Deciding to Rent or Sell Your Home in San Francisco

Deciding to Rent or Sell in San Francisco

An Interview by Ruth Krishnan with Tracy Ballard, Founder and Leasing Director SF City Rents

Ruth: Tracy, thank you for joining me today.

Tracy: Yeah, definitely. It’s fun to talk about this. I know people are super interested in it.

Ruth: Well, it seems like this year more than any other year before, you and I are doing a lot of tag-teaming. When I’m talking to clients, oftentimes they’re calling me because their tenants gave notice and they’ve tried to rent their place for a little while unsuccessfully and then they have to hear from me that maybe they might not like the results of selling their condo either. Homeowners are in a very difficult situation in some segments of the market.

For rentals, is it all bad in San Francisco and how bad is it?

Tracy: Right, that’s an excellent question. No, it’s not all bad. When I talk to owners of single family homes in mid San Francisco, especially if the house has a yard and lots of outdoor space, then the rents are almost the same as they were before, give or take. In some cases we might get 5% or 10% less than the last time around, but in some cases we’ve gotten more. It’s a bit wonky. Then the closer you move to downtown, whether you’re single family, condo, or apartment, the bigger the rent declines have been. The worst area is SOMA and Dogpatch, which makes sense because that’s where housing is most dense, right? You’ve got lots of condos and apartments in those areas.

Rents have fallen in SOMA anywhere from 30% to 50%. Dogpatch is about 40% to 50%. Yeah, that’s a big pill to swallow. As you go North of Market Street, Tenderloin to Russian Hill have big drops anywhere from 20% to 30% mostly. As you go West from Van Ness, Pacific Heights, Marina, and all the way to Noe Valley, rents are down about 10% to 20%, so not as bad. Richmond and Sunset have started to come down in the beginning of the fall. Actually, rents went up there when downtown was starting to go down, but now rents have started to fall there as well, but not as much as the rest of the city, so maybe 5% or 10% somewhere in that region. The biggest drops are in condos and apartments. The lowest drops are in single families.

Ruth: Got it. I spoke with a gentleman today and he has a place in the Marina. He bought it in 2016 and he doesn’t want to lose money. His definition of losing money does not calculate any of the free rent that he got for the last four years as his mortgage was being paid.

He wants to sell for a couple hundred thousand dollars more than he paid, which is hard to do right now. I told him he should talk to you and find out if it might be a good time to rent. Then of course the question is, “Well, if I want to rent for a year and then sell in a year from now, how do I do that?” I know you’re not an attorney, but I’m sure you get that question.

How do you usually answer that question?

Tracy: In San Francisco, it just changed that every property has something called just cause eviction. Which means that although you’re signing a 12 month lease with your tenants, they can stay as long as they want to on a month to month basis. Wanting to sell it is not considered a just cause. A just cause would be if they stopped paying rent or they become a nuisance, kind of the typical eviction reasons that you think of. You can do an owner move in eviction, but not if you’re going to sell it, you actually have to move into it if you’re going to do that kind of eviction. If it’s a condo or a house, then you’re exempt from the rent increase maximums that we call rent control, here in San Francisco. If it’s a TIC or an apartment, two units or more that are owned by the same owner in one building, then you have San Francisco rent control.

Renting something right now, your tenants are going to get a good deal. If it’s rent controlled, you’ve got to pretty much plan on them being there for many years. The longer that they’re there and rent starts to recover, the better deal it gets for them.

It could be a really long time. If it’s a condo or a single family home, then at least you can raise the rent to market as rent starts to recover. When you’re able to do that, the average tendency is only about a year and a half. If you can keep the rent at market, then the tenant is more likely to move on. The more expensive the rent is, the more upwardly mobile your tenant is and the less amount of time they’re likely going to be there. Because maybe they’re to buy a place of their own, or they’re going to upgrade because they’re going to make more money or they are starting a family, whatever the reason might be. If it’s an in-law apartment that’s rent controlled or a studio apartment that’s rent controlled, those tenants may not be as upwardly mobile and you should just plan on them being there for the longterm.

I’ve talked to a few owners lately who have TICs and that’s a really hard decision to make right now because if they don’t sell it now and rent it it’s hard to say when they’ll ever have it vacant again. They can do a buyout, they can buy their tenant out of their lease, but then the tenant has a lot of leverage at that point. If you can’t meet that price then you can try to sell it with them living in it, but that’s going to greatly impact the value, I’m sure. It’s a tough spot to be in right now because if it’s not a good time to sell it’s often not a good time to rent either.

Ruth: So if you have a condo, you can rent it for a low rate and a year from now, you could raise the rent and if the tenants choose to stay there, you maybe feel fine with it and if they choose to go, then you can choose to sell it at that time?

Tracy: Yes, exactly. You’re not allowed by law to raise the rent with the intention of the tenant moving out, that would be called constructive eviction. You just want to be careful and keep it at market. You don’t want to go way over market and be unreasonable about it. I do have clients that tell me they want to sell in a year or so. In this case we will disclose that to new tenants when they’re looking because if they’re looking for a spot to set up shop for four or five years then maybe it’s not a good fit for them. The tenants that we’re renting to now are super savvy.

I would say 95% of them are locals who are just looking to upgrade. They don’t really have to move and they know all about rent control. Condos are much harder to rent right now for that reason and so we’re seeing more tenants propose 18 month leases, 24 month leases, or just options to renew later. That’s how we’ve been able to get deals done on condos, but it’s become a lot more difficult. Almost every tenant is negotiating as well. Every unit is a lot more difficult to rent and we have about three times as many as we did before COVID so it’s been a challenge.

Ruth: If you have something in SOMA and you’re competing with all of this inventory, can you give away some free months and then after that, raise it to a higher rate or do you have to give away the three months and then have this super 50% discounted rate as well in order to be competitive enough in the market to move it? What is the reality?

Tracy: It’s a bit of both. Again, the tenants are super savvy about these free month offers. Generally, you see them in rent controlled buildings where the owners are trying to keep the base rents as high as possible and using the free rent to get the effective rent down to where market is. Just today, I had somebody say “I don’t want any free rent I want the base rent down here”. It’s a difficult sell right now and we’re also seeing it in the newer buildings because the rental income is how you value a building. They want their base rents to be high too but they’re good with giving all kinds of incentives. Sometimes in Dogpatch we’ve had to do both lower the base rent and give them free rent. It’s a mixed bag, sometimes you have to do both.

Ruth: The interesting thing is because of this, prices are 20% to 30% lower than they were in some cases. Investors could come in and swoop up some deals right now on the buy side but then they do need to be prepared for dealing with the competitiveness for the next few years. I really do believe in San Francisco. I think that we’re going through a bit of a hard time right now in condo land and I firmly believe that things are going to come back. It’s a great city. I think people are going to want to go back to the office and that the restaurants are going to open back up and people are going to remember what San Francisco is all about.

All of the people who went to Marin are going to be tired of traffic and they’re going to come back home. You have to be ready to ride out a few years. It’s a risk, which is how you make money. You don’t make money without risk and it always seems like, “Oh gosh, I wish I would have scooped up one of those fire sale condos in 2008”. I’m sure you remember 2008, nobody that I knew had money in 2008. Even if you did, you were too scared to buy anything because it didn’t feel like the market was ever going to recover.

Tracy: It always does, doesn’t it?

Ruth: Yes it does. When you’re in it, it just feels so bad. I’m trying to get Condo people to rent with you instead of selling with me. I’m like, “No, don’t sell it will recover”. I personally think it’s going to be a few years before we see a recovery.

What do you feel like on the rental side?

Tracy: Right, I was talking to a client yesterday who doesn’t want to lower her rents now because she’s convinced that after the new year things are going to start to come back. I think that’s really optimistic. I appreciate her optimism and I would love for that to be true. I think it’s a long shot. Although, I am starting to get calls from tenants who are saying, “I’m moving back to San Francisco in January”, or “I’m moving back to San Francisco in August”. Yes, I agree with you. That’s going to start happening as things start opening up.

San Francisco has not lost its luster. I agree. I think it’s going to take several years. Maybe by the end of next year or the year after we’ll start to see rents start to bump up. I doubt it’s going to be before next fall or winter but as far as getting back to where we were even earlier this year or last year, I do think it’s going to be probably four or five years until we get to that point and then maybe it’ll go even higher, right? That’s kind of what we do here up and down.

Ruth: Yes. On the plus side for both the rentals and the sales side, there are people who’ve been waiting on the sidelines and living in really small quarters that are able to finally upgrade. It’s a nice reset for a lot of people to be able to finally afford something whether it is renting or buying. I think that we really needed that as much as it hurts on the other side for a lot of people. Somebody’s got to lose here, but what goes up must come down and what goes down must come up. I do think that we’re going to recover.

Are you seeing less people trying to rent their own stuff these days?

Tracy: Yes, I do get new clients now who tell me, “I used to do this myself but this market is something I’m going to try to attempt.” I’m also getting a lot of people who are trying to let go of one agent and then hire me. Still listing is always a challenge but usually it’s because it’s overpriced. Until the owner comes to reality about where the rents are it doesn’t matter who your agent is or even if you’re doing it yourself. You’ve got to be realistic about the price. It’s kind of hard to tell right now because there’s not good data sources that are up to date. There are a lot of backward looking things that aren’t helping us in the now. Like I was mentioning before, the different neighborhoods are doing different things. Also, studios and one bedrooms have fallen a lot more than two bedrooms or bigger.

Leasing agents in San Francisco don’t really use MLS. All you can go by is what you’re seeing. Then asking rents can be way off too and all over the place, because again, the landlords and the agents don’t know where the right prices are. Using an agent who can also cross sell your property from another listing of theirs is super helpful to get attention in a market like this because it truly feels like you’re just drowning in a sea of vacancies. We do things like video walkthroughs to try to make our listing stand out and we say that we’ll do zoom tours or FaceTime tours with you, but it’s a battle to just stand out from the crowd.

Ruth: Are people renting sight unseen?

Tracy: Not so much now, we did have quite a bit of that actually when things first got shut down. From March to June we did almost all of our business virtually, but that was only maybe 20 or 25% of normal. We did do a showing the other day with somebody from Montreal that’s trying to rent something before they get here but I’d say it’s not so much sight unseen. Most people want to see it in person.

Ruth: Got it. I would think that the bigger stuff, the four bedrooms are renting because you throw four tech guys, everybody pays $2,000, and one of them is sleeping in the dining room. There was this place, it was actually a two or three bedroom on Woodward, I think you rented it for one of my clients, and it ended up being made into a four or five bedroom. They got like 10 grand a month and I couldn’t sell it for $1.3 million. It just made no sense to sell because the rent was so good on it.

I imagine those days are over, right?

Tracy: Yes. Where I’ve really noticed it is in the mission district. I have a client who has a three or four bedroom unit that he used to rent for $7,000 – $8,000 a month and it’s hard to even get $5,500 for them now because there’s not as many of those people that are wanting to move in together for obvious reasons. We still do get groups of roommates that are looking or two couples that want to move in together. Nothing like before. I’m confident that those days will come back just like everything else will come back.

Ruth: Where do people who want to rent look? Is Craigslist still a thing? What are the things they days?

Tracy: Yeah, Craigslist is still a thing as much as we would like it not to be. One that is local that’s starting to get more popular is Zumper. Zillow is another one. Zillow has purchased a lot of other companies now like Trulia and Hot Pads. They have a good corner on the market. I would say between Zillow and Craigslist. Those are the two big ones.

Apartments.com. The Jeff Goldbloom commercials. I just had a client with a larger apartment building pay for advertising with that and I’ve not been impressed with the results. I don’t think that people here use that as much. Craigslist is still a thing and Zillow started charging you to put your listings on their sites. There’s less on Zillow now than there used to be. So actually, Craigslist is kind of making a comeback now because it’s still free. You can find more on Craigslist.

Ruth: Interesting. I started getting calls from people who are like, “Oh, I want to rent your listing that’s for sale”. I’ve heard that people have lost money getting from these kinds of deals. They are scams, right? That’s the scary thing with Craigslist.

Do you work on the tenant side?

Tracy: We have kind of on and off over the years. I don’t know how sales agents do it, it’s difficult to tour with a tenant all day and not show any of your listings to anyone else but that one person. It’s a challenge with leasing because you do such a high volume of showings. We have agents from time to time that we call for re-locations where they take the tenant on a tour.

We don’t have an agent in house that’s doing that right now, but I do know several tenants agents and they actually are starting to get busier now. Just in the last couple months, they disappeared and now they’re back touring with the tenants. The tenants have to pay those agents for representation because the landlords only pay their listing agent like me. If you’re a tenant, unless your company is paying for it, you’re probably not inclined to pay an agent to conduct a search for you unless you’re coming from an international location or something like that. Or you just don’t have time but you have a lot of money. Most people prefer to do it themselves.

Ruth: Interesting, all right.

Well, anything that I forgot to ask you that everyone else is asking you about renting?

Tracy: Is this the bottom? I hope it’s the bottom. This time of year it usually is kind of the bottom for the year, right? Rents are usually softened a bit. I’m hopeful that this month, December, will be the bottom and then things will start to improve in January. By improve I don’t necessarily mean that rents go up, just that they stopped going down. If they would just stabilize that would be fantastic. I think that’s probably going to be when all of those companies start saying, “Okay, it’s time to come back to the office”. That’s when we’re going to start to see things at least stabilize and then rents will start to go up from that point. I think next summer is kind of what people are thinking for coming back to the office, but who knows?

Ruth: Well, I think we’ve got good news on the vaccine, it looks pretty good. I would say next summer looks pretty solid for going back to the office and getting our kids back to school.

Tracy: Also, I have a theory that we lost so many of our single millennials, right? Who are maybe living with their parents right now. At some point even if the vaccine is not here yet that’s got to get old. How long can you live with your parents? They’re going to hopefully start coming back for that reason too and just anticipating the arrival of the vaccine and things starting to open up.

Ruth: Well, you can always reach out to me. Tracy and I are tag teaming a lot right now because many people I’m talking to are trying to make tough decisions. I’m here to provide information. I’m never here to just sell you on selling. It’s just like, “Okay, let’s look at the whole picture, talk with Tracy, find out your rent, I’ll tell you what the situation is on the buy side”.

For the people listening, what’s the best way for them to get in touch with you?

Tracy: Our website is SFcityrents.com. My phone number is (415) 797-8296. I welcome phone calls any time. Those are the two best ways to reach me.

Ruth: Awesome! I think Tracy’s probably worked with over a hundred of my clients by now. She’s amazing. I haven’t yet heard one negative thing about her out from anyone she’s worked with. I highly recommend her. Tracy, thank you so much for your time today and for taking such great care of my clients. I really appreciate it.

Tracy Ballard: You’re welcome! Keep them coming and thank you for having me.

Ruth: All right, take care.

Thinking of buying or selling? Call the Krishnan Team at 415-735-5867 for a no-obligation consultation. You can also email us at info@ruthkrishnan.com

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January 12, 2021
Homeowner , Selling a Home
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