The Property Management Shop
by Marc Wilson
Q. I listed my 5-unit property for sale in February 2006. At the time, my agent showed us comparable sales information that supported an asking price of $1,825,000. He was confident that either a tenancy in common (TIC) conversion buyer or an investor in a 1031 Tax Deferred Exchange (a trade buyer) would come along and purchase our property at or near the asking price. Since February, we have reduced our asking price twice; the current asking price is $1,650,000. At least 30 or 40 agents and buyers have toured the property, and we’ve still received no offers. The agent tells me that there is very little action on the listing. What is the story with the current apartment building sales market? Should we keep lowering the price? Should we take our property off the market and wait for a better sales environment?
A. You sound like one of my clients. I don’t think that anyone specializing in San Francisco apartment building sales can reasonably argue that nothing is afoot. I consider myself to be somewhat of a market indicator relative to apartment building sales—a mine canary, if you will. I usually have a handful of apartment buildings for sale at any given time, so it is easy for me to compare one year to the next when it comes to overall investor interest, property showings and broker tours, the number of phone calls, total buyers in the marketplace and, finally, total closed transactions. And the market activity up to the fourth quarter of 2005 was absolutely historic. No one has ever seen so much residential investment property change hands on a yearly basis.
Virtually all of the stars have been in alignment for apartment building sellers and their brokers for the last three years. The market was very strong, primarily for four reasons: historically low interest rates, a veritable plethora of tax-motivated trade buyers, the advent and prevalence of TIC-conversion buyers and a capital gains rate on property sales that was lowered to 15%. Buyers were motivated by low interest rates, tax considerations (trade buyers) and/or TIC-conversion profits; sellers were driven by a historically low capital gains rate. Everything was perfect! I would list a property, advertise, conduct property tours and three weeks later receive six to eight offers, most over asking price. The phone was ringing off the hook. How does the old song go? “We had joy, we had fun, we had seasons in the sun.” This year the U.S. Treasury is overflowing with the capital gains taxes being paid by last year’s sellers. My tax accountant has confirmed that he has never filed so many tax returns with so much capital gains tax paid by local property owners. I guess President Bush was on track with his tax policies after all.
But how does that old song end? I think it goes something like: “But the wine and the song, like the seasons, have all gone.” I don’t want to sound like an alarmist, but change is definitely in the air. Total apartment building sales for the first five months of 2006 for all 5-plus-unit properties are down 13%. Total sales for just the larger buildings (16-plus-units) are down 25%. These numbers are not that horrific; they are actually more encouraging than the lack of overall market activity that I am personally experiencing.
Those properties listed after January 2006 are experiencing considerably less activity than a year ago today. I would typically get 8 to 10 calls a day on new listings, whereas this year I am receiving an average of only 2 or 3 calls a day. Total property tours and showings are down by at least 50%. What does this mean? It means that there are fewer buyers in the marketplace. I honestly can’t remember the last trade buyer that called for one of my listings. In previous years, I would get frequent and frantic calls from recent sellers looking to place their funds in order to avoid capital gains taxes. These buyers appear to have disappeared from the market. I can only assume that either the smaller properties are not selling as briskly or that more sellers are deciding to pay the taxes and keep the money, because they are decidedly not trading up.
Similarly, the TIC buyers are either gone or dramatically more selective about their purchases. The market is awash with individual TIC units for sale, and the conversion people are starting to get nervous. The availability of individual TIC loans has not exactly blossomed like we had all hoped. The result is that TIC-conversion buyers are much more particular about their investments. Only premier properties, fantastic locations with parking and buildings with owner-occupancy appeal are being considered for conversion.
In sum, we have discretionary buyers. We have buyers who do not have to buy an apartment building. We have buyers who are interested in, and have expectations regarding, the operating numbers of their potential investments. The trade buyers are gone, TIC buyers are bearish and interest rates are going up every bit as fast as they went down. I think we can safely say good bye to the heady days of yesterday.
What is the number one thing that, if not done properly, will prevent your apartment building from selling in any market? Is it the quality and experience of the realtor that you hire? Is it whether you advertise on the internet or not? Is it the size of the realtor’s advertising budget? Is it the grandness and sophistication of the marketing brochure? I don’t think so. The number one thing is price. No matter what else you do, if your property is not priced appropriately, it will not sell. If a property is not selling, it is for one of two reasons: either your real-estate agent is incompetent or your asking price is no longer appropriate. Your property needs to be priced in such a manner as to guarantee a steady flow of potential investors. Rest assured that the buyers in this market are looking at properties; they are just not looking at yours. Many of us made the mistake of using 2005 sales statistics to price 2006 listings; this was unavoidable for those properties listed in January and February of 2006. We should simply forget about 2005. My suggestion would be a 15%-20% reduction in asking prices from the heated climate of 2005. It is interesting to note that there does not yet appear to be a corresponding decrease in single-family home and condominium sales to date.
Here’s another fun fact: the total number of expired listings (those properties that failed to sell) for the first five months of 2005 was 15. For the same period this year, the total is 23—a 53% increase. You and your agent are not alone. In a falling market, it is better to price your property aggressively from the get-go as opposed to chasing the market from an unrealistic starting point. Pricing will be far more important over the next few years. Don’t select a real-estate agent just because he is promising you the highest potential sales price. He is not buying your property, an unknown third party is. If your agent has fully exposed and properly marketed your property and there is little or no action, drop the price.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Marc Wilson is the president of SFAA and has specialized in the brokerage of San Francisco apartment buildings for 20 years. He can be reached at 415-229-1275. Copyright © 2006 by the San Francisco Apartment Magazine. All rights reserved.