Why is tenant occupied property harder to sell and less valuable than vacant property in San Francisco? There are a few different factors making tenant occupied property less valuable and/or harder to sell.
#1: Property condition
In San Francisco the majority of properties are prepped to sell to the hilt to achieve maximum value. New paint, refinished floors and staging are the starting point. But often we change the light fixtures, fix anything that’s broken and even may go so far as to remodel the kitchen and/or baths to get the highest price. We might also do significant landscaping. In the last year I have renovated/remodeled more than six homes before putting them on the market. Some examples of before and after values:
One in the Sunset: would have sold for 1.2 and we got 1.465M= 265k or + 22%
One in NOPA: would have sold for 1.1 and we got 1.5M= 400k or + 36%
One in Pacifica: would have sold for maybe 650 because it was moldy and we got 1015k= 365k or + 56%
In each case, the investment on the part of the owner was less than 50k and you cannot make these improvements with tenants in the home.
#2: Difficulty for the new owner to occupy the property
Many people are willing to buy a home where the tenant has previously be evicted or bought out but they would never undertake this themselves. Here are some reasons why:
-they are morally opposed
-it just makes them uncomfortable
-This is the big one: they are spending everything they’ve got just to buy the house and the financial risk that the tenant might not move is too much for them.
Roughly, the process of doing an owner move in eviction costs 18k+/- and will take a minimum of 2 months based on statutory requirements. It is generally wise to budget 25k and 4 months. The tenants may want to be bought out at a higher than statutory rate because they think they have a way of fighting the OMI. The fact that in order to occupy the property they will have to go through an legal process with an uncertain outcome is something most buyers cannot stomach and this decreases the value of the property in proportion to the perceived risk.
There is a lot more to say on this subject and you can find more info here: https://g3mh.com/wp-content/uploads/2018/03/2018-Tenant-Eviction-FAQs.pdf
#3: Rents are low
This is important especially in multi unit where you have investor buyers. The value of a property is related to the cap rate or gross rent multiplier (“GRM”) and this is based on the rents for the units. Buildings in Sf sell for between approximately 14 and 22 GRM depending on the outlook for turnover, banked rents, etc. The GRM is the number of years it would take to pay back the purchase price based solely on the gross rent (without subtracting expenses). So if you have a property with rent of 2500/month, the value will be between 420k and 660k to an investor if they cannot see an easy way to raise the rents.
#4: Harder to show the property and people looking are just uncomfortable
Some tenants are lovely and make it easy to want to keep them in possession of their homes. They clean up, make the bed, and serve homemade piroshki to the realtors (true story). Other tenants – not so much. There might be threatening signs, deliberately bad housekeeping, or shouting. You name it, I’ve seen it. I was followed through a SFH in the sunset with a movie camera, a movie light with a a boom microphone flapping in my face. Most tenants are somewhere in the middle. Whatever the case, most buyers are uncomfortable with the feeling they are invading someone’s home – and perhaps rightly so! I think it is easy to see why this causes the property to sell for less.
How does all of this affect value? When I’ve studied SFH, tenant occupied homes without illegal in-laws sell for about 30% less than their value. Tenant occupied SFH with occupied illegal units can sell for as low as 50% of their vacant, improved value. With the median price of a SFH at about 1.6MM, this is a lot of money.
I have done extensive research into 2 unit buildings in particular and I found that a single vacant unit increased the value of the building by about 20% and that having both units vacant increased the value about 25%. This is in cases where the building was not remodeled. If an owner is able to, as in #1 above, stage and improve the home, the difference can be far greater.
If you have questions about a property you own or are interested in, I am happy to weigh in on the potential. Just give me a call or shoot me a text at 415-269-4663.