of rentals in these buildings which drive down rental rates, adding to the burden of those who always meant to use them as investments.

Finally, one distressed sale leads to another as the prices keep coming down until Buyers see them as deals. Current owners see the low sales prices and realize they are paying more on their loan then their condo is worth, and some will purposely short sell or allow themselves to be foreclosed upon to get out. If that happens, it becomes a snow ball effect of ever decreasing values. Devaluation happens when Buyers expect tomorrow's prices to be lower than today's, and if every buyer sits on the sidelines waiting, it will take enormous discounts to move any Condo. The lower the prices, the more likely home owners who paid higher prices will want to cut their losses. That is likely to eventually even impact the 2003 buyers at 140 South Van Ness.

At some point the prices will be so low that new buyers will snap up the condos, but that level is likely to be far lower than today's prices.

Could this be stopped? Well, there are possibilities. For one, all new construction is already coming to a halt thus limiting supply. The counter to this is that I estimate that there is probably about an 18 month supply of Condos in the area (what is on the MLS, what the new buildings are selling off the MLS, and those owners who are waiting for the Spring market hoping for a more robust market). So it will be a year and a half of downward price pressure which I think will keep the supply in the 18 month range until prices are so far down that investors and former renters jump in with both feet (ala Contra Costa and Solano counties today - prices down 40% while sales are up 100%).

The government could also step in with 4% 30 year fixed mortgages, or increase the new $15,000 tax credit to a far larger number, or force banks to do principal reduction in their loan modifications. But the government seems to be stuck as they always are. Of course the economy could do a dramtic turn around and the days of easy money could return... but don't hold your breath on any of the above.

One 2BR REO at 140 South Van Ness recently sold for $580,000, one at The Palms sold for $590,000. Expect these sales to just be the beginning, and if that ends up being true, the prices will be lower as time goes on.

REO's in San Francisco - Condos - Feb '09

Searching for REO's (Real Estate Owned by Banks) in San Francisco, make this your stop. The SFisHOME Real Estate Group team keeps track of all San Francisco REO's.

Click here for a list of all available Condos, TICs, Lofts and Coops that are listed as REO's in the San Francisco MLS as of February 8th 2009.

Please note the above link is good for 30 days. Please look for a more recent San Francisco REO post at the top of this blog, or contact the SFisHOME Real Estate Group at 1-415-366-8218 or info AT sfishome DOT com if you'd like the newest properties.

If you are wondering about other foreclosure opportunities, we can also access all MLS listed Short Sales in San Francisco, where the bank has to agree to take a loss to enable a Seller to sell when they owe more than the property is worth. Finally, there are auctions at City Hall at 400 Van Ness. I recommend PropertyShark for a free way to keep track of Notices of Default and upcoming auctions. Of course to get addresses they have a pay-for service.


Converting TIC to Condo in San Francisco

The San Francisco Department of Public Works published a flow chart of how the a 2-unit Owner Occupied building gets converted to Condos here http://www.sfgov.org/site/uploadedfiles/sfdpw/bsm/FlowchartConversion2UnitBypass.pdf

For Buildings with 3 to 6 units, or a 2-unit building with only one owner occupier, if you want to convert to condos in San Francisco you must go through the lottery process. I found a surprisingly informed discussion about the lottery on SocketSite after they published a San Francisco Chronicle article about the Mayor's Office considering the idea of allowing lottery participants to buy the right to convert. That San Francisco Chronicle article can be found here.... but for those curious about how some of the TIC rules work, and for an interesting discussion of the pros and cons of TICs, rent control, and condo conversion in San Francisco, the SocketSite comments are smarter than your average joe (well, most of them :)

That discussion can be found here. The article was typical of mass media... bad. The final comment was perfect... someone saying a lottery is fairer than allowing someone to buy their way out of the lottery. Not well thought through because if you can't afford to buy your way out, wouldn't you hope and pray that EVERYONE else did? You'd then be the only remaining building in the lottery... so obviously you'd win. So the more the merrier right? Anyway... watch out for anything mass media says... including the Chronicle, when it comes to Real Estate. Blogs can be notoriously un-researched, but most people know that... whereas they think a paper like the Chronicle must always be accurate, thorough, researched, and fair... hardly.