Interest Rates Rise, Time to Update Your Loan Preapproval

There will be plenty of buyers attending open houses this weekend, despite a predicted lack of new inventory as we head into a holiday week. Some of you may have been recently preapproved for a loan. Others may have completed the process a month or two ago.

The big news this past week is that interest rates have increased significantly. If you’re about to write an offer, I recommend you contact your lender to revisit what your monthly payments will look like in conjunction with the latest interest rates. You may have been quoted 3.5% for a 30-year fixed loan a while back, but now you may be looking at upwards of 5% in today’s market.

And while that news may not make you happy, you may be pleased to know that the rise in interest rates may level the playing field where overbidding on properties is concerned. Yes, there are many cash buyers floating around. But a majority of buyers will be obtaining loans and may be concerned about not taking on more mortgage debt than they can handle.

Bottom line? Check out the details with your lender before you commit to a purchase price on a property.

What You Need to Know About TIC Ownership

Given the competitive real estate market in San Francisco, many buyers are considering tenancy-in-common (TIC) units. These differ from condos in a few fundamental ways. And the Board of Supervisors recently approved TIC legislation that could affect the ability of many owners to ultimately convert their TIC units to condos. (For more details on the legislation, click here.)

Quite honestly, if you’re purchasing a unit in a 3+ unit building right now, it’s likely you will not be able to condo convert due to conversion restrictions. So here are the key things you need to consider about TIC ownership:

A TIC is different from a condo. Multiple individuals share ownership of a property in a TIC. Each individual has the right to reside in a particular unit, but does not own the unit itself. Rather, each person owns a percentage of the building. With a condo, you own your unit and a percentage of the common area.

The TIC holy grail has traditionally been condo conversion. San Francisco regulates how many TICs can convert to condo status. There is such a backlog in the system at this point, that it’s important to note that anyone purchasing a three- to six-unit TIC building now will probably never be able to condo convert. (And if the recent condo conversion legislation prevails, the condo lottery will be halted for the next ten years, and buildings with more than four units won’t be able to convert once the lottery ban is lifted.)

You need “fractional financing”—or cash—in order to purchase a TIC. TICs traditionally had group loans, where all owners shared one mortgage. However, fractional financing has taken the place of group loans over the past several years. These types of loans are different from those you would obtain for a condo or house. Only two or three lenders offer fractional financing. So if you’ve been preapproved for a condo or house loan, you will need to get preapproved separately for fractional financing.

There are still risks to owning a TIC, despite not sharing a loan. The bank can’t foreclose on the whole building if a co-owner defaults on his or her mortgage. (This is the case for a TIC group loan, by the way.) But there are still certain risks to be aware of. For example, property taxes are a shared effort, and everyone is on the hook if one co-owner suddenly can’t pay his or her portion of the property taxes. Additionally, a contractor who didn’t get paid for one of your co-owners’ kitchen remodel can slap a mechanics lien on the property, for which all owners are then responsible. But the main legal risk, according to a prominent attorney in the field, is that if there’s a dispute where a court will be called upon to interpret and implement the TIC agreement, it will have less guidance than a court interpreting a condo’s HOA documents, as there’s more law on the subject.

What are the basics on this fractional financing? There are no fixed-rate, 30-year loans—only one-, three- and five-year adjustable rate loans, with a minimum of 20% down payment. You also need proof of six months’ of mortgage payments in reserve in a bank account and high credit scores. Interest rates may be a bit higher than that of a more traditional condo loan, though the fractional loan rates have come down a lot. (They’re currently below 5% on the 5-year adjustable rate mortgages.)

Resale value will not be as strong as that of a condo or house. The main reason behind this fact is that you will be reselling a TIC interest, which has a smaller buyer pool. Buyers will need to qualify for the fractional financing, and will also need to be comfortable with the risks involved with TIC ownership.

So why even consider a TIC? Despite the risks, they offer more space and a better location than a condo at the same price point. If you think you may be interested in pursuing such a purchase, contact me and we can talk.

Another Bubble Brewing for SF Real Estate?

The San Francisco real estate market continues to go gangbusters, and many people are wondering if we’re heading for another housing bubble. It wasn’t long ago that we experienced a housing boom in the city, only to see it break down from 2008-2011. And as buyers agree to pay crazy prices that comparative sales don’t support—waiving appraisal contingencies along the way—things start to feel, well, kind of creepy.

I was recently interviewed for a CNBC story on the subject, “Housing Market: From Recovery to Bubble—Already?” by reporter Kristen Scholer. No, I really wouldn’t be surprised if another bubble is forming, as I state in the story. But interest rates are steadily rising, and it’s quite possible that some buyers will pull back a bit and not be so ready to throw unreasonable amounts of money at properties.

Read the CNBC story here, and take heed if you’re a buyer who’s out there looking to make a purchase. Do your due diligence, don’t be so quick to waive contingencies, and above all, take a long, hard look at comparative sales and be smart in your decision making.

What You Can Buy: 1BR Houses

Small one-bedroom houses are sometimes good condo alternatives in San Francisco, particularly if they’re nicely remodeled and are in centrally located neighborhoods. Today we take a look at a trio of one-bedroom homes in popular areas of the city:

439 Hill
Eureka Valley

1BR/1BA, 947 sq ft
No parking
Days on Market: 1
List Price: $995,000

The Scoop: 439 Hill is a Victorian cottage that has a living room, formal dining room, and rear sitting area on the main level. Downstairs is an unwarranted, remodeled studio that’s currently tenant occupied. There’s a garden with a hot tub, waterfall, small pond and several sitting areas.

The Location: Prime Eureka Valley block near Muni, Mission Dolores Park, Noe Valley, and the Castro.

Background Check: Though 439 Hill is priced at $1,050/sq foot, there is an unassigned value to the unwarranted studio, which could be legalized in the future and incorporated as a second bedroom.

Bottom Line: For those looking for the privacy of a house in an excellent location (and studio income, to boot), 439 Hill is a good option.

217 Bocana
Bernal Heights

1BR/1BA, 460 sq ft
1-car pkg
Days on Market: 7
List Price: $599,000

The Scoop: 217 Bocana is a unique cottage, complete with a living room with Murphy bed and kitchen on the main level. Downstairs is a bedroom accessed via what I’ve learned is called an alternating tread staircase (typically reserved for ships). There are small front and rear yards.

The Location: Excellent north slope location, just up the hill from the heart of Cortland Avenue.

Background Check: Last sold for $475,000 in 2010, the home has gone through some changes in its current ownership. The lower level bedroom has been added, along with the crazy staircase. The property extends between Bocana at the front and Bennington at the rear, and you can access the home from either street.

Bottom Line: 217 Bocana is maxed out on expansion, but if you’re willing to compromise on space to achieve a superior Bernal location, this house may be a good fit for you.

86 Stanton
Eureka Valley

1BR/1BA, 435 sq ft
No parking
Days on Market: 38
List Price: $985,000

The Scoop: 86 Stanton includes two buildable lots and one updated cottage that sits in a little dell down flagstone steps, with a terraced, stone-paved front yard and grassy side yard. The house features two skylights, bleached hardwood floors and peaked beamed roof.

The Location: Tucked away in the Upper Market area, 86 Stanton is near Kite Hill and about one mile from the Castro.

Background Check: Last sold in 2005 for $795,000, 86 Stanton has been on and off the market since 2011 at various list prices. There are plans available for a three-bedroom house and carriage house, though they haven’t been approved by the city. The cottage is currently tenant occupied.

Bottom Line: Intriguing development opportunity, but buyers should investigate their options before committing to a purchase.

What You Need to Know About the SF Market

When I first meet with a buyer who’s new to the San Francisco real estate market, we discuss the realities of how our market is operating. Because unless you have a full understanding of what to expect, you could spend months wasting time—and not getting what you want.

We’re midway through 2013, so it’s a good time for a recap on what’s happening in our current market. Here are the things you need to know and navigate in order to be a successful buyer:

Most properties are listed at a price that’s lower than what the sellers want. Some markets operate in the opposite direction, with a selling pattern that sees homes listed higher so sellers can have room for expected downward negotiation. This is not the case in San Francisco, unless a property—whether it be a single-family home, condo, TIC or multi-unit building—has been sitting on the market for three weeks or longer. In the latter case, you can sometimes submit an offer for less than asking with some possibility that the seller will budge.

Marketing times for properties are short. Many properties with all the amenities or which are in desirable locations may only have five-day marketing periods prior to an offer deadline. So if you miss the first weekend open house, it’s critical to work with your agent to schedule a showing as soon as possible so you have time to review disclosures, comparative sales and make sound decisions.

There are a lot of cash offers. Approximately 25% of properties sold in San Francisco recently have been cash offers. So if you’re heading into an extreme multiple-offer situation (i.e., 8+ offers expected), there’s a good chance one of those offers will be for cash.

Cash offers don’t equal discounts. A cash offer won’t mean you’ll necessarily get a property at a discount. What it will mean is that you’ll get a call back from the listing agent if you’re in the ballpark on price, particularly if you don’t have any contingencies. But if you write a lowball offer for cash and there are several other offers involved, it’s likely you’ll have to come up in price.

Buyers are waiving inspection contingencies. The current market is a challenge for first-time home buyers who aren’t familiar with property ins and outs and are greatly relying on a home inspection professional to evaluate the home. Competition rears its head from buyers who have purchased homes previously and are familiar with the fundamentals, or from buyers willing to rely on inspection reports provided by sellers. Other buyers are conducting pre-inspections so they can be comfortable waiving inspections in a contract.

Buyers are also waiving appraisal and loan contingencies. Buyers with hefty down payments (30%+) may be going into competitive situations willing to waive an appraisal condition. This means they’ll be willing to kick in extra money if their appraisal comes up short on the value they’re paying. And they also may be waiving the loan condition if their file has already been approved by an underwriting team and they have absolutely no reservations about their financial documentation (or property details).

It’s the year of accelerated contractual timeframes and fast closes. Many lenders are being pressed to condense loan and appraisal contingency timeframes and the close of escrow from buyers looking to get a leg up on the competition. Appraisal and loan approval timeframes traditionally were anywhere from 21- to 30 days. In the current market, however, it seems like three out of five offers that aren’t waiving the contingencies are committing to 14-days or less approval timeframes on appraisals/loans, and 21 days or less on the overall close.

Condo Lottery Legislation Passes, High-End TICs Abound

The Board of Supervisors approved the controversial condo conversion lottery bypass this week, for better or for worse. Depending on whether you’re a homeowner or renter, you’ll be happy with the outcome.

Despite the shaky ground upon which some TICs stand, luxury TICs are out there and buyers are snapping them up. We take a look at a trio of high-end TICs that are worth considering.

It’s all here in this edition of the Zephyr MarketTracker!

Just Sold: 2BR Condo at BLU in Yerba Buena

My client just purchased a wonderful 2BR/2BA condo at BLU, the coveted luxury condo building at 631 Folsom at 2nd Street. Boasting city views, sleek finishes, and a 24-hour door person, #16E is one of only six residences its floor. Perks include air conditioning, washer/dryer, and one-car parking. BLU is located in the hot Yerba Buena/SoMa area, right near the Embarcadero, AT&T Park, a multitude of restaurants and cafes, and has excellent freeway access.

Special thanks to Cherolynn Vila at Wells Fargo for a fantastic job on our loan, as well as escrow officer extraordinaire, Nga Do Losacco at Fidelity National Title.

List price: $879,000.

How Many Offers Will It Take To Get Your Next Home?

The current market is rolling along with multiple offers and overbidding on a majority of homes in San Francisco. And many buyers are asking: How many offers do I need to write before I get my offer accepted?

I’ve heard some agents talk about having to write 10+ offers before their clients had one accepted. But all I can offer is my own experience and track record, which I thought I would share.

In general, my rule of thumb is that if you’ve written five or more offers and haven’t yet had an offer accepted, you may want to pause and reconsider your strategy.

It usually takes one or two submitted and rejected offers to encourage you to evaluate your strategy. Much will depend on your financial resources and risk tolerance, as well as how prepared you are and how flexible you can be in your home choices. For example, if you have more of a condo budget and are trying to purchase a single-family house, it’s likely you won’t be successful. Know your average sale prices, and don’t just give it a shot because the list price seems to be within range. What’s key is the ultimate selling price, which will be significantly higher if others are interested.

And if you’re going in with a standard 20% down, 21-day loan approval/30-day close and inspection period, know that in a situation where there are disclosures distributed in the double digits, it will be unlikely that you’ll have your offer considered as is unless you’re offering an extremely competitive price.

The underlying key to all this home-buying stuff is knowing the values in your neighborhoods of choice, and being flexible in what you can live with. Yes, there are many cash sales happening, but most buyers are getting loans. In that case, there’s an element of compromise involved no matter what your budget may be, especially when you’re faced with low inventory and lots of buyer demand. Your only choice is to suss out the less obvious housing prospects and avoid crazy multiple-offer situations that will end up beating you down. So if you’re about to submit offer #10, you may want to refocus your energy and aim for more realistic possibilities as you continue your house hunt.

21 Days & Counting: What’s Not Selling Quickly

Most of the homes that hit the San Francisco market are in contract within a week or two, with multiple offers and an ultimate selling price of well over the list. However, there are actually properties sitting on the market that have somehow slipped through the cracks. If you’re a buyer on a budget and sick of complaining about how there’s no inventory, you may want to consider one of these single-family houses that has been on the market for 21 days or longer:

250 Elsie
Bernal Heights

2BR/1BA, 1100 sq ft
No parking
Days on Market: 23
List Price: $759,000

The Scoop: 250 Elsie was built in the mid-1800s but has an open floor plan and a loft above. The yard has mature fruit trees, formal box hedges, and rose bushes. The foundation has been upgraded and there’s a large, undeveloped basement.
The Location: Steps from Bernal’s Cortland Avenue retail strip, and close to the Mission Street corridor.
Background Check: This is a probate sale that’s not subject to court confirmation.
Bottom Line: If you’re all about outdoor space, 250 Elsie will fit the bill. Consider leasing a garage, parking is not that easy in this location. Or contact your favorite garage contractor and see what the possibilities are for creating a one-car garage out of all that basement space.

740 Foerster
Miraloma Park

1 parking
Days on Market: 29
List Price: $899,000

The Scoop: 740 Foerster is a lovely art deco single-family home with a remodeled kitchen and family room down. Stairs to yard that’s mostly concrete. Low termite report on file.
The Location: A bit of a hike to the downtown Glen Park area and BART, but great freeway access and a peaceful environment.
Background Check: Last sold for $1,010,000 in 2007.
Bottom Line: Solid house in good shape that doesn’t need work.

1766 10th Avenue
Inner Sunset

3BR/2BA, 1425 sq ft
2 parking
Days on Market: 37
List Price: $949,000

The Scoop: A spacious home with open beam ceiling, 1766 10th Avenue has a formal dining room, large split bath with separate shower and tub, and two good-sized bedrooms overlooking the large yard. Lower level has two bonus rooms, full bath, laundry and two-car tandem parking.
The Location: Reasonably close to the 9th and Irving retail area, UCSF Medical Center (for all you physicians in the crowd), and Muni lines.
Background Check: Went into contract, but fell back out.
Bottom Line: Nice neighborhood location and overall attractive house with good period detail.

Inner Richmond, NoPa Condos Open This Sunday

My Inner Richmond and NoPa condos have been popular this past week with buyers. Here’s a quick rundown:

472 12th Avenue
2BR/1BA + sunroom, 1508 sq ft
One- to two-car pkg
HOAs: $240/month
List Price: $799,000

Boasting a remodeled kitchen open to the formal dining room, 472 12th Avenue has excellent 1930s period detail throughout. Coved ceilings, picture rails and parquet floors are just some of the features that make this home very unique. There’s also a wood-burning fireplace, two spacious bedrooms and a bright sunroom overlooking the shared, landscaped garden. Location is wonderful, in walking distance of the Clement retail area, as well as Golden Gate Park and bus lines on Geary.

1300 Fell #3
3BR/2BA, 1730 sq ft
One-car parking, private garage
HOAs: $250/month
List Price: $799,000

1300 Fell #3 is one of those rare units with three large bedrooms, plenty of closet space and amazing natural light. This top-floor condo is conveniently located near multiple transporation lines, the shops and restaurants on the Divisadero corridor, as well as across the street from Falletti Foods and Nopalito. You get your own private garage, additional shared storage, and a washer/dryer that is exclusive to #3.

Stop by and visit us this Sunday 6/9 from 2:00-4:00. We’ll have both properties open during that time.

What You Need to Know About SF Property Taxes

If you’re considering purchasing a home in San Francisco, you should be aware of the fundamentals of property taxes before you sit down to sign your loan documents and complete your purchase. Property taxes are something you don’t really think about until you’re scrambling around trying to pay them on time.

So here’s what you need to know, in a nutshell:
Property taxes are based on a percentage of your home’s value. The property tax rate changes slightly each year. For example, for the tax year 2011-12, the rate was 1.1718%. But for 2012-13, it’s 1.1691%.

Property taxes are charged on a fiscal year, starting on July 1 and ending on June 30. Taxes are billed in two equal installments, and the bills are sent to homeowners in the last week of October. The first installment covers the period from July 1-December 31st, and it’s delinquent if not paid by December 10. The second installment covers the period from January 1-June 30, and is delinquent if not paid by April 10.

Don’t miss out on the homeowners’ exemption. If you own and occupy a home on January 1 as your principal place of residence, you’re eligible to receive a reduction of up to $7,000 of the dwelling’s taxable value in the form of a Homeowners’ Exemption. You have to contact the Assessor’s office and file a claim. Once you receive the exemption, you don’t have to file the claim each year as long as you own and occupy your residence.

There are various parcel taxes included in your bill. San Francisco loves to put measures on the ballot that involves some sort of annual parcel tax. So you may see a laundry list of small-scale charges on your bill. For example, there’s the Mello-Roos Community Facility District tax, which is about $32 per year. (Mello-Roos districts are designated areas which have issued bonds for various community facilities. There are two districts in the city, one encompassing the entire city and the other in a small area South of Market.)

Don’t forget about supplemental taxes. When a property changes hands, the Assessor’s office reappraises the property and bills the new owners for the difference in taxes resulting from a higher assessed value. The Assessor issues you a supplemental assessment bill which is prorated based on the number of months remaining in the fiscal year ending June 30. And it works both ways; if you paid less than the previous owners for your home, the Assessor will send you a refund for the difference on the tax between the old and new property tax base.

Do factor in property taxes when you calculate your overall monthly payments. Along with the estimated mortgage payment and insurance, you should break down your total property tax amount on a monthly basis so you can get an accurate idea of your true carrying costs.

For more detailed info on property taxes, hit up the Treasurer and Tax Collector section on the SF Gov Web site.

Interest Rates Low, SF Prices High

It’s no secret that San Francisco prices are increasingly higher. The current edition of the MarketTracker delivers all the key stats you’ll need to know if you’re an intrepid buyer or seller seeking to gauge the value of your property.

We also feature a piece on Golden Gate Park sculptures, along with a snapshot of the most recent sales in the city.

It’s all here in this edition of the Zephyr MarketTracker!