the 2-4 World

by Erika Burke

For the second quarter of 2008, 118 2-4-unit properties transferred for a total dollar volume of $165,202,350, down 31% from the dollar volume in the second quarter of last year. Properties sat on the market five more days than last year at this time. Also, 43 fewer units transferred and the average median sales price has dropped by $80,000 (6%), though it was still higher than the same quarter in 2006. The bulk of transfers are selling for under the asking price for the first time in four years. For a market that is reported to be skittish at best, multiunits have not lost significant value but are taking longer to sell. Clearly, this is the time to buy. Though this quarter was 7% to 10% lower in overall volume than 2-4-unit sales during the second quarters of 2005-2007, the average sales price remains respectable and higher than it was in 2005 and 2006. We have not slid back as far as the media would have you believe.

Notable Sales
Coldwell Banker led San Francisco sales during the second quarter for a 16.24% market share with 47 sales and dollar volume of $53,640,600, followed by Zephyr Real Estate with 28 property transfers for $34,156,000 and a 10.34% market share.

The curb appeal award goes to Sara Khan of Pac Union/GMAC for a gorgeous Lone Mountain Edwardian; its exterior was as showy as the three vacant remodeled units. Though it sold for $87,000 below asking, the San Francisco beauty at 2249-53 Fulton Ave. went for $2.310 million. This quarter, there is a runner up in this category, a sumptuous and Romanesque two-unit at 1762 Dolores St. It sold for $1.828 million, $67,000 under asking, represented by Joshua Burns of Pacific Union Residential. The lack of curb appeal award goes to a two-unit at 3330 San Bruno Ave.; one could call this building a Mediterranean fused with the 1950s, which sold for $655,000.

The lowest sales price in the city this quarter was a two-unit at 1662-64 Kirkwood Ave. Originally listed at $799,000, reduced to $699,000 and finally sold for $525,000, properties like this show that value is alive in San Francisco.
The high end does well in this climate, and Leise Gilliat of Leise Inc. made the three-unit sale of 1864-68 Golden Gate Ave. at Baker, which sold at asking for $2.937 million. The three vacant full-floor flats had been upgraded, remodeled and included parking. The building sold as a whole, not as tenancies in common.
This quarter’s fortitude award goes to Edwin Camarao of Century 21 Alliance. He sold 1435-37 19th Ave. for $770,000 after 342 days on the market.

2 Units
The hot area during the second quarter was the Sunset/Parkside, where 15 two-units transferred. The Richmond had 12, Noe Valley and Eureka Valley had 5 each, Inner Mission had 4, and Potrero Hill, Bernal Heights and the Haight had 3 each. Judging from the fact that 45 of the 87 units sold were listed as vacant with no Ellis Act evictions or OMI history, former tenants may now be able to afford to purchase a unit. There were 25 units listed as remodels, 9 as fixers, 6 with price reductions, 5 as trust sales, 5 as income property and 12 in original or “as is” condition. At 59 days on the market, 4 days more than the first quarter and 22 days less than at the end of 2007, two-unit properties are still sought after.

The total volume in sales of $115,748,600 was encouragingly up 29% from the first quarter of 2008. Those who withdrew two-unit properties from the market should have persevered. The average sales price is down 7% from the previous quarter, though there was a spike in the average sales price of two-units during 2007. The overall drop is 7% to 10% from 2007’s two-unit average sales price. At $665,222 per unit, this is still a performing market segment. Any fluctuation under 10% is just that, a fluctuation, and unless a trend develops, it should not be taken too seriously.

The average square footage for a two-unit was 2,795 at $499 per sq. ft., with $211 per sq. ft. in the Bayview and $764 per sq. ft. in Laurel Heights. Only 17 of the 87 transfers used GRMs, positioning the units as income property with the average GRM of 38.30, a low of 17.90 and a high of 98.83. Generally, these properties are not seen as income property purchases. There were 31 properties sold for over asking, 15 sold at asking and 41 sold under asking. This high number of underbids continues to demonstrate the shift towards a buyers’ market.

3 Units
Seventeen three-unit buildings transferred during the second quarter, which is in keeping with most of 2007 and only three more than the first quarter. The average median sales price for a three-unit has risen by 13%, reiterating that the high end is prospering. The list vs. sales price is down to 98.85% in this sector, with 10 more days on market (60 days). Dollar volume is up by 29% to $29,952,750. In 2007, we saw 44% more transfers and 37% higher dollar volume, with 3.71% overbids across the board. It’s true this market has slowed from last year, but it has also stayed consistent for the last three quarters without too great a material change. The rise of the average sales price is encouraging. Three-units now have an average value of $587,308 for each unit.

Aside from one three-unit sale for $605,000 in the Crocker Amazon, all other buildings sold for a minimum $1.45 million. Three buildings were sold in the Richmond, with the others scattered throughout the city. Half of the properties sold stayed on the market for less time than the 60-day average. The 4,403 sq. ft. average made for a cost of almost $400 per sq. ft., with some as low as $326 per sq. ft. in the Crocker Amazon or as high as $527 per sq. ft. for a remodeled building in Lone Mountain. Four buildings sold at asking price, four sold over asking and nine sold under asking.

Ten of 17 transfers provided income details, with GRMs from 12.91 to 24.51 and an average GRM of 19.17, which is high, even in San Francisco. With average GRMs like this, when it comes to loan to value and obtaining purchase funds, an investor will have to have deep pockets for a down payment of at least 30%. One potential cause for the citywide GRM hike could be a forced use for multiunit TIC/condo conversion. These GRMs make it challenging for an investor to justify purchasing income property.

4 Units
In the four-unit sector, 15 properties transferred, with an increased dollar volume of $20,951,100, a 40% increase over the first quarter of 2008. For the last year and a half, the list vs. sales price has almost continually been as it is now, 99.89%. Days on market is 52, close to the average for the last two years. The median sales price has risen by 6% over the final quarter of 2007, but has fallen 12% from the first quarter of 2008. Two properties each transferred in Noe Valley, the Haight, Bernal Heights and the Richmond, with the remaining scattered over different neighborhoods.

The lowest sales price was $575,000 in SOMA and was coincidentally a FDIC bailed-out IndyMac bank-owned property. The highest transfer was $2.4 million in Pacific Heights. Three of the fifteen properties sold were positioned as income properties and showed an average GRM of 19.25. Four-unit buildings showed an average square footage of 3,324 at $406.27 per sq. ft. The highest cost per sq. ft. was in Eureka Valley at $629 and the lowest in SOMA at $202.46. Four properties sold for over the asking price, four sold at the asking price and seven sold under asking. A single unit in a four-unit building goes for an average of $440,481.

Big Picture
The overriding message is to sell your flats vacant. Marketing your units in original condition seems okay as well right now. The positioning of flats as TICs seems to have slowed. Perhaps it is understood that a two-unit has conversion benefits and this benefit no longer needs to be pressed upon purchasers. The fluctuating threat of changing legislation seems to have slowed this type of promotion, if not the sales themselves. Could it be that the TIC purchase is riskier these days? Or is it that buyers’ agents are savvier in putting together purchasing groups and individual fractional financing has paved the way for less commotion surrounding the TIC sale? We’ve only got a few fixers on the market, though judging from the amount of properties positioned as remodels, this is still a trend. We are seeing reductions in sales prices across the board, so set your asking prices accordingly.

The market speaks. The market dictates to us. Two-unit sales are not for the investor, but for the speculator. Three-unit sales are still an income property choice for the investor with deep pockets. Less than three four-unit properties were positioned for income. In each sector, the GRMs are jumping to new highs, not a harbinger of future bullish times in San Francisco.

San Francisco politics continue to promote the escalating sales prices via stringent and long-outdated rent control policies. We no longer wear the shoulder pads and big hair of the 1980s, so it seems that the policies should be updated as well. Make income property profitable and in line with cost of living and maintenance increases, and landlords will hold onto their property or transfer their property to incoming landlords, confident that the city will support their efforts. Rent control was put in place to regulate the market, and there is a need to amend its antiquated stance to continue to regulate this market effectively. Because this has not happened, the 2-4-unit building is capitulating out of the income property sector.

 

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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 © 2008 by Black Point Press. All rights reserved.