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A first time buyer has questions about how to get started buying a San Francisco home

A reader asks: As a first time buyer, what are the first steps in buying a house or condo in San Francisco?

Our reply: Our first suggestion would be to meet with a mortgage broker to see what price range home you qualify to buy. There are also mortgage calculators. We have one linked to our site to give you an idea of what you can afford. But meet with a professional who will know what loan programs are available to you as a first time buyer. Once you know this it will go a long way in determining what area you should be looking in and the type and amount of the property you should buy.

– Mick Orton

Explaining the difference between a TIC, a condo and a co-op for Real Estate in San Francisco – Part 1

A reader asks: In San Francisco, I hear a lot of people throw around the terms, tenancy in common, condominium and co-op and often use them to describe the same property in the same sentence. What is the difference between them?

Our answer: We thought we’d answer your question an several parts. In Part 1 will cover “TIC” or Tenancy In Common as a form of ownership.

Attorney, Andy Sirkin, the local San Francisco TIC expert, says, “The acronym ‘TIC’, which stands for tenancy in common, along with the terms ‘cotenancy’ and ‘fractional ownership’, refer to arrangements under which two or more people co-own a parcel of real estate without a ‘right of survivorship’. This type of co-ownership allows each co-owner to choose who will inherit his/her ownership interest upon death. By contrast, the type of co-ownership called ‘joint tenancy’ requires that each co-owner’s interest pass to the other co-owners upon death.”He goes on to explain some of the ways a Tenancy In Common is different from condominiums and cooperatives. We will refer to these in our later articles on the second two types but also go into the nuances of each.

Stimmel, Stimmel and Smith, another San Francisco law firm, explains, “…[referring to new buyers] The question is how to break into that market. How does one manage the economics of buying the first home, the first condominium in such an expensive market? Condominiums were long seen as the best and least expensive way for those with limited funds to enter the market and enjoy the appreciation and tax benefits that come with home ownership.”In short, a tenancy in common allows many people to own the same building, in effect, pooling the resources of two or many people to buy more than they could afford on their own.
One problem with this form of ownership is, what happens when one of the parties wants to move and the others don’t? A well written agreement should cover this, as long as an expert has been consulted from the beginning.

– Mick Orton

Retirement accounts and San Francisco Real Estate

A reader asks: I have quite a bit of money in my retirement accounts and heard from a friend that there is a way to use this to do real estate investing. Do you know anything about this?

Our reply: We are familiar with a company based out of Oakland called Entrust Administration They can help you invest in Real Estate using you IRA or 401(k) money. Go to their website and you will see what types of plans they can work with. 

On the other hand, Fox news contributor, Gail Buckner, cautions readers in her 2002 article to think hard before using retirement money to invest in real estate. She says, “While investing in real estate in and of itself is not prohibited, it does present a lot of problems. If there’s not enough money in your IRA to purchase the property outright, then your IRA would have to take out a mortgage — not you.

“I doubt you will find any lender willing to make a loan to an IRA without your personal guaranty. And your guaranty of the loan to the IRA would be prohibited. Also, you should note that pledging your IRA as collateral for any type of loan is also prohibited.” She goes on to give other reasons, but check with the experts to see if new rules overcome her list of objections.

However, Realty Times writer, Phoebe Chogchua, is more positive in a 2006 article. We realize that she is writing for a magazine that promotes the real estate industry so there might be some bias. At the same time, the article is much newer than the one above and probably has more current information.If you would like more information, Realtor Magazine Online has a really good article explaining this relatively new concept. As always, talk to experts before making any financial decisions based on information found here.

– Mick Orton

No Statewide or National Recession on the Horizon: UCLA Anderson Forecast

No question here! This is good news for the economy but mixed news for Real Estate in California. RIS Media reported in their daily e-news, “RISMEDIA, June 22, 2006—In its second quarterly report of 2006, the UCLA Anderson Forecast anticipates a slowdown in real estate across the United States and in California. But absent other factors that historically precede recessionary conditions nationally and in the state, no recession is foreseen. ” Our number show that the San Francisco Real Estate martket still remains stong.

– RIS Media

Mold issues with San Francisco Real Estate

A reader asks: I’ve heard there are a lot of issues with mold and mildew. Considering the foggy and damp weather, do you think this can be a big deal when investing in San Francisco real estate?

Our answer: Mold and mildew can be an issue anywhere but where there is more moisture in the air it can be a factor. Mold can develop when there is inadequate ventilation and often develops when windows and doors are kept shut and moisture from cooking, showers and laundry accumulates. If leaks in roofs, bathrooms, or other parts of the house are not repaired and moisture builds up, mold can develop within the walls and floors. The occupant of a property should be careful about moisture in the home. It helps to open windows, use fans in the bathroom and kitchen for ventilation, and make repairs to leaks before they cause too much damage.

In these ways mold can be managed. However, if someone cooks and uses the shower and laundry and does not open windows or ventilate the rooms, then mold can become a problem. The Sunday, June 18th San Francisco Chronicle has a good article regaring this issue.

For advice on prevention of mold or cleaning mold when you see it on wall or furniture go to the EPA website. If you own rental property you may also send tenants information on mold which is available from them. Education on the causes of mold and preventative measures is the best way to help prevent serious mold problems.

– Janis Stone

How to pull money out of a property without selling it – Part 1

A reader asks: I want to pull some equity out of my San Francisco property and pay as little as possible in taxes or none at all. Is there a way to do this?

Our answer: There are several ways to do this. When to do it one way or another might be a better question. Depending on the market conditions or current interest rates, you could refinance and pull some money out that way. During the past several years ago where rates were historically low, mortgage companies were swamped with people refinancing their homes. When you refinance, any money you take out from the proceeds is not taxed, and it does not raise your property taxes.

However, with interest rates going up (check our trusted mortgage advisor with Princeton Capital, Dennis Kowalski’s website for the most current information and new trends), that might not be the best strategy right now. It is always a good idea to talk to your accountant or financial advisor to evaluate your situation and determine the best time for you to refinance. There are many things to consider, for instance, the amount of the new monthly payments, what you are using the money for, what the future interest rate might be and how long you think you will hold the property.

Another way that defers most of the capital gains taxes is the Private Annuity Trust. As the Real Estate Journal put it, “Under this plan, the owner of commercial or residential property transfers ownership to a trustee prior to the sale of the property. The trust pays the seller with a special payment contract called a private annuity that stipulates that payments from the sale of the property go to the owner for the rest of his or her life. The trustee then sells the property to the buyer, getting cash for the property and holding it in a trust. The trustee also can invest the money held in trust.” With this method only the amount of the distributions are taxed at a rate calculated by the IRS depending on your life expectancy and only at the time the payments are made.

When you start hearing legal terms bandied about like “trust” and “trustee”, it can sound a little ominous. So check with the experts and ask a lot of questions!

– Mick Orton

Single family homes are not townhouses – San Francisco’s unique architecture

A reader asks: I’ve always wondered this. Why are buildings considered single family homes in San Francisco and not town homes when most of them are built side by side with no yard?

Our answer: San Francisco is one of the most unique and architecturally interesting cities in the world. Part of the charm comes from the way San Francisco has made use of maximum number of properties in such a small amount of space. San Francisco proper is only 7 miles by 7 miles so the city planners have allowed most houses to be built to the lot lines. Some neighborhoods such as St. Francis Woods are zoned as R1-D which means they have to be detached single family homes and cannot be built to the lot line. The lots in that area are much larger and can accommodate bigger detached homes. Most other areas the average lots are only 25′ wide and 100′ deep so a builder has to build across the whole lot in order to get a reasonably sized home.

San Francisco does have some “townhouses” but these are classified as condominiums and not single family homes and they share common walls. The short answer to your question is, town homes share a common wall whereas San Francisco’s single family homes actually have separate walls.

– Janis Stone

Earthquakes affect buying decisions for San Francisco Real Estate

A reader asks: I am considering buying a second home in San Francisco, but just about the time I decide to make the call to a Realtor, I turn on the news and hear that there’s been an earthquake in the San Francisco Bay Area. I really want to own a home there, but how worried should I be about earthquakes when considering buying San Francisco Real Estate?

Our reply: Disasters can happen anywhere with regard to “acts of God”. Consider places that have tornados, hurricanes, horrendous snow storms, floods. And disasters like these can happen every year. So what’s the big deal about an occasional earthquake???

Of course, we’re joking. And earthquakes are no laughing matter either.

On the whole, buying property in San Francisco should be considered relatively safe with regard to earthquakes. They can happen anywhere, and the effect it would have on your property depends on several factors.

Questions you might ask your Realtor when considering specific properties are; what type of soil is it built on? USGS has a soil-type map for San Francisco which might help you when considering certain areas. Another question you might ask is, when was the property built, and has it been retrofitted with shear walls? Does the property have a bolted foundation and adequate reinforcement over the garage if it has one? (we’ll discuss San Francisco parking issues in a later post!)

It is also going to matter how strong the earthquake is and where its epicenter is. After the earthquake in 1989 San Francisco adopted new building codes for any new construction or major remodeling using the latest engineering techniques and passed a law requiring unreinforced masonry buildings (called UMB by the building department) be reinforced to withstand the effects of an earthquake. So San Francisco has been preparing, and there are emergency systems in place. The City of San Francisco Department of Building Inspection has a site with lots more information on the latest building requirements.You might also buy earthquake insurance that would cover damage to your home. Though there is a substantial deductible, it could protect your equity in the event of a catastrophic earthquake.

Regardless, there are no guarantees in life! So if you are really worried about earthquakes then maybe the California, and San Francisco in particular, is not for you. Earthquakes happen all up and down the west coast, and have even happened as far inland as Yellowstone Park. So we do not feel that San Francisco is more “unsafe” than anywhere else on the West Coast or even Hawaii. Having been in San Francisco for over 30 years, it is actually easier to face the risk of earthquakes than have to worry about having tornados every summer as they do in the Midwest and South!

In closing, let us review. The most important thing you can do is be prepared; retrofit your home, have emergency supplies and good insurance. If you want more detailed information about earthquakes, the California Geological Survey has an interesting website which answers specific questions about earthquakes.

– Janis Stone and Mick Orton

When buying a new home in San Francisco which area has the best restaurants?

A reader asks: As a single man who really doesn’t like to cook, in which area should I be looking to buy if I want to have easy access to the best restaurants in San Francisco?

Our answer: You’re in luck if you choose San Francisco as a place to live. The City (as we like to call it) has a plethora of great restaurants. Areas (with links here to the San Francisco Chronicle’s website and Wikipedia) like Pacific Heights, Russian Hill, North Beach, Nob Hill and Telegraph Hill are really popular with people who want easy access to great restaurants. Some of the best restaurants are within walking distance regardless of which area you might choose.

There is a site where San Francisco restaurants are reviewed by the people who count; (the ones who pay to eat in them!) called SFSurvey. And just because you choose one area to live, doesn’t mean you can’t take a quick cab ride to another area and check out other dining options! You can also read the neighborhood guide on our website to get an idea about what different areas for San Francisco Real Estate have to offer.

– Mick Orton and Janis Stone

Upside and downside of investing in multi-units in San Francisco

A reader asks: I am thinking about buying multi-units in San Francisco as an investment and renting them out for income as well as building equity. Do you think this is a good idea?

Our answer: Buying multi-unit buildings in San Francisco for rental income is a challenging because of several factors. First of all, San Francisco properties are governed by rent control which restricts yearly rent increases to 60% of the CPI (consumer price index) and allows some tenants to be “protected”…. in other words they cannot be evicted even if you, as the owner, wants to live in their unit. (There is what’s known as the Ellis Act which is explained briefly in an article on the San Francisco Tenants’ Union which also has a link to a PDF of the actual law.) However, the Board of Supervisors is pro-tenant and tries to discourage individual ownership of units by passing laws that prohibit owners from converting their units to condos if there is more than one eviction. Go to the City of San Franciso webpage and do a search on condo conversions; you will see all the laws that are being proposed or that have been passed to limit the amount of condo conversions being done. Needless to say, there is too much to cover in the space we have here!

You might ask, why would a city government be anti-condo conversion if the producing of more real estate properties adds to the property tax base and increases the city’s revenue? Good question. At this time many building owners do not live in San Francisco so there are more renters who vote. Given this dynamic, I think you understand who the politicians tend to cater to. The San Francisco Tenants Union is one of the most powerful lobbying forces we have. Fortunately, the San Francisco Association of Realtors (which tends to be more pro-property rights) is another strong lobbyist.

Another reason your idea is challenging (you thought we forgot the question, didn’t you?) Many of the units sell for a large gross multiplier which means you will not get positive cash flow unless you put more than 50% down. And in that case you lose the advantage of the normal leveraged investment that real estate normally provides. Horizon Financial Associates has an article from 2004 which explains leveraged investments rather nicely.

So what do investors do? Therefore, investors in San Francisco Real Estate depend upon appreciation to recapture their investment. That appreciation has been due in part during the past few years to reselling multi-unit buildings as TIC’s (Tenancy – in – Common) and/or doing conversions to condominiums. However, with the passage of the new law mentioned above, it undermines the ability of owners to vacate their buildings so they can sell the units individually. (Owners have been using the Ellis Act to be able to deliver vacant buildings to potential buyers or sell to individual parties as TIC’s.)

So before buying any units as investments, analyize the current income, understand that any increases will be limited by rent control, and have a good attorney to talk to when and if you have tenant issues. I would never suggest you negiotiate with any tenant without using an attorney who specializes in tenant/landlord issues. Tenants have successfully sued well meaning landlords for simple misunderstandings. Also be sure to have good insurance with protection for tenant issues. As we like to tell our clients: “It’s not how much money you make, it’s how much money you keep”.

Note: Since we wrote this article, we found details on the condo conversion process from legal consulting firm G3MH which we have downloaded to our website in PDF format. We hope you find this useful.

– Mick Orton and Janis Stone

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