Investment Property

Selling investment properties in San Francisco is more challenging than selling a single unit, such as a condominium or single family home.  San Francisco’s continually changing rent-control laws can often make decisions for you in your strategy and will certainly impact the sales price.  Owner occupancy or vacancy is usually preferred over tenant occupied, depending on whether you want the rental income, or to owner occupy.

Extensive preparation is necessary, especially with disclosures relating to the tenancy of your property. A well-organized package of leases, past notices, rental increases, rental questionnaires and other tenancy documentation that provides the history of your real estate investment assures an easier, smoother sale; see the Investment Property Checklist.

A comprehensive list of the items that should be considered to make your building the most presentable for a prospective buyer, can be found at the Presenting your Property Checklist.

Clear, written communication with tenants during the marketing and sale is also important, particularly when notifying them of showings. This is a task your real estate agent should take care of when marketing your property.  Occasionally, tenants will make showings difficult and an attorney may need to be part of your team.

Investment Property Value Considerations

Property values will be determined taking the following variables in mind:

1. Vacant Buildings.   
2. One unit currently owner occupied or vacant
3. One or more units to be recovered for owner occupancy and/or extended family occupancy.
4. Completely tenant occupied to remain that way (leased, month to month,  or protected rentals).
5. Evictions already performed on the building creating a ‘tainted unit’.
6. Ellis Act evictions on the premises.

In establishing marketing strategy, there are several options:

1. Approach the tenant/tenants as buyers.
2. If the tenant plans to move at any point in the future, be flexible with them on expected time lines, offer to help them with moving expenses, or wait until the unit becomes vacant.
3. Wait to market the building until the tenant, or tenants vacate.
4. Sell the building now at a value consistent with its income.
5. Consult an attorney to explore your options.

Investment Property Checklist

The following is a checklist for you to work from to generate the tenant related information we need to provide full disclosure to a potential purchaser:

1. Rent History.  Understanding the tenancy and rules of the building will be critical in the building’s sale because investors will want to know what they are buying. Calculate the allowed banked increases on each unit, note when the last increase was done and identify what is allowed.
2. Consider banking increases with notification to the tenants, or raise them as allowed.
3. Pull together copies of leases, 6.14 notices, and all tenant/landlord correspondence.
4. Pull together documentation on capital improvements and operating and maintenance expenses, which can be passed through to your tenants.  The city’s form is lengthy and time-consuming; you may want to hire someone to do this for you.
5. Pull together any rent board hearing information or small claims court information.
6. Consider getting some necessary repairs or deferred maintenance fixed.
7. Empty units generally are a premium and will raise the value of the building; if you have vacant units, consider selling the building with the unit(s) vacant.
8. Have structural pest control inspections.  This gives a clear picture of the condition of the building and will take some of the negotiation away from the purchaser of the building.  The condition of the building may contribute significantly it’s value in the marketplace.
9. Serve Rental Questionnaires and Protected Status Addenda.  A rental questionnaire is a statement completed, on a form provided by the landlord or real estate agent, by a tenant on their understanding of the tenancy; it should match the landlord’s interpretation, but occasionally this does not happen, this mis-match needs to be worked out between landlord and tenant in advance.
10. The protected status addenda is also significant in that it is intended to identify protected status claims for tenants who are elderly, disabled or catastrophically ill which would protect them from eviction for an owner moving into their unit.  Children under 18 years old who have lived in the property for 12 months or more, are on their way to becoming protected tenants in a legislation currently under consideration.  A protected tenant does significantly affect property value.
11. Tenants are not required to fill out either one of these forms.  By trying to get them completed by the tenants in advance, we will have a clear picture on how to market the building, if the tenants will be cooperative, or if there are documents that are not available to provide to a prospective buyer.

For more information about the rent control ordinance, contact the Rent Board information line at: (415) 252-4600 or visit their web site: www.ci.sf.ca.us/rentbd/.  You can download a copy of the latest rent ordinance and rules and regulations.