the 2-4 world
Wheel of Fortune
by Erika Burke
The slowing real-estate market has finally come to roost in our 2-4-unit sector. During the final quarter of 2008, we transferred 78 properties—a 40% drop in the number of transactions from the same quarter in 2007. The final quarter’s average sales price of $1,243,754 dropped 14% from last year’s $1,439,201. The dollar volume of $90,794,070 shows a drop in volume of 52% over last year’s fourth quarter. The days on market are up 11 days to an average of 67 days. The sales versus list price is also down by approximately 3% at 97.95%, providing us with a buyers’ market indicator.
I’d like to say we’re looking up, but as far as the averages are concerned, we’re not. Let’s try to remember that this final quarter coincided with a global economic meltdown and may be more indicative of property owners holding on to their investments until some positive signs in the market occur, rather than a harbinger of what could be a consistently down-turning market.
The properties that did transfer were in some of our higher end neighborhoods. Seven properties sold in Eureka Valley, Hayes Valley and the Sunset, six sold in Noe Valley, five sold in Russian Hill and Inner Richmond, and four sold in Bernal Heights and the Inner Mission.
We must also attribute the lack of easily available mortgage monies to prospective purchasers as another part of this slowing. Those with excellent credit, stated income and assets and a low debt to income ratio are still able to purchase units. Owner-occupier loans are possible with top of the market rental income added to the borrowers qualifying income toward securing purchase monies for income properties. Currently there are FHA loans available with the possibility of adding a FHA home improvement loan product to the package. Check with your mortgage broker for current solutions to purchasing units.
Notable Sales
Coldwell Banker led the market during this quarter with a dollar volume of $12,492,000, representing 15.42% of all volume with nine listings. Pacific Union followed with six listings, a dollar volume of $7,764,000 and a market share of 9.58%, followed by Zephyr Real Estate with a 6.85% market share and $5,546,000 dollar volume.
I viewed the remarkable 2-unit building at 515-517 Waller St. in Hayes Valley. It was an enormous (4,010 sq. ft. as per tax record) and charming storybook Victorian in much need of TLC and updating—delivered vacant. It was a real standout in terms of size of rooms, architectural detail and potential. On the market for $1,295,000 with James Appenrodt of Laurel Realty & Investment, this property sold for $1,460,000—$170,000 over the asking price.
The Days on Market Fortitude Award goes to Dominic Leung of JB Franklin Realty for a 33 Elsie St. in Bernal Heights. This remodeled duplex with views and a garage stayed on the market for 248 days. Originally listed for $1,199,000, it sold for $144,000 under asking at $1,055,000.
2 Units
The hardest hit sector in unit sales were 2-units. There was a 40% drop in the number of transfers from the third quarter’s 79 transfers down to the final quarter’s 48. The average sales price of $1,176,750 showed a drop of 7% from the third quarter. Sales volume was down by $42,900,487, or 56%. At $588,375 per unit, this is the lowest per unit cost we have seen in years.
This is bad news for property owners and speculators. The investment side of the business has slowed to a dull roar. There were far fewer remodels, and those that sold had been in the hopper, waiting for permits and completion for a while. I’m hearing a lot of grumbling about contractors and speculators not getting their expected and hard-earned returns on their investments.
This sector shows a 57% drop in the number of transactions from the final quarter of 2007. The average sales price last year at this time was $1,412,408, a decline of 17%. The sales volume is down 47% from last year at this time. This sector is staying on the market for 21 days, or 3 weeks longer that the same quarter last year.
3 Units
In the 3-unit sector, 13 properties transferred in the final quarter, which demonstrated a 54% drop from the same quarter last year, though only 3 fewer transfers than the prior quarter in 2008. The average sales price of $1,314,994 is down by 6% from last year or 11.5% down from the third quarter of 2008. That makes a unit in a 3-unit property $438,331 per unit, as opposed to the prior quarter’s $494,989 per unit.
Three-units stay an average of 63 days on market and the list versus sales price has gone down to 96.24%, which is down by almost 2.5% from the prior quarter. The overall dollar volume from the prior quarter is down 28% or $6,664,580.
4 Units
Four-unit properties continue to perform with the least amount of change. The average sales price for the final quarter of 2008 rose $16,290 from the prior quarter. It’s only a 1% rise, but we’ll take it. The bad news is that transactions were down by six compared to the third quarter and the overall dollar volume is down 33%.
Buildings in this segment are staying on the market for 61 days, which is 19 days more than last year at this time, but only 7 days more than the prior quarter. The dollar volume is down 17% from last year and the average sales price rose $145,214 from this time last year, making a unit in a 4-unit property worth $364,795, still an excellent value.
When looking at these numbers, we must factor in the fact that 4 units are not our most prolific type of building available in the 2-4-unit market. Since 2006, from quarter to quarter and year to year, we have not seen significant fluctuation. It almost goes without saying, however, that we are nowhere near the average high sales price, volume or number of transactions of 2005.
The Big Picture
What can one say during these times? One of my clients told me that even though he had planned to put his multiunit on the market, he has now decided to hold off. He knows that the income from his property is stable and he was concerned about available mortgage funds for a replacement property, as well as subsequently finding a property that would show a return on investment in this market.
Small property owners are a unique tribe. I know some owners with multiple smaller buildings who enjoy landlording and keeping their smaller buildings
as income property. I know others who share their properties with their tenants as owner-occupiers. That seems to be the trend right now in the 2-4 unit sectors. The owner-occupier can make it work, if the building has the appropriate vacancies.
The TIC market, which contributed greatly to the number of transactions and volume of business of the past, has slowed for a number of reasons, including stiffening legislation regarding how owners can create vacancies. Other factors
are the rising price of building materials in the last 18 months, the tightening of purchase money availability and the investor sector holding tight, thereby not making any moves.
My recommendation continues to be, “Buy, buy, buy!” Take a look at the mostly stable 4-unit market. For owners and investors who have stable portfolios and assets, this really is the time to continue to add to your cache. Quietly maintain and improve your buildings, work toward market rents, improve tenant profiles, and purchase in the high end if you can.
It’s that top 10% of investors who keep the real-estate economy moving in San Francisco. A high-end purchase or sale can significantly alter the averages data, contribute to higher appraisals and improve the risk factors for lenders. It’s all about risk right now, and you need to take a little so the banks will follow.
By the way, the market is picking up. In the last few weeks, many new properties have come to market, and closed sales are beginning to rise in number. This could be a spring awakening like we see annually at this time of the year, or the advent of a sense of pervasive security with the inauguration behind us.
Let’s look forward together and keep our eyes on the proverbial bouncing real-estate ball. Remain aware of good purchasing opportunities, make sure you have excellent representation and marketing in place when selling, and continue to participate and contribute resources, knowledge and skills to our San Francisco 2-4-unit market.
The opinions expressed in this article are those of the author, and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Erika Burke is a realtor with a 25-year background in sales and marketing. She specializes in the sale of San Francisco multiunit properties with Zephyr Real Estate and can be reached at 415-279-1135 or erikaburke@zephyrsf.com. Copyright © 2009 by Black Point Press. All rights reserved.