[San Francisco] How to value/decide on a primary home purchase

[Brian Shum]

Hi BiggerPockets community!  

First time posting!  Looking for some advice and guidance.  My wife and I live in San Francisco (great city but incredibly expensive).  My wife wants to purchase a home in a SF neighborhood like Miraloma, Portola, etc.  Based on what we have seen, a 2000 sq ft. place would carry a price tag of ~ $1.5M.

Here's where I struggle... what is the best way to decide "yes" or "no" on making this purchase? 

There are a bunch of articles that compare renting vs buying.  There are also books like Rich Dad, Poor Dad, which say that buying a primary residence home is a foolish purchase because it is a financial liability.  On the flip side, there are websites which claims that SF real estate will always appreciate.

How would you guys make a decision on whether or not to purchase a 2000 sq ft home for $1.5M in SF?  I am a fan of using numbers and quantitative analysis, so any feedback there would be much appreciated!

[David Faulkner]

I'm not in SF nor all that familiar with the neighborhoods in and around, but live in SoCal where things are similar, though a bit less expensive ... so I'll give you my generic answer without market specifics.

First and foremost, figure out a realistic budget and stick to it, and that budget does not necessarily have to be the max your bank/mortgage broker approves you for. It is what you and your wife are very comfortable being able to afford on a monthly basis for a long time, through thick and thin. This is first because the only home owners who lose over the long term in markets like SF are those that stretch too far financially and are forced to sell at the wrong time or give it back to the bank.

Beyond that, I'd identify the sub-markets that seem to have the types of properties you need in budget. Which of those sub-markets best fits your needs in terms of lifestyle, commute, etc.? Are the schools good and/or improving? You can also look at macro-economic trends like population growth, construction activity, rent appreciation, vacancy rate, price trends in this and adjacent neighborhoods and if they are more or less expensive, etc. Are there planned developments like mass transit extensions, large development projects, etc. that don't seem to be priced in yet? This tends to be more art than science.

Finally you narrow in on the property. On a personal level, does it meet your needs now and in the future? Of the things that don't meet your needs, can you change those things, and if so how much will it cost and how much value will it add? If not, then can you live with it? On the financial side, think like a flipper ... how much does the property cost vs comparable sales? If it needs upgrades to bring it to the level of comparables, then how much will these upgrades cost vs how much value will be added? In general, the cosmetic stuff that buyer's can see are the easiest to fix and give the largest value increase vs. infrastructure that is not seen (roofs, electric, HVAC, etc.), so something with "good bones" but dated finishes, ugly, dirty smelly, etc. and priced accordingly will tend to offer a better return. If your wife's initial natural reaction is "Eeew!" then you're likely on the right track :) Are there other value add opportunities like a 2000 SF $1.5M property in a neighborhood surrounded by 3000 SF $2.5M properties where you could build it out longterm? What is your return on investment for these forced appreciation/value add items?

Most of the properties are losers ... only a few are winners, so don't be afraid to look at and offer on a lot of properties before you buy one. If your RE agent has a problem with putting in a lot of offers, find another one. Better yet, consider dropping the buyer's agent all together and putting in offers through the listing agent. They want to double end the commission and you want a good deal and to have your offer at the top of the pile ... give them what they want to get what you want. Then watch your own back in escrow, which is always the best strategy anyhow whether you have a buyer's agent or go through the listing agent. You are in a competitive market, so good luck ... but the good news is that supply and demand cuts both ways: that which is hard to buy is easy to sell or rent and tends to appreciate well over the long term.