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.


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