Depending on your circumstances, plans and current market conditions, renting one’s home instead of selling it may certainly be an option worth considering. Owning rental property may be a viable investment choice for you. However, there are additional factors to keep in mind as you make your decision.

1. In San Francisco, renters often reduce property value for the following reasons:

• Rental properties rarely show as well as owner-occupied properties and renters often neglect basic upkeep and maintenance.

• If your property is subject to SF rent control/eviction limitations – which most properties built before 1979 are – evicting tenants or paying them off to move without eviction in order to sell the home later may be prohibitively expensive, take long periods of time or even be impossible. (You should consult a landlord-tenant attorney.)

• SF tenants under the rent control ordinance are now owed relocation fees upon eviction – thousands of dollars per tenant. Buyers will want to be compensated for that cost.

• If it’s impossible to evict the tenants, then you have to show it while tenant occupied, which can bring up multiple issues pertaining to appearance, showings, open houses, and tenant resentment and lack of cooperation. It also makes it virtually impossible to perform any staging of the home to make the property show in its best possible light.

• Many buyers don’t want to buy tenant occupied homes and those buyers willing to deal with the issue usually expect a significant discount on the price.

2. Managing a rental property and tenants can be a hassle—the calls about broken plumbing on Thanksgiving Day may not be something you wish to deal with. And if you hire a professional property manager, there will be a significant additional expense to deduct against the rental income.

3. If you are able to get the tenant to vacate the property prior to the listing period, a vacant house will have to be staged to show well. It costs money to stage an empty property and it costs money to keep the house vacant during the listing and sale period.

4. Renting for an extended period may affect the $250,000/$500,000 exclusion from capital gains tax for owner-occupied properties upon sale.

5. If you want to own rental property, you will typically get a better return on investment from multiple-unit properties than from single family dwellings.

6. You may need your proceeds of sale to purchase your new home.

Note: If you do decide you wish you rent out your home, Paragon has a very able rental department which specializes in this exact situation.

Anyone considering renting their home or evicting a tenant is strongly recommended
to consult with a qualified landlord-tenant attorney and the San Francisco Rent Board.
Speaking to an accountant about the financial ramifications is also recommended.
Paragon agents are not qualified to give advice on these issues. 

Fair market value is that price a qualified, reasonably knowledgeable buyer will pay to a seller not under duress, after the property has been fully exposed to the market.What was once an unusual way to market homes – outside of MLS – has become much more common. The question is: does this make sense for most sellers?

There are basically three reasons for trying to sell your home as what is variously called a pocket, off-market or off-MLS listing:

1. Your highest priority and primary concern is confidentiality and privacy: you absolutely do not wish it to be public knowledge that you are selling your property.
2. You don’t want to prepare your home for showings, have open houses or really make any effort at all. Perhaps you don’t even need to sell, but if someone is willing to pay you a certain price that you’ve already decided on, taking the property as-is, then you will be completely satisfied selling at that price.
3. You believe that marketing and selling your home this way achieves the highest sales price, because buyers who do learn of it believe they’re getting a special inside shot at buying and step up aggressively.

Those are all valid reasons, but you should be aware of the potential trade-off you’re making.

One thing has become clear in the current red-hot market: it is not uncommon for one, specific buyer to be willing to pay significantly more than anyone else when they’re competing with other buyers. The reason behind comprehensive marketing, including listing the property in the Multiple Listing Service – which is probably the single best way of getting the word out to buyers and their agents – is firstly, to reach that highest paying buyer (in the effort to reach every possible buyer), and secondly, to orchestrate as big a competitive bidding situation as possible – or at least the fear of impending competition in that buyer’s mind. This typically brings about the best result for the seller.

Without comprehensive marketing, it is much less likely that this single buyer will hear of your home being for sale in the first place, as well as being much less likely that a dynamic competitive bidding situation can be orchestrated. In either or both of those cases, it is quite possible you will sell your home for less, and perhaps significantly less, than you could have.

If you do sell your home “off-MLS” in this market, it’s quite conceivable that you’ll find a buyer who will pay what appears to be a very good price. But there is simply no way to tell if you are getting the best price achievable, or even, by definition, current fair market value. This is especially true in a rapidly appreciating market. Might there have been somebody else, who, if they knew about the opportunity, would have paid more? There’s no way to know.

So, there are valid reasons to make the conscious decision to go the pocket listing-off market-off MLS route, as long as you realize that you might not get as high a price as you could have otherwise. What are not valid reasons are your agent or broker desiring, by not publicizing the listing to other agents, to “double-end” the sale (i.e. represent both you and the buyer) and thus earn twice the commission, or your agent preferring not to spend the time, effort and money to comprehensively market and show your home. In both those scenarios, your agent is putting their interests above your interests – which, by the way, is a violation of their legal, fiduciary duty – and you should find another agent to represent you in the sale of your home.

The quality of the agent working on your behalf—his or her competence, integrity,
work ethic and commitment to your interests—can make an enormous difference
in the outcome of your home purchase or sale: in money, stress, time, future happiness.

#	Date	Days on Market	Area	Property Type	Address	Beds	Baths	Price	Sales Price as a % of the Original Price
1	9/6/13	8	Bernal Heights	SFD	324 Highland	3	1	$1,112,000	146.51
2	9/13/13	28	Glen Park	SFD	12 Addison Street	3	2	$1,312,000	145.94
3	9/20/13	13	Potrero Hill	SFD	837 Wisconsin	2	1	$1,301,000	144.72
4	9/25/13	20	Inner Sunset	SFD	1566 9th Avenue	4	2.25	$1,395,000	142.35
5	9/4/13	38	Bernal Heights	SFD	3025 Cesar Chavez	3	2.5	$1,050,000	140.19
6	9/13/13	29	Mission Dolores	Condo/Coop/TIC/Loft	161 Dolores Street #3	1	1	$580,000	138.42
7	9/12/13	55	North Panhandle	SFD	2133 Golden Gate Avenue	3	1.5	$1,105,000	138.30
8	9/17/13	10	Inner Mission	SFD	837 South Van Ness	5	1	$1,901,000	136.27
9	9/9/13	22	Glen Park	SFD	37 Elk Street	3	2	$1,282,000	135.09
10	9/27/13	12	Pacific Heights	SFD	2201 Lyon Street	6	3.5	$5,250,000	134.79

The question: Should a Seller should incur the cost of supplying property inspection reports — such as structural pest control inspections and the more general contractor’s inspection performed by a home-inspection specialist – to buyers prior to soliciting offers, part of what is typically called a buyer disclosure package?  Though it is true that this cost is usually borne by a buyer subsequent to their offer being accepted, there are large advantages for the seller to do so for buyer’s review before any offers are made. Advantages that we believe far outweigh the additional costs.

• Getting pre-sale inspections up front helps preclude due-diligence renegotiations – which are almost always for amounts (far) greater than the cost of the reports – and makes it much less likely that the transaction will fall out of escrow (most often due to new issues being discovered, post-offer-acceptance).

• If material issues are uncovered by these inspections, it gives the seller time to remediatethem appropriately or the listing agent to quantify them with professional estimates – which may be very important to prospective buyers – prior to going on market.

• It allows for buyers to make no-inspection-contingency offers without the dangerous liability worries a listing agent and seller should have when there are no recent pest and contractor inspections. Any transaction allowed to close without recent inspection reports is asking for post-closing trouble, trouble that will embroil all the parties and will always cost more in time, energy, aggravation and money than the cost of having the inspections proactively.

• Pre-marketing inspection reports may help price the property properly to begin with, and may even help substantiate a higher asking price. It’s always good to make prospective buyers as comfortable as possible regarding the condition of the property, because that comfortableness helps generate higher sales prices, especially in competitive bidding situations.

Remember: Always use the most widely respected inspectors in the area and have them do complete and comprehensive inspections.

 

Fair Market Value

Neither agents nor sellers determine a property’s market value: Fair market value is determined by that (highest) price a qualified, reasonably knowledgeable buyer is willing to pay at a specific point in time, to a seller not under duress, after the home has been properly exposed to the market.

An agent’s comparative market analysis (CMA) attempts to estimate today’s fair market value by an honest assessment of the following:

• General Area and Specific Location within Neighborhood
• Size, Appearance, Condition & Emotional Appeal
• Attributes & Amenities: Views, Parking, Yard, etc.
• Recent Comparable Sales
• Competitive Properties on the Market
• Properties that Did Not Sell
• Current & Projected Market Trends
• Likely Buyer Profile

Property Strengths & Weaknesses

The purpose of this analysis is to price the property appropriately to maximize market response and the final sales price.

Buyers – for any product, including homes – don’t find the issues of what a seller wants, needs or has invested germane to fair market value, so those issues shouldn’t play a role in a CMA or pricing the property.

Older appraisals or refinancing appraisals performed by appraisers not intimately acquainted with the property’s specific market area often do not accurately reflect current fair market value.

Pricing and Buyer Dynamics 

The vast majority of buyers and agents will not make offers on homes they consider significantly overpriced. The vast majority of home sales in San Francisco do not sell more than 3% to 5% under the last asking price (including any price reductions): If the home is not priced within that narrow range, buyers simply move on to other listings.

If priced outside that range, the listing is generally ignored by the market and generates no offers, regardless of the quality and appeal of the property.

Well-priced homes create a sense of urgency in the buyer/broker communities to act quickly with strong, clean offers—and help produce the competitive bidding situations that generate the highest sales prices. 

The Effects of Overpricing 

Overpricing wastes the optimum period of buyer and broker attention: when a listing first comes on the market. This level of attention cannot be recaptured or recreated later.

Overpriced homes kill any sense of buyer urgency to act and spend much longer periods of time on market, on average 2 to 3 months longer, than well priced properties. This significantly reduces perceived value in buyers’ minds and makes competitive bidding unlikely.

This sample breakdown of San Francisco home sales below illustrates the large discount off original list price and the big increase in days on market, as well as the significant proportion of listings that don’t sell at all, when the listing is overpriced to begin with. The exact sales price percentages and days-on-market figures will change based upon market conditions, but the differences in results between properties priced correctly and incorrectly stay relatively the same over time.

“Ironically, instead of getting more money… [Over-pricing] usually stigmatizes a property and reduces the eventual sale price to less than it would have been with more realistic pricing.” 

Brown & Tyson, House Selling for Dummies