San Francisco Pocket Listing w/Rent Control: Deal or No-Deal

[Kris Lai]

hello BP friends ... been MIA for a while and looking to get back in the RE groove of things, hoping to seek some advice on an off-market deal that was presented to me. It's a 3 unit bldg in the hot area of Bernal Heights, each 2BA/1BA, roughly 850 sq ft. Each unit has its own garage space and storage. Asking price is $1.6M. 

One unit is going to be vacant in the next two weeks, another is rented at around $2500, but the last seems to be protected at $1200. 

An RE mentor of mine suggests moving on this deal fast, securing it by any means before the seller decides to list it. The goal is to have it seller-financed as I have no cash left. But a trusted and respectable agent I spoke with suggests this isn't a bargain. He says if I decided to sell, it would be difficult to condo convert, thus selling as TIC only, but finding buyers would be difficult due to the protected tenant.

Based on Craigslist ads, the lowest 2/1 unit in Bernal is going for $3300, but with the two units under market rent I would be at a negative cash flow. 

Would love some perspectives here :)

[Amit M.]

1. Only real upside here is if the low rent tenant takes a reasonable buy out. Maybe agent can ask current owners if they've had that discussion with the tenant before. But I wouldn't be surprised if the tenants  are not interested. It's VERY contentious now in SF, especially in the mission district (which is next to bernal) with tenant dislocations. Basically your $1200 tenants will need to be willing to leave the city, so it'll be a big deal for them  

2. I can't imagine owners would want to self finance for 10 years at that rate. Why, when they can get all cash offers. And 100% financing?  They'd be nuts to do that. Even in 2009-2010 sellers didn't have to resort to that. 

3. Bldg may be in good shape, but I doubt it's been fully modernized and renovated. So I'm not thrilled with it at $1.6. And I doubt they would sell it for much less. 

As long as the layouts are decent, the units have decent light, etc., they will probably get 1.6 on the open market; probably from someone that will live in the vacant unit. This is an ok deal for someone who loves bernal and wants to owner occupy and hold it for a few years for appreciation...while they pray that the $1200 renters decide to move out 😅

Saving grace: is there independent garage parking for 3 cars?  Do the existing tenants get 2 spots, or are they yours?  At $250 each, that could add $750 to your income. 

Bottom line: not a great deal, but this is not a great market to be buying in either.