Friday, October 31, 2008

672 Page: Price Reduction Update

The price on the 672 Page Street flat has been reduced to $599,000 -$40,000 less than the original list price. My suspicion is, in addition to the general economic slump, the glut of condos currently on the market in the mid-Market and Hayes neighborhood are putting downward pressure on TIC prices. At The Hayes, located at 55 Page, prices have also fallen on several unsold units. A one bedroom with a small study and a private terrace is listed for $523,000. The Hayes building is solid new construction, with a gorgeous shared roof deck, a doorman and a fitness center.

I wouldn't trade my TIC for a unit at The Hayes, but I bought into my building back in 2000. A TIC made a lot of sense back then for a first time buyer in a highly competitive market. At this point I've used equity to trade up to a larger unit within my building, my fractional mortgage is almost paid off and my property taxes are relatively low. Plus over the years my TIC partners have become neighbors and friends. (I was just invited to my first floor partners' wedding.) So I'd give up quite a bit, personally and financially, if I chose to move to a condo now.

However, if I were a highly qualified buyer looking to purchase a home today I would be more inclined to play hardball negotiation at the condo complex of my choice and compare that with what the TIC market might offer me. I'm not saying condos are always preferable to TICs. If you love old architecture, the building with vintage mosaic floor tile, coved ceilings and redwood framing is more likely to be a TIC. If you want the most square footage for the price a TIC is likely still the way to go. Working with TIC partners is probably no more or less aggravating than dealing with the members of a condo association. (On second thought condo associations may be more of a hassle, as they tend to involve a larger number of owners.)

Whether its a TIC or a condo or any other property, there will likely be some good deals to be had for savvy buyers in this economic climate.

Wednesday, October 22, 2008

672 Page

In the midst of an economic downturn are there bargains to be had in San Francisco? It appears that wishful thinking still lingers among the real estate establishment. I went to look at 672 Page recently. It is a nice enough two bedroom TIC flat in a circa 1908 six unit building with tandem parking. The layout felt quasi-Edwardian Victorian. The rooms and closets were larger than a typical Victorian but all ran off a long Victorian style hall book-ended by two parlors (or in this case a parlor and kitchen). A nice enough but not particularly alluring central San Francisco space, somewhat lacking in an abundance of natural light and behooved by all the vicissitudes that likely come with maintaining a 100 year old building with five different co-owners.

Let's go back to basics and talk about how these things go. (Please note I am making some assumptions here.) An owner, perhaps a small time LLC consortium, likely purchased this building years ago when it was a six-unit rental property. (Hence the elderly and eviction-proof tenant still residing in one unit on the ground floor.) With the dawn of the TIC in the early 2000s, it became apparent to this LLC owner that there was far more profit and far less risk to be had by Ellis Acting the building. (Ellis is the state law that allows rental building owners to get out of the rental business.) Do the math. Perhaps you have six units for rent at an average of $1000 per month, which equals $6000 per month or $72,00 annually MINUS all the costs and responsibilities of building maintenance. Oh, and don't forget also subtracting your property and business taxes. And the hassle of those aging soon to be non-evictable tenants that will be living there forever at below market rates.

If, instead, you Ellis Act your property (which we presume has no mortgage debt, since you perhaps purchased it in 1982 for $50,000) and sell all the units AND hold the mortgages yourself, you can get 2.5 TIMES THE AMOUNT OF THAT RENT WHILE REDUCING YOUR COSTS AND PRACTICALLY ELIMINATING YOUR RISK. Even if you hold a very conservative $400,000 note at 6.5% interest for each unit you will be collecting about $2,528.27 a month per unit or OVER $15,000 a month. And if a pipe breaks, or the roof needs repair, it is no longer your problem.

Don't get me wrong. I'm a TIC owner and I've got nothing against TICs. I just think that pricing a unit like this at $639,000 in this market is a bit wacked. When the real estate agent starts to tell you that it is a gift to be able to get financing from the owner ON HIS TERMS (6.5% adjustable bi-annually linked to COFI) because banks won't finance borrowers these days... alarm bells should be going off in your happy, house-hunting cortex. If you like the place well enough you should laugh and say "Call me if you don't get any offers and really want to negotiate." I'd say you should start at $500K and you, not the lender, should dictate the terms of the loan. Perhaps 6.5% fixed? After all, YOU are the one taking on all the risk. And, as with any 100 year old building, make sure you read those disclosures. And take a walk past the building after 8pm. There is some weird conclave of hangers about doing things I couldn't quite figure out next door. In short, if you are a credit worthy buyer ready to put your cash on the table, it's a buyer's market - don't be intimidated, play it that way.