As tenants in a unit of a 3 unit building that has recently been put up for sale, I am interested in buying. Where to start?

Asked by Chrystal Ball, San Francisco, CA Tue May 7, 2013

My husband and I have lived in an apartment for ~10 years in SF. The building isn't listed until next week or so, but it is up for sale. The price is within, but at the top end of what we can comfortably afford, but it has 2 other solid renters and it appears appropriately priced. The building needs much work on the exterior, requiring additional investment, but we have no doubts the ROI is considerable. We know the place, the neighborhood, and the renters. The place will go fast considering the neighborhood and the price. We were only slightly, mildly looking until we got this news. Now we've jumped into action. Are we naive to attempt to make an offer? We wont have much time to consider other places and are just now looking for an agent to help. Anything we should absolutely be aware? Admittedly, this would be our first home purchase in SF, but we are long time residents.

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Eileen Bermi…, Agent, San Francisco, CA
Wed May 8, 2013
Hi Anj--I've discussed the renter-turned-TIC owner with many individuals over the past few years. As my colleagues point out, there are a lot of factors to consider---far too many to list in a Trulia Voices post, but here are some highlights:

1. Market value: This depends on multiple data points when it comes to TICs, so it's not necessarily as straightforward as looking at comps and picking a number. Renter-to-owner occupier ratio is important, number of units overall and potential condo conversion ability should all be considered. (The latter is somewhat up in the air due to TIC legislation making the rounds. Moreover, anyone buying into a 3-6 unit building at this point in time probably can't realistically expect to condo convert during his/her ownership.)

2. Your appetite for sharing title with multiple owners: Though loans would be on a fractional/individual basis, you'll still share property tax obligations; be responsible for mechanics liens on the whole property; and need to be aware that future unavailability of fractional interest loans is always a possibility.

3. Fractional loan requirements: Lenders offer one-, three- and five-year adjustable rate loans, with 20%+ down payment; proof of six months' of mortgage payments in reserve in a bank account; high credit scores. Interest rates may be a bit higher than that of a more traditional condo loan, though the fractional loan rates have come down a lot. There are only two lenders or so who provide this type of financing, so rates are not highly competitive. However, you are not at risk if one of your co-owners defaults on the mortgage. The bank will simply foreclose on that particular interest.

Sounds like you know the building well, but I would recommend an inspection as part of your purchase agreement.

I have been covering TIC ownership on my blog for a while, and host TIC workshops with Sterling Bank. Here is a link to some of the posts I've written, which also go into more detail on these types of issues:

Good luck!

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Leopold A Ro…, , San Francisco, CA
Wed May 8, 2013
The first issue is why you would even consider the purchase of a three unit building in a rent controlled jurisdiction. The answer must be ….. the lure of TIC conversion

The second issue is understanding TIC ownership. It’s been around as long as the English Common Law. So what’s the big deal? I recommend that you understand the answer by visiting the websites of two attorneys: Andrew Sirkin and David Gellman. They both publish excellent online memoranda on the concept of TIC conversion/ownership in San Francisco. We are not permitted to post links on this forum so you can either Google them or find the links on my site.

As a TIC listing agent and a TIC buying agent I’ve seen the roadblocks. Since 1998 the Viceroys have imposed so many political roadblocks to TIC conversion that I wrote to Queen Amadala asking for help. My letter is online.

The latest roadblock is being debated by the Viceroys this very week: whether to place a 10 year moratorium on condo conversion. These possibilities should be factored into your ROI calculations. Also, see Gellman’s projections on the statistical probability of “winning the lottery”.

The third issue is understanding your rights as tenants. What if you and your agent put in an excellent bid but lost to someone who didn’t care about the “tedious analyses” raised above. Or, what if you did nothing. What are your rights under the Rent Control Ordinance? What is a reasonable expectation on buy-out compensation.

Best of luck. Oh …… since Queen Amadala was not familiar with the term “Board of Supervisors”, I began calling them “ Viceroys”.

Leopold A Rodriguez
Single Agency Broker 00849905
Attorney at Law
400 Montgomery 505, San Francisco
Office: 415.781.3000
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, ,
Wed May 8, 2013
As a lender...when you qualify for this property, the underwriter will take into consideration the potentail rent on the other two units.
The appraisal that you will be provided will have a rent survey of your area. You will be able to see what rents you are potentially going to be able to collect.
The good news is that on three units the maximum loan amount for a conventional loan is $645,300. You must put 25% down payment.
You will qualify for owner occupied rates.
Let me know if you need help with this!
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Rob Regan, Agent, San Francisco, CA
Wed May 8, 2013
I'll reiterate what I think are the two most important points from my colleagues' answers below.

First, you need to speak with a lender immediately - your offer will not be taken seriously if you don't have full pre-approval which means submitting your tax returns and pay stubs to a lender and having them pull your credit scores.

Second, if you believe there is "considerable ROI" I would bet that the asking price will be blown out of the water. That's just how this market is right now. And the fact that it is tenant occupied building and needs work just doesn't seem to matter one iota in this market. That is, of course, if your property is as well located as you say. There are some areas that aren't this hot - but it is shocking what places are selling for - I've got story after story of situations where you would think some disclosure or another would slow buyers down - and it didn't.

So you need to speak with a lender and find out if you can even compete. You can contact any of us here for lender referrals and/or help putting an offer together. I too am happy to take your call.
Rob Regan

PS - a third point is making sure you really want to be a landlord - even if the other tenants are solid, you're still going to have to fix their toilets, and so on. And its funny how people change when you're no longer "one of them". And if you're spending your last dime to buy the building you're likely putting yourself in a really tricky financial situation. So I would think long and hard about buying a rental building and what it means.
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, ,
Wed May 8, 2013
Anj One,

On a 3 Unit Owner Occupied Property; we lend for up to;
80% on loan amount 750K - 1.1Mil
70% on loan amount > 1.1Mil

We can have you pre-approved in less than 24 hrs (and this will help you and your agent)
We guarantee close of escrow within 30 days

Let me know if we can assist.

Thierry Abel
Senior Loan Consultant
All California Mortgage
A Division of APMC
P: (415) 464-8261
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Matt Ciganek, Agent, San Francisco, CA
Wed May 8, 2013
Hi-I'd be happy to help and will be listing a three unit property for sale soon myself. I'm very familiar with this type of situation. We have a very fast and strong market. If something seems very inexpensive, possibly too good to be true, it may be just that. I was also an appraiser for many years so I know several ways to value a property. Give me a call if you'd like to talk about the situation further. No obligations! Thanks and good luck-Matt Ciganek 415-240-9901 Barbagelata Real Estate
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Alina Aeby, Agent, San Francisco, CA
Wed May 8, 2013
Hi Anj,

There are some great suggestions he from my colleagues.

I recently closed a 3 unit building in Inner Richmond with tenants in 2 of the units and with a loan involved.

This is my taken on your situation:
- this is a great opportunity, so by all means, do write an offer if you can;
-you are in the unique situation to know the other tenants, perhaps have an idea about their ages to figure our if they may be protected tenants and for long they have been in the building; you will still need the estoppels in the disclosure package;
-you know better than other potential buyers if the building has any problems, as you just mentioned it needs some exterior work done soon; perhaps yo know about other past problems that you asked to be fixed;
-you know the sellers- if I were you and in good relationships with them, I would contact the sellers, let them know about my intentions and ask if they are taking pre-emptive offers.

Now you need to do 2 important things:

- talk to a lender as soon as possible and get pre-approved; there are a lot of cash buyers/investors for 3 unit buildings out there;
-find a good agent to represent you.

Of course, I would love to be considered.

Best regards,

Alina Aeby-Broker Associate
Pacific Union International
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Peter Century…, Agent, San Francisco, CA
Wed May 8, 2013
It is never naive to attempt to make an offer...but backup your offer with proof of funds and proof you can get a loan (a pre approval for a loan letter from your bank).

You should be aware of choosing the right agent that knows landlords, tenants, and the rental laws in San Francisco which are the most extensive codes in the nation; you can worry about GRM, CAP Rate and ROI later when you have the right agent to do a market valuation for you and submit an offer.

My experience specializes in rental properties and landlords and tenants and a lot of my friends are landlords in San Francisco; I've been a member of the San francisco apartment Association for close to 15 years as well as all the other associations that deals with landlords.

Buying a multi family with tenants requires this experience and know how and some agents may not have this knowledge; I do.

I wish you luck in finding an agent you're comfortable with.

Take care,
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Oggi Kashi, Agent, San Francisco, CA
Tue May 7, 2013
Here are some items to consider. It sounds like you do not have an agent. Interview with a few and move quickly. How are your finances and have you contacted lending professionals yet? In this market you need to be as strong as possible to have a decent chance. If this is at the top of your price range, have you considered taking on a financial partner? Living in the building for so long gives you great advantage over other investors. Being on good terms with your landlord would help. How familiar are you with tenant laws in SF? Have there been any evictions in the past? How do the other renters get along with the landlord?

Oggi Kashi
Broker Associate, Paragon Real Estate Group CA DRE 01844627
All data from sources deemed reliable but subject to errors and omissions, and not warranted. truonly
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Cole Irwin, , San Francisco, CA
Tue May 7, 2013
Depending on the price and your credit profile, it may be difficult to obtain a loan on a multi-unit building if you expect to have the income from the other two units factored in to your income. Most lenders want to see two years of history being a landlord before they will consider lending on proposed rental income, however it can be done. The first step would be talk with a couple different lenders about your financing options and see if it would be a realistic possibility before you move forward. Assuming you can make the numbers work, there's no reason not to make an offer. If you have a good relationship with your landlord, the emotional connection may work in your favor as well.
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Amy Blakeley, Agent, San Francisco, CA
Tue May 7, 2013
Hi Anj,
I am available now to chat with you more about the scenario if you want to give me a call.

Amy Blakeley
McGuire Real Estate
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