San Francisco Real Estate - Residential

The Front Steps - a new San Francisco Real Estate blog

We are regaular contributors to a new San Francisco real estate blog called The Front Steps. It can sometimes be contentious as the latest round of posts show (topic: Why are Realtors such @$$holes?) but the ultimate goal of the articles is to be helpful and inform. We'd like to thank Alex for giving us a chance to get exposure in his publication.

What we've done today is take one of the questions we answered on that blog and expand the explanation because, in my mind, there was clarification needed. And it is also a great example of how government price controls can actually "hurt" the people it is trying to help. Here is a recent question from a reader:

Hello, Thanks for putting up these Q&A's! (at TheFrontSteps) They're very helpful... ...My sister was actually selected from the lotto (we both entered), and we're excited about the opportunity to purchase a condo (fingers crossed-we're meeting with the banker today about qualifying). My question is, if we get the condo, and want to sell it, let's say 30 years from now, would there be a restriction on the selling price? We aren't looking to use this as an investment property, but if we decide to sell it later we don't want to get totally ripped on the price. Thank you! ~Sophia

Our original reply was this:

Sophia, There are two types of lottery for condominiums in San Francisco. One is the condo conversion lottery which allows apartment buildings convert their units to condominiums. It doesn’t sound like this is what the question is about.

The second type is the lottery for the Mayor’s Program which is geared toward first time buyers. This is probably what you are describing. There are a lot of nuances to a purchase (and sale) like this which may be found here. (Once you decide to sell...) First off, the Mayor’s Office of Housing (MOH) will set the price for you, not the market. Although they try to be fair to all concerned, there is a formula which may be found at the above link in Step 3. To that price you are allowed to add 5% to pay the listing and selling agents, but that is all. And finally, the only buyers allowed to purchase the property must qualify for the Mayor’s program.

The good news is, you can buy a place in which to live for under market prices! The bad news is, there are certain restrictions on how much the MOH will allow it to appreciate over time (as described above). One of the reasons for this is, they want the property to remain in the Mayor’s program to give other people a chance at your home when it comes time for you to move on to your next purchase.

People buy property to build wealth, so this will probably not be a great vehicle for that. While we are not experts on the subject, contacting the Mayor’s Office of Housing would be the best place to start. I hope this helps you with your decision. - Janis Stone

At the time of the writing, it seemed like a clear answer, but I'd like to clarify a few things here.

The good news to people participating in the Mayor's Program is this. If you are a first time buyer, you can purchase a home at below market value and live there. In my opinion, owning is ALWAYS better than buying as long as you can afford it!

However, this program is not a place where you will be able to build wealth from your home when it comes time to sell, mainly because there is an artificial cap put on the price by the MOH.

The formula the MOH uses to calculate the resale value is very conservative because they don't want homes to keep disappearing from their pool of available properties when you do finally resell. So to quote from the MOH Q&A page for reselling below market rate housing, "Many units will be priced in accordance with planning approval the change in the area median income from the time of the current owner’s purchase to the time of sale..." To simplify, that means they will take the area you own in and look at the median income for people living in that area and base the new price on that... NOT the value of the properties which have sold in that area (which is what the free market does). In effect, any improvements you might make will have no effect on determining the resale price.

In a normal real estate transaction, given the current rate of appreciation of properties in San Francisco and the recent rash of multiple offer situations, you could earn a considerable amount in capital gains ($250,000 of which is tax free on your primary residence at the time of this writing) over your original capital investment (cash downpayment). Whereas in the Mayor's Program, you would be limited to the increase allowed by the formula set forth by the MOH worksheet.

- Janis Stone

posted by SFResidence.com @ 7:41 AM