the 2-4 world

By Erika Burke

First, some good news and impressive numbers. The end of 2007 means we have come to the end of a three-year period where we have sold a grand total of 2,070 2-4-unit properties in San Francisco for a whopping $2,820,596,861. This should make us feel better about our current slowing market. The average 2-4-unit price is $1,362,647, and the average sale over list price is 103.39%. The average number of days on the market (DOM) was 50.

During the final quarter of 2007, we transferred 115 2-4-unit properties for a total dollar volume of $162,510,235, which is a 17% drop in dollar volume from the fourth quarter of 2006. We dropped 20% in the number of multiunit transfers from 2006 and 45% from 2005.

The good news is that the average sales price of $1,413,132 for all 2-4-unit properties is up 14% from last year and has risen 20% from 2005. It’s apparent that our sales volume and activity have declined, yet our average sales price continues to climb in the multiunit sector.

Currently, we are at an average list vs. sales price of 100.3%. This may mean that buyers are willing to pay asking prices and that sellers are pricing commensurate with what the market is dictating. To see an average like this is encouraging, as buyer confidence appears to have been maintained.

Notable Sales
The top dollar volume for both listing and selling agency goes to Coldwell Banker with $44,316,100 and a 13.63% market share with 30 transfers. Coldwell is followed by Pacific Union/GMAC with $39,147,000 in dollar volume, 12.04% market share and 21 transfers. Close behind were McGuire, Paragon and Zephyr Real Estate, in that order. Chris O’Connor of McGuire Real Estate transferred five multiunit properties for a 5.71% market share with a total volume of $6,243,000 during this quarter.

A gorgeous and spectacular 2-unit development project, two years in the making, was sold by Richard Teed and Payton Stiewe of Sotheby’s at 52-54 Iris Ave. for $3 million. This ultra-contemporary, high-end custom remodel included a roof deck, parking for four, views, high-end finishes, exquisite landscaping and was located steps from Laurel Village.

Roberto Tamayo of Prudential California Realty deserves his sale of a 4-unit property this past November at 815-819 Capp St. after 204 days on the market. It sold for $1,240,260 with a list price of $1,350,000. The right buyer and a good negotiation can get every multiunit property sold.

Two Units
Everybody loves a 2-unit building. What’s not to love? The number sold in the fourth quarter went up by 3 transactions to 84, with the same 46 DOM as the prior quarter. The average median sales price was $1,412,408, which is up 4% from the last quarter and 2% over last year. We still see consistent overbidding, with a list vs. sales price of 101.23% for this type of purchase. Thirty-three properties transferred for under the asking price, 22 at asking or very slightly over and the remaining 29 sold over asking.

The total dollar volume was $118,642,275, up by $8,755,075 from the previous quarter. The price per unit for this sector is $706,204, nearly the price of a single-family home in San Francisco.

The sales were spread throughout the city for the last quarter. Eleven sold in the Richmond District, nine sold in the Sunset District, seven sold in Noe Valley, five sold in the Inner Mission, and four each were sold in Lone Mountain, Ashbury Heights, Hayes Valley and Cow Hollow. Sixteen other neighborhoods also saw 2-unit transfers.

The marketing remarks about two-unit properties are quite telling: 15% of the 2-units sold were marketed as fixers, about 25% mentioned vacancies of one or both units, nearly 50% mentioned remodels and about 15% focused on the TIC/condo-conversion possibilities. Remarks also included comments about tenants’ rights and protected tenants. Only 8 of the 84 units sold were marketed with their GRMs, which gives the impression that marketing a 2-unit as income property is the exception and may be looked upon as a liability. This demonstrates how San Francisco’s restrictive rental policies are contributing to making the 2-unit sale a speculative purchase. When the seller is pricing his property for sale, it appears to be based upon what the speculator is willing to pay.

Three Units
Sixteen 3-unit properties transferred in the fourth quarter. Six of them were marketed as income property, four as fixers, four as remodels and three as vacant. The average sales price in this sector is $1,484,969, or $494,990 per unit. The average sales price over a three-year period for a 3-unit has been $1,473,671. In the fourth quarter of 2007, the sales price continued to climb, but dropped 5% from the first half of the year and up from the third quarter by 4%. Sales prices ranged from $899,000 to $2,550,000 and GRMs ranged from 12.92 to 38.91. The average DOM was a little skewed, as one listing stayed on the market for 1,003 days. The average without that DOM would have been around 64 DOM.

Seven properties sold at or ever so slightly over asking, eight sold under and only one sold 20% over asking. This is definitely showing a downward trend in list vs. sales price for a 3-unit. Sales activity is egregiously down in this sector by 13 transfers from last quarter and 13 from last year during this quarter. This is the smallest number of 3-unit transactions that we have seen in the prior three years.

Four 3-units transferred in the Richmond District, followed by two in Hayes Valley and the Marina, and the rest sold on the northeast side of the city. This quarter put the myth that properties don’t transfer around the holidays to rest, as almost half of the 3-units closed escrow in December while the other half closed in equal amounts in October and November.

The total dollar volume in the fourth quarter of 2007 was $23,759,500 and has dropped a significant 43% from the prior quarter and 42% from the same quarter a year prior. The average DOM was 123 and there was a sales vs. list price of 98.65%. Perhaps there is no excitement for the buyer considering what it takes to make this a viable income opportunity.

Four Units
Eleven of the 16 4-unit properties that sold in the final quarter of 2007 sold in November, showing us that marketing in September and October is a viable way to see escrows closing before the holiday rush. Five 4-units were sold in the InnerMission and Portrero Hill, four sold in Noe Valley and the remaining buildings were sold in the Inner Richmond, Hayes Valley and Pacific Heights.

Sales prices ranged from $927,000 to $2.53 million. The GRMs ranged from 14.47 to 24.61. Two properties sold at asking, five sold for over asking and the remaining nine sold for under asking, making the average list price vs. sales price 97.40%. The average DOM was 42, though it ranged from 8 days to 204, with the bulk of time being from 8 to 57 days.

The average sales price for a 4-unit has dropped somewhat significantly from the prior quarter (16%) to $1,313,966, though that price does not differ from the final quarter of 2006 by much. We sold only two units less than the previous quarter. We transferred only six less buildings this year than last, which shows we still have momentum in this sector.

The total dollar volume was $21,023,460, with a 26% drop from the prior quarter and a 16% reduction from this quarter last year. The average cost per unit in a 4-unit is $328,491, continuing to make the 4-unit the value buy of this sector of the market.

The Big Picture
We rarely talk about price per sq. ft. in San Francisco since we have such varying architectural styles and conditions on the properties that are being sold. When a buyer or seller is looking to remodel, he and his contractor discuss what the cost of remodel per sq. ft. will be. A contractor or architect might give you a price of anywhere from $350 to $450 per sq. ft. and provide another number for common areas, garages and foundations. Therefore, it makes sense to keep an eye on the average price per sq. ft. for the different buildings. Last quarter, 2-units sold for an average of $528.33 per sq. ft., with properties from 760 sq. feet to 5,600 sq. feet per building. The 3-unit average per sq. ft. was $475.39, with properties from 1,900 sq. feet to 4,775 sq. feet per building. Finally, the 4-unit average per sq. ft. was $373.98, with properties from 2,000 sq. feet to 4,500 sq. feet per building. The drop in value appears commensurate with the same type of drop in cost per unit for the 2-, 3- and 4-unit building.

Apartment owners and investors should seriously consider the 2-4-unit property for their portfolios. Though also governed by San Francisco rent ordinances, unlike the larger buildings, these buildings have multiple uses and are often priced near what one might invest for a larger property with a higher value per square foot.
With a 2-4 unit, one avoids inheriting the larger liability and management issues of
a larger property.

Also commonly overlooked is the commercial mixed-use property in San Francisco, for which TIC and condo-conversion rules apply. Consult with your agent or attorney to understand how you can benefit from this type of ownership. This may be the last, best bit of speculative ownership available. Don’t tell anyone I told you.

Consider your choices. Will you remodel, keep units vacant as they are vacated, upgrade to a newer construction building, sell your building to your tenants, improve your tenant profiles, and/or finally get around to your passthroughs? Rethink your investment and make sure you and it are both living up to your best use and potential.

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The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. Erika Burke is a realtor with a 25-year background in sales and marketing. She specializes in the sale of San Francisco multiunit properties with Zephyr Real Estate and can be reached at 415-279-1135 or erikaburke@zephyrsf.com. Copyright © 2008 by SF Apartment Magazine. All rights reserved.