The Impact of a Tenant

Clients often ask about where they can find a “deal” in San Francisco real estate. Some people believe that REOs are an excellent value, others focus on probate sales. My experience is that the number one detractor from the value of a property in San Francisco is a property being sold with tenants who will be in occupancy at the close of escrow. Whether or not that decrease in value makes for a “deal” is an open question. That introduction probably makes me sound like a horrible person, so I’d like to preface this by saying that I was once a tenant in San Francisco, and that home ownership in San Francisco is an elusive goal for many individuals, even those with financial means that would be considered enviable in the rest of America.

I also want to be clear that I’m not advocating eviction, particularly when it comes to people that are elderly, disabled or otherwise in a precarious and challenging personal situation.

I did some research over the weekend looking at the sales price of single family homes in San Francisco that are tenant occupied vs. those that are vacant at the close of escrow. The numbers were pretty eye opening, even though I went in expecting their to be significant difference in the value of a tenant occupied property.

How dramatic is the difference? For homes that have sold in the past 15 months (since January 1, 2010), the median sales price of a tenant occupied home was $554,000 while the median sales price of a home that can be immediately owner occupied was $740,000. If you calculate out the median price per square foot, the tenant occupied home has a median price per square foot of $402 while other homes have a median price per square foot of $548.

San Francisco has extensive — some would say byzantine — laws and regulations regarding tenant rights. These laws vary by property type, among other things, and single family homes are perhaps the easiest to recover possession from a tenant. I would expect these values to vary by property type, and also by neighborhood. Finally, should you be considering purchasing a tenant occupied property, be sure to consult with a qualified San Francisco attorney who has a specialty in this particular area of practice.

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