Fred, Other/Just Looking in San Francisco, CA

If you rent out your home in San Francisco in order to wait out the market, can you lose property rights?

Asked by Fred, San Francisco, CA Tue Feb 10, 2009

We'd like to rent out our home, it is an old SF Victorian. If we rent it for a year will we open ourselves up for potential landlord/tenant difficulties at the end of the lease?

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9
You've gotten some good answers, but from my prespective, the answer for you lies in your tolerance for risk.

As has been noted below, if you rent, the tenant will have rights under the Rent Ordinance. Under the Ordinance, you can only evict tenants for one of 15 just cause reasons, and wanting to sell you house is not one of the 15.

It is quite common, however, for sellers to be willing to use the Ellis Act to evict their tenants in order to prepare the property for sale. The Ellis Act requires a 4 month notice and the tenant is entitled to base relocation expenses of a bit less than $5,000/ person up to three persons. In addition, if any of the tenants are 62 years or older, or disabled under a broadly word statute, the tenant is entitled to extend his tenancy to one year and to additonal relocation expenses of something less than $3,300.

If the Ellis Act is used, it results in a restriction on the property in that it may not be used as a residential rental property for the next five years. For single family homes, this restriction does not materially affect the value of the property because the vast majority of potential buyers are looking to live in the property, not rent it out.

With single family homes, generally we have much less problem getting tenants out because tenants pay market rent. Under a state law known as Costa Hawkins, tenants of true single family homes (without in law units) in which the tenancy commenced after 1995, the tenancy is not subject to rent control, but remains subject to eviciton control. Because such tenants are paying market rent, they have little incentive to fight your efforts to evict them.

So why would you want to rent? Well, if you calculate the cost of getting the tenant out after a year into the rent you charge, you may decide that it's worth it. If your timeline is longer than a year, the financial logic may make even more sense.

One last thing. Many people ask me if it is possible to draft a lease in which the tenant is required to move out after a year. Simply put, no. Such a contract would essentially be an attempt to prospectively get the tenant waive his rights under the Rent Ordinance. Such waivers are void as against public policy.

Jeffery Woo, Esq.
Sedgwick, Detert,. Moran & Arnold
Complex Rental Property Group
415-627-3607
jeff.woo@sdma.com
1 vote Thank Flag Link Thu Feb 26, 2009
Hi Fred,

The question is, what did you do? Did you rent your property and is it now time to sell? Since August of 2009, the market in San Francisco has recovered considerably.

Best,

Jason
0 votes Thank Flag Link Thu Sep 23, 2010
Hi Fred,
It sounds like you got some good answers regarding rent and eviction control. Here's my consolidated list of resources in case they are not all listed below.

http://www.sftu.org/rentcontrol.html
http://g3mh.com/downloads/2008-Tenant-Evictions-Brochure.pdf
http://bornsteinandbornstein.com/ (resources page)

As for keeping the home as a rental, I certainly understand how this could be a good option. Depending on your situation, you may be able to cover or come close to the holding costs with the rent. The major ones are: mortgage, property taxes, insurance, up-keep and maintenance.

Unfortunately, due to SF's strict rent and eviction control laws, a tenant-occupied home will be worth less than a vacant one; it will lower the property value. (exception: actual multi-unit income property; then it depends on the tenant profile and rent roll)

In other words, renting your place out may solve the problem in the short term but add more for next year. To maximize the sales price, you'll want to have the tenant move-out and be able to market a vacant home. Unless they do this voluntarily, you may be giving them a hefty moving gift! And, there are no guarantees. Maybe you have a special situation. I don't know so I'm assuming a standard tenancy...

Also, please consider tenant wear and tear. No doubt, the tenant will be "harder" on your home than you would be so more repairs and fix-ups may be necessary to get the highest sales price when you sell.

All in all, there are many factors to consider and yes, I totally agree with consulting a tax and legal advisor.

Many potential sellers are contemplating these questions right now. The media is full of bad news, making it seem like a sale is not possible or that it must be a fire sale. For nice homes in nice locations, this is simply not true! In fact, there are now so many more buyers out shopping than last Fall. I keep hearing of open houses with 100 visitors. This was true in my latest listing too!

Where is your home? Maybe it would be helpful to see recent sales history for your neighborhood if you haven't already. With interest rates this great, many buyers are actually taking the plunge.

My general advice to folks pondering rent v sell is that if you plan to keep the house for 5+ years, I'd say rent it out. If you plan to sell within 5 years, there is a strong argument to sell now.

The market is declining. It may or may not continue to decline into 2010/2011. Regardless, it will be a while before prices start appreciating significantly to make up for price declines etc. A big factor is where do we think interest rates will be next year? If rates go up, that will have a big effect on our market's recovery.

Every situation is different and this is a conversation better suited to offline so we can discuss your particulars. Sometimes, I do recommend holding onto the property and not selling. It all depends on the issues above and others.

My blog has more info on the current market and home selling etc etc. Check it out at: http://sfhotlist.com/blog/index.php .

Best of luck with your decisions and I hope this was helpful! I'm available should you want to discuss further. We are all here to help! :)

Cheers,
Danielle

Danielle Lazier
San Francisco Realtor
415.731.5000
danielle (at) sfhotlist.com
0 votes Thank Flag Link Wed Feb 11, 2009
Thank you all for your thoughts. Yes, we will certainly consult an attorney before we do anything (!) and work with our cpa as well regarding the 2 out of 5 year income/ownership rule. All good advice, thanks. What I hear is that it is possible but tread carefully and be well informed as our rent control laws add yet another difficulty to the current challenging real estate ownership climate. Thanks again to all of you for your time, this has been very useful. Best, Fred

(Oh and Cheryl, you've got a good blog going there, thoughtful writing. I'll keep checking in. Thanks for that as well.)
0 votes Thank Flag Link Wed Feb 11, 2009
While SF is a renter friendly city the most important aspect of the protection of your rights is in the lease/contract you sign with the tenant. As a property manager I'd make sure that the you were aware of the different groups of law that apply. Local rent law and state eviction law.
Becoming a landlord is a business and going into business you should have good advisors and often that includes legal and tax professionals. An agent such as a property manager can make the process easier, but doesn't stanfd in for the advice of the other professionals.
Since it's a single family home and you don't have other rental property many aspects of consumer/tenant protection are different than if you had multi-units and were going into it long term.
As I said I am a property manager and work with many who are in the same situation. The lease is the key. In it all parties need to be clear about expectations. The limits and rights can be negotiated and in writing prior to giving keys and therfore possession of your property.
0 votes Thank Flag Link Wed Feb 11, 2009
Jed Lane; Fog…, Real Estate Pro in San Francisco, CA
MVP'08
Contact
Fred,

As you are probably aware, this city is VERY pro-tenant. There is even an organization that will litigate on a tenant's behalf for free, but only if they refuse to accept a buyout for voluntary vacating the property. We have represented clients and our own properties in these situations, and it can get ugly and expensive. For example, in one case the tenant's attorney actually asserted that the tenant (who had only resided in the property for 3 years) should receive a portion of the profits of the sale of the building.

Your ability to get tenants out depends upon a number of factors, but you should definitely speak to an attorney who specializes in landlord-tenant law before doing anything. We have dealt with a number of them and are happy to provide referrals.

Best Regards,

Lance King/Managing Broker
415.722.5549 Cell
lance@fixedrateproperties.com
0 votes Thank Flag Link Wed Feb 11, 2009
Hi Fred,

Renting for a year could be a good strategy although no one can predict where the market will be in a year. As advised, consulting with an accountant and a lawyer are good recommendations. My understanding is that if you sell a property which has been a rental you may have limited tax implications as long as you’ve lived there for two out of the last five years.

If you’ve never rented S.F. property I highly recommend working with a leasing agent who is experienced in renting S.F. properties. It’s really important to have good systems in place when screening potential applicants as well as using a S.F. specific lease & appropriate rental disclosures. Even though a single family home is not under rent increase limitations, one still needs to be aware of the other rental laws that are applicable.

I’ve been renting my pet-friendly units for 12+ with a track record of zero evictions. Feel free to contact me with any questions.

You can also visit my blog which has further rental tips:

http://activerain.com/blogs/cherylbower

Best wishes,

Cheryl Bower, Realtor, GRI, ABR
415.999.3450
cheryl@cbower.com
Web Reference: http://www.cbower.com
0 votes Thank Flag Link Wed Feb 11, 2009
Fred,

Potentially yes. Once you have rented out your home you change the nature of the ownership and you could potentially have difficulties at the end of the lease depending on the tenants and the situation when you decide to sell your property. Also realize there could potentially be tax implications for you as well. Investment properties when sold require you to either find a replacement property or you will have to pay capital gains taxes on the profit from the sale of the home. It might be a good idea to talk to a CPA as well. If you need a recommendation for a CPA, please let me know.

You may want to contact the San Francisco Rental Control Board to pose the question to them as well. On the site you can find additional information as well as contact them directly to determine what would be the best path for you. Here is the URL: http://www.sfgov.org/site/rentboard_index.asp. Beyond that you would be well advised to make contact with a lawyer to discuss your idea and goals so you have a complete understanding of what you can and cannot do.

Hope this helps!

Take care,

Lisa Cartolano
Alain Pinel Realtors
0 votes Thank Flag Link Wed Feb 11, 2009
Hey Fred,

ABSOLUTELY!!! Talk to an attorney BEFORE you do anything. I would be happy to recommend a few good landlord-tenant ones with whom you could consult.

Rebecca
0 votes Thank Flag Link Tue Feb 10, 2009
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