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What You Need to Know About the San Francisco Condo Market

November 3, 2016

Before you sell, should you turn your home into condominiums?

San Francisco in particular has a scarcity of new housing, especially affordable condominium units. When land is scarce and affordable housing is hard to find, condo conversion can be a real opportunity for homeownership and financial stability. The San Francisco condo market and condo conversion in general has been a contentious issue since the system was created in the 1980s, but recent changes to the law have made more people eligible for conversion, strengthening the middle class and working families and contributing to affordable housing funds. In this article we’ll be discussing the pros and cons of converting your San Francisco home into a condominium and weighing the costs against the benefits.

What is a Condominium?

A condominium consists of an individually owned unit with shared ownership of the remainder of the property, which are known as common areas. To cover common repair and insurance expenses, owners pay monthly dues to their Homeowners Association. Individual mortgages, property taxes, and utilities are paid separately. The relationship between owners is governed by state laws and other rules established in the “Covenants, Conditions and Restrictions” documents.

What is a Condominium Conversion?

Conversion is the process of legally subdividing a multi-unit residential building into separate condo homes. In order for a conversion to occur, it must comply with various federal, state, and local laws and regulations. Once it is approved by the local municipality, a condo association will be established and individual units can be separately owned, financed, or sold.

Qualifying For Condo Conversion in San Francisco

There are currently three ways that existing buildings can qualify for conversion. The first way is through lottery bypass, an automatic qualification for two-unit buildings where each occupied unit would have a separate owner.

The second way to qualify for condo conversion in San Francisco is through the Expedited Conversion Program, in which buildings that lost the 2012 or 2014 conversion lottery and buildings owned as a TIC (Tenancy in Common) as of April 15, 2013, may convert to a condominium up until 2020.

Finally, there is the annual conversion lottery, which has been suspended until 2024. Pre-existing buildings without a signed TIC agreement in place may never qualify for condo conversion. San Francisco still limits all condo conversions to buildings of no more than 6 residential units.

The condo conversion ordinance that was passed in 2013 allowed about 2,200 TIC owners to pay a $20,000 conversion fee that goes to an affordable housing fund to let them turn their unit in a condo. The law also placed a 10-year moratorium on the San Francisco conversion lottery, which chose 200 TIC units per year and left thousands on a waiting list.

What is a TIC?

A Tenancy in Common (TIC) is when a building is owned by the TIC group in percentage shares, including the right to occupy particular units. There are fewer financing options and higher interest rates for TICs in comparison to condominiums, which is why it may be beneficial for TICs to convert. Only TIC buildings with 6 or fewer units are eligible to be converted to condominiums in San Francisco.

Over the past 20 years, there has been a rise in TICs because of the high demand from entry-level buyers to own their own home in San Francisco. Although a riskier form of holding ownership, TICs have allowed working families and middle-income residents to own property in the city. TIC owners are primarily first-time homeowners and take this riskier form of ownership to make San Francisco their permanent home. If you own a TIC in San Francisco, you may want to consider your property’s eligibility for condo conversion. TIC to condo conversion can be a path to individual home ownership and achieving your short and long term financial goals.

As a TIC owner you will be more familiar with issues the property may have. Therefore, you will know what kind of work needs to go into the home and can properly assess whether it’s a good investment or not. By converting a property you already own, you are reinvesting back into your own home, and turning it into a condo has many financial benefits.

What Do I Need to Convert to Condominiums?

There are several documents that both the owners and tenants must file for a condo conversion in San Francisco. You'll need to fill out an application and have the property surveyed and inspected. You also have to develop conditions and restrictions for the condo owners. A real estate attorney would be needed to draft all of the appropriate documents.

Furthermore, your property must conform to California state law, which outlines how you must organize your condo and the documents required, such as the Condominium Declaration, Articles of Incorporation, and Operating Rules.

If you already have an income generating property, converting it into a condominium could make good business sense. However, you’ll need to comply with state laws and local laws, and if you have tenants living in the building already, they will have certain legal rights when the property is converted.

Should You Enter the San Francisco Condo Market?

Just because the building can be converted, doesn’t mean it’s a good idea to convert it. Before making a decision, understand the costs and weigh the costs against the benefits. Here are the pros and cons of turning your San Francisco home into condominiums.

Condo Conversion in San Francisco: Pros

  • Provides homeowners with many financial opportunities and long term equity; conversion generally increases a property’s value.
  • It facilitates the re-sale of individual units and allows co-owners of multi-unit buildings to eliminate many of the risks of TIC co-ownership. A conventional mortgage will allow better stability, flexibility, and interest rates.
  • Most condos are also exempt from local limits on annual rent increases.
  • Condo conversion offers people who otherwise might be unable to afford to buy their own home a vehicle for home ownership.
  • Condo conversion allows more middle class residents and families that have greater financial stability to own homes and create a permanent community for the city.
  • The new condo conversion fee helps the affordable housing community by replacing funds lost when the state closed Redevelopment Agencies.

Condo Conversion in San Francisco: Cons

  • Condominium conversion is a long and complicated process. There are many variables that can interfere with your eligibility, costs, and schedule.
  • There are a lot of upfront fees, rules and regulations, as well as potential hidden fees and repair costs.
  • It can be difficult to estimate the costs for repairing code violations.
  • Although conversion does not increase property tax, converting owners may be required to pay up to three installments of property tax in advance.
  • The high cost of Insuring a Condo Homeowners Association (HOA).

The Take-Away

The TIC and condo conversion process in San Francisco is complex and challenging, but the benefits and opportunities resulting from a condominium conversion are well worth the time and effort. All investments carry some degree of risk, but San Francisco real estate has proven to be exceedingly safe and extremely successful over time. Every condo conversion project is different and needs to be assessed by many variables but a real estate professional such as Danielle Lazier :: SFhotlist Team and Keller Williams San Francisco can assist you through the process.

Historically, condo conversions in San Francisco have resulted in an immediate increase in value and normal market appreciation has also been substantial in recent years. The good thing about condo conversions is that they can make good business sense in both a buyers and sellers market.

Converting Your Home Into Condominiums

Condo conversion is not a passive investment that solely relies on waiting for your property to appreciate over time; it’s an active strategy that leverages your money and maximizes the value of your property in both the short and long term. In short: it will automatically make your property more valuable, and in the long term it will also appreciate in value.

There’s a high demand for homeownership in San Francisco, but if you’re willing to put in the time and work, the condo conversion process can really pay off. Ask a qualified real estate agent to make sure you make the right decision.

We can help you assess whether current market conditions are in your favor and whether the projected value increase outweighs the cost of converting your San Francisco home into a condominium.

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