There is no doubt San Francisco Bay Area real estate, specifically real estate on the Peninsula and in San Francisco is strong. There's also been a huge push to provide tax incentives for high tech companies to set up offices in San Francisco. You should ask yourself: Should I sell my house now?
With so much tech money sloshing around, it's hard not to be tempted to sell your house now. Post-pandemic, the NASDAQ went up over 40%. The S&P 500 is also at new highs. So many people in the SF Bay Area are richer than ever!
Further, I believe the housing market is not in a bubble. Interest rates are low, the government is accommodative, and everything is bouncing back.
I originally wrote this post on March 19, 2012 because I was really thinking of selling my house then. In fact, I put my house on the market for $1.7 million and thankfully got no offers! Let's review.
IT'S SO HARD TO DO THE OPPOSITE
We all know that people like to run in herds. It's very hard to sell while the market is rising due to greed. It's also very hard to buy while the market is collapsing due to fear. Sell too soon, and you feel like an idiot because everybody else is getting rich and rubbing it in your face. Buy too soon, and you feel like an even bigger idiot because you're losing money, at least on paper.
From my 2012 predictions, you will recall that I believe US property is one of the most attractive asset classes to own in the world. When you can borrow at 3% and rent at a 7% yield, you should be buying given the spread is huge! We've already had a correction (although some in places like SF don't think so), rents are skyrocketing (I know first hand as a landlord in SF), and a wall of money is flooding into the system due to these IPO lock-ups. As a result, one should be buying, not selling at the first signs of rabid interes.
I actually feel more stupid selling too soon, especially when I don't need to sell. But ironically, one should never sell when they need to sell. It's better to sell when you don't need to sell because your head is on straight. You can be bold and dictate terms and not leave money on the table.
THE TEMPTATION OF MONEY
Despite what the media likes to report, many of you still have plenty of home equity. My primary residence currently has a loan-to-value ratio of about 60% based on an appraisal done on March 8, 2012 for my never ending mortgage refinance that just got done on April 27, 2012. It's part of the reason why the bank keeps calling me to refinance, because they know they have solid collateral. I've also been with them for 15 years now.
I've got a house that actually fits a young 28 year old Facebook couple quite nicely. A couple thousand square feet, and enough extra bedrooms for little Johnny and Eva. The location is in a good area in San Francisco, very close to one of the many Google, Facebook, Apple, Yahoo, and Ebay notorious bus lines. If you want to learn how to hook a Facebook millionaire, you should click the link!
Given I'm refinancing my mortgage down to 2.625% from 3.125% with all fees included, my gross payments drop by another 10%. My gross monthly payment is now about 37% lower than my peak monthly payment when interest rates were higher. If we talk about just the interest portion of my PMI loan, it's 50% lower given the highest interest rate I ever paid was around 5.5%.
BenGenie has tremendously increased the cash flow of homeowners everywhere and all real asset owners are very thankful. At some point, the party will end, but not until the end of 2013 given what he promised to the markets. Savers are screwed, and I'm an aggressive saver, but at least the economy is taking off again!
GAINS & LOSSES IN REAL ESTATE
I've only made about 10% on my house after the evil brokerage fees. 5% is ridiculous, and needs to get crushed to a flat fee just like income taxes. It makes no sense that it costs $100,000 to sell a $2 million home and only $10,000 to sell a $200,000 home. The 10% increase is still better than a kick in the face given the housing downturn, but in the grand scheme of things, it really isn't that much. Sorry, it's a 50% cash on cash return on my 20% downpayment years ago.
My thought process is that if I can sell my house at a price where I think it may go to in the next 12-24 months, I should sell. I'm trying to lead a more minimalist lifestyle with less property weighing me down. I've got multiple properties, and my primary residence is my largest and most expensive property.
PROS OF SELLING PROPERTY NOW
* Major increase in liquidity. By selling my largest asset, I increase my liquidity by over 50%. I don't know what to do with this much cash, but that's a good problem.
* No more maintenance. Homeownership requires a lot of maintenance. From leaky roofs, to dry rot on the deck, to cracked windows, to blow furnaces, everything adds up. No ownership, no more maintenance.
* Increase in freedom. I can go wherever I want now, but I've still got to come back. With no more home and a mortgage tied to it, I can truly go anywhere in the world forever. I imagine living on a cruise ship for 2 months in the Mediterranean. I'll then spend a month in Casablanca exploring all of North Africa. Perhaps I'll go back to Hawaii for a couple months to rest and eat my favorite laulau dish, and then go to Tahoe for the winter to snowboard for several months.
* Lower monthly nut. I'd have to downgrade to a 2 bedroom apartment, but the montly nut will probably go down by about $1,000-$1,500 given I no longer have to pay property taxes. I hate taxes, especially property taxes which go towards so many things I don't use eg the $1 billion dollar phantom high speed rail from SF to LA. Renters need to pay a Renters Tax since they are the majority in the Bay Area and use public transportation too!
* Never have to work again. In “How To Retire Early,” I reveal my 14-18 years worth of living expenses saved over the past 13 years. If I sell my house and increase my liquidity by 50%, the math dictates I will at the very least have 21 years worth of living expenses saved up, excluding all passive income, online income, and rental property income. In other words, I don't think I'll ever have to work again if I cash in on my house. I could even quit my job and not die alone because I hear ladies can smell cash from a centimeter away! Maybe this mega freedom alone is worth selling. Although, couldn't I just experience the freedom and not sell and work online instead?
* Reinvest the proceeds in higher returning assets. One of the biggest temptations is to reinvest the proceeds into completely passive income generating assets. My favorite idea is reinvesting money from expensive San Francisco into the heartland of America through real estate crowdfunding. Fundrise, based in DC, is one of the largest real estate crowdfunding platform that lets me invest in commercial and multi-family properties at much lower valuations and higher yields because they are located in cheaper parts of America.
CONS OF SELLING PROPERTY NOW
* Nostalgia. I really enjoy my home. The memories here are priceless. From house parties to potlucks to friends and family members staying over, it's hard to let go. 90% of all my blog posts were written in this house as well! Nostalgia makes me so happy. I never bought the house to try and make a profit. Purchasing the house was because I loved it, and thought it would provide a wonderful lifestyle in San Francisco. I'm glad to say that so many years later, it has indeed been a wonderful experience.
* Rents are ridiculous. Rents have probably gone up another 5-7% since I told you about my crazy landlord open house experience in the Fall of 2011. I felt too guilty raising my rent by more than 10% then and I'm therefore probably around 6% below market. That said, I do have the option of raising rent this November when the one year lease is up. If I sell my house, I've got to jump in the rental fray, and it doesn't look pretty. In fact, it looks downright depressing what $3,500/month gets here in San Francisco!
* Moving is a pain. Moving really sucks. For the past 12 months, I've been consciously trying to get rid of clutter with the anticipation that I might move this year for whatever reason. As a result, I've gone to Goodwill about 14 times, and brought more than 30 bags of stuff to donate. What's left are the big furniture items (beds, sofas, dining table) and TVs. I don't want to move this year, only to move again in a couple years when I really aim to make a drastic life change.
* Lower quality digs. My most important concern is lifestyle and the rental stock is inferior to the purchase stock here in San Francisco at least. The rental units in the South of Market area are all new and pretty good, but the area is not my favorite. Even if I don't sell my primary residence, I still have almost a couple decades worth of living expenses saved up if I don't work. So why should I downgrade my quality of living if I don't have to? The temptation and desire to lead a minimalist lifestyle is perplexing.
* Property taxes reset. Thanks to Proposition 13, California property taxes are calculated based on the base year purchase price of your house and rises by only an inflation index of around 1-3% a year, depending on what California decides. A $20 million mansion purchased 30 years ago for $200,000 still has a property tax based on a valued under $400,000! If I sell and decide to buy a again, my property taxes would reset to a higher level if I buy a similar property.
* Realtor fees. Realtor fees alone make me not want to sell! As I said before, a 5% commission is ridiculous for the amount of work Realtors do now that everybody has the internet and can find their properties on Trulia, Zillow, Redfin, and the MLS themselves! Everybody knows how to dial a phone, go to open houses, read what's happening with the markets. Just on principle, I don't want to sell my house given the oligopoly commission structure that is ripping off buyers and sellers. If the commission structure was a flat fee, I bet the housing market would instantly recover given there would be much quicker market clearing.
* What if the property market goes ballistic? There is a real good chance that the property market in San Francisco goes bonkers as the fever moves north from Palo Alto. These tech/internet companies have some serious profits and some mega balance sheets unlike the dot com companies in 2000. Property could easily rise by 5% a year for the next three years, which is equal to around 12% a year in easy gains given my LTV of 60%. Making a 40% cash on cash return on my equity in my house over 3 years would be phenomenal, especially since all I had to do was enjoy my life in my home!
CONCLUSION
I've got several Realtor friends who are all chomping at the bit to list my house. Inventory is down about 50% Year over Year for some reason, while demand is heating up. Realtors make money through transactions. As a result, I'm going to sit down with a realtor and come up with a game plan.
I'll discuss a floor price I'm willing to accept, and an aspirational price. There will be minimal-to-no upfront costs on my part, and my Realtor will bear the risk (his time, marketing materials, staging, etc) if he agrees he can get my floor price. Only if my house sells will he get paid.
As a personal finance blogger and investor, I am extremely curious if all this media real estate hype about how hot the market is bullshit, or reality. The only way to find out is to test the market! The only downside is that my ego gets hurt. Even then, I don't care because I'm about to close on my refinance for just 2.625%.
Recommendations
Explore real estate crowdsourcing opportunities: If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you're looking for strictly investing income returns. Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It's free to look.
Shop Around For A Mortgage
Check the latest mortgage rates online through Credible. Credible has one of the largest networks of lenders that compete for your business. You can get free, no-obligation quotes in minutes. The more lenders compete for your business, the lower your rate. Mortgage rates continue to be near all-time lows. Take advantage.
Cash won’t make me happier than the home. The feeling of having less and feeling more free is what I’m weighing.
I’m still upside-down (according to Zillow), but I have not considered selling my home since we just moved in. My wife just left work to stay at home with our 4-month old, so we’re very comfortable there. We’re planning on staying for another 7 years or so (hopefully be rightside-up at that point) and then buying/building our dream home.
I do wish I had some free cash to snatch up a rental property or two, because there are some ridiculously cheap foreclosures around here that would easily be $500 positive monthly cashflow each. Ahhh, bad timing on my part, but hopefully I can get my income up in the next two years and get in while it’s still a buyers market.
We just sold our 4 bedroom 3 bath house and moved into a 2 bedroom 2 bath apartment. We’re saving at least $1200 per month by not owning a home. The cost of electricity, water, home maintenance and upkeep, and the commute were all much higher in a house. We’re in our fourth month of apartment living, and we’re loving the income that has been freed up. There are some downsides to apartment living, but overall it was a good move for us. We were able to get our must have expenses down to 50% of our income, which freed up much more for saving and for creating meaningful experiences and adventures.
Really good to hear about the increase in flexibility and savings.
Was your plan to sell due to Facebook? Or just sell because you wanted to lower costs and such?
I’m mostly being opportunistic with my house here as I would like to keep it for 3-5 years longer.
No, it had nothing to do with facebook, it was just the right time for us. We wanted to lower our costs so that we could free up money for experiences. Financially speaking, it was a bad time to sell, but it was the right time for us to sell, if you know what I mean.
Gotcha. I’m thinking about just holding on for another 3-5 years given my mortgage refi just recently. It’s literally 70% cheaper to own than to rent my house after all costs now!
Hmm, from an outsider’s perspective (UK) I do think generally USA prices represent fantastic value in a lot of areas e.g. Florida. However, there are special case markets like SFO which seem to be a law unto themselves, as you pointed out some of the prices are ridiculous. Mind you Palo Alto has always been a hotspot since the apple orchards were cleared hasn’t it? With regards what should you do – I’m not sure your reasons for wanting to sell – but if you don’t have any particular motivation for selling why not stay put, or rent out and move into a smaller place?
The motivation is really to take advantage of the pent up demand in the market and get a price which I think is higher than what I value the house.
I am thinking about renting out the house as well. I’m just worried that it’s a pain in the ass to move, and to manage another tenant.
If I’m from the UK, I’d be buying US property for sure!
Sam,
I’m doing the same thing as you. I’m going to test the market, if I get a number I like I will sell.
Where you at?
SF
Very nice! House or condo?
News item out today on a guy looking to sell his house to Facebookers for their shares pre-IPO. Thinking about that approach?
Sure, would love to. Just need a power agent to get me the right hookups!
Man…I just can’t believe how much homes cost in that part of the country.
If I were you…I’d sell & move to Texas! Of course…I’m a tad bit biased.
I’ll openly admit it- I’m spoiled with Real Estate prices here in Texas…and I LOVE IT!
Yep, it’s kinda nuts out here! But, the pay is also nuts too .
I would love to relocate to Texas if I could figure a way not to live there!
That’s a nice chunk of change! I hear the UK property market is on fire! Care to write something on FS about that?
Imagine if you rented all that time…. instead, you bought, made money, and basically lived for free and then some!
It definitely sounds tempting to sell. I’d probably end up holding on for at least a couple of years unless you could do something creative like sell your place and then lease with a two-year option to buy your rental for today’s market price. If the RE market goes up over the 2 years you get in at today’s prices plus the option. If the RE market goes down, you let the option expire and buy that place or another one at depressed prices, leaving the difference between your selling price and the option price as profit (plus rent costs, I guess, but you’d have payments anyhow). Win win? (Not sure if they do that a lot out in SF, but I love the idea of leases w/ cheap options to buy at “today’s prices” when the RE market is uncertain).
My two cents. Keep the change.
Ahhh, if things could be that simple or complicated! Alas, it’s not the case but I have heard of companies selling derivative contracts to help protect downside.
Yeah, I don’t think I’ll be buying with the proceeds, but maybe. I just hate the transaction costs, hence why I never really like to sell.
I would totally downgrade or move to a cheaper city!
Where do you see yourself when you retire? If I buy a property and I plan to retire there, then I would not sell it albeit the booming market. If you sell, would you consider buying somewhere else? Would you consider downsizing? I am already thinking about retirement way too much though I am not even close to be there financially. I am envious that you have this option right now :))). Great on you!!!
I see myself retiring in SF, Hawaii, Lake Tahoe and traveling for 2 months a year abroad. If I sell the house, I still have my rental which is a nice place to live.
I’m sure if you save 55-70% of your after tax income a year for the next 13 years, you will have the optionality to retire too! Just build assets as well along the way, b/c after 13 years of renting, you will have nothing to show for it.
Thanks for your comment!
This article might be a helpful read on your decision fipath.com/financial-blog/personal-finance-for/home-equity/renting-versus-buying
It wasn’t very helpful that article unfortunately. There were no numbers involved. How can you make proper decisions and analysis with zero calculations?
Two years ago we relocated and bought a small house in a shore (mainly summer resort) community on the East coast and now live here full time. We could not sell our house before we moved and it is now rented; we plan on selling in 2013. Before the housing crash this shore real estate market was on fire; it seemed everyone was selling to cash in. If I were you I would seriously consider selling, downsizing and buying rather than renting. If the housing market continues to rise in SF you will benefit with your new digs, have the $ from the house you sold, and as the economy recovers reap the benefits from the invested $.
Donno if selling and then buying again is consistent with my goal to minimalize. The realtor commission is a killer and I want to own less, not more. We shall see. Hope your digs are working out for you.
Sam,
If you don’t care about selling or on the fence why not push up your asking price? If it sells awesome if not, you were on the fence anyway. Bump up your bottom line price another 10 to 20%. That will cover the realtor and a little extra “lets try to buy your nostalgia”
On a separate note where is your cross over with renting? Meaning that if you sell right now for your asking price do you still need a “home base” in SanFran? Are you selling to save on a 5K mortgage to just pay 4K rent?
Anyway to save on rent by moving a bit outside the city?
That’s a good point, and something I will do, to a realistic level. I don’t want to waste everybody’s time, since showings, staging, etc is a waste of time which = a waste of money.
To rent my house would cost about 2X my payment, and 3-4X my true costs (after interest deduction and principal, since I have a PMI loan). So, I wouldn’t rent like for like.. I’d downgrade to a 2/2 in a similar quality neighborhood. I hate commuting.
I think it depends if you’ll be happy renting for years and years or if you’ll get the itch to own your own home again a year or two down the road and be buying again. Since you lose such a chunk of equity every time you sell one house and buy another I’m a fan of owning each home for a long time.
I agree that the real estate commission system is pretty messed up – but I think you mention part of the problem:
“my Realtor will bear the risk (his time, marketing materials, staging, etc) if he agrees he can get my floor price. Only if my house sells will he get paid.”
Real estate agents have to do so much work for “free” – and then they charge such high fees when a deal actually goes through. An agent might work for months trying to sell a home and eventually have the seller take it off the market. Another seller might price their home super aggressively so that it sells in minutes and they have to fork over 5-6% for relatively little work. I know there are a lot of industries that work on commission but I figure there has to be a better way.
Thanks for your thoughts Anna. The irony is, my net worth goes DOWN instantly if I sell, b/c on paper, there is no realtor fee. I guess I can just add it in. I’m definitely a fan of owning property for the long term, or forever actually.
I’m not familiar with the housing market in the Bay Area, but considering all the tech companies in the area and the historical prices I would have to agree with your assessment. So, why not wait the 2 years and sell then? Who knows, you may change your mind during the next 24 months.
Waiting 2 years does seem like the logical conclusion. I just have the curiosity and the itch. If someone wants to pay me big bucks for the house, it would be irrational not to entertain the offer. Hence, I think I should try and test the market.
At the very least, some good follow up posts!
You know I’d sell and bail for parts all over the world in a heartbeat, but that’s just me. I’ve never been all that attached to nostalgia. If you are going to stay in the Bay Area then it’s probably best to keep the house. If you are planning on living a more nomadic lifestyle then by all means sell and find a good place to invest all that cash. Because you keep mentioning making a change I think it is inevitable that you will be heading out sooner rather than later, but that’s just my $0.02 which is worth next to nothing these days :)
It all comes down to timing though… the best timing since there’s no need to sell. It’s not just about me either. I think I’ll stay in SF for 2 more years and give this place one final push to see what I can make of it, and then call it a career and move.
I do think property prices will be 5-10% higher in 24 months with the way things are going.
@Tim Harrington I send that…. if only I owned property there!
I would do the same as Roy Marvelous would – sell it and travel or do whatever I have been wanting to do.
Let go of properties we have fond memories. Let go of thoughts thinking that we might have gotten more if we had waited longer. To me, this will be such a good opportunity to learn to let go and get more freedom to do things we enjoy doing, and feel no regrets later.
Let’s see what price I can get. I do love the word “freedom”!
Sounds good Roy! Welcome back. Where have you been for the past year? You still cruising and such?
Maybe they make 5X your salary? Seriously, lots of people make lots of money here in the Bay Area. 29 year olds out of b-school can easily make $150-200K. Add two 29 year olds, and that’s 300-400K. In several years, they can buy a $1 million house no prob.
The greed hasn’t hit a crazy point yet.
Pricing are falling? Did you not click the Zillow link, see the chart price history, and the pictures? Prices are rising!
It all comes down to the right selling price. But, the real estate agent’s cut has something to do with it. I’m pretty sure I can negotiate down to 2.5% total for both sides if it comes down to whether I will sell or not. I have no need to sell at all, so it becomes a question of whether the agent is willing to improve his/her resume and earn something, or get nothing.
Is the housing market getting better in CA? I live in San Diego, and I get daily updates via Redfin on some areas around me. All signs are pointing towards lower and lower housing prices.
Personally, I bought my condo 2 years ago for 280k and at the time that was the lowest sale in the history of the building for a 2 BR/2BA. Since then, the prices have definitely been trending downards with a couple sales below 280k. I’ve seen the same thing in another area I am looking to move to by the beach…
Sorry to hear it is still weak. Real estate is local as they say, and yes, things are heating up here in the Bay Area. Click the Zillow link, and the media hype link at the end of the post to see what I mean.
I want to know if you have any plans to ever leave San Francisco after you sell your house? You’ll do the fun travels, but when you come back do you always want to return to SF or elsewhere? I think it will be a good move for you if you end up leaving your job as well. But you might sell the house then decide you’ve got too good a thing going with your career…even with all that money in the bank!
Good questions and things I’ve definitely thought of. I also have another property in San Francisco that is currently being rented out (see rental story from last fall). I have a feeling my tenant will be there all 3 years due to her three year contract. I can always just move back into my other property after she’s done.
I really am leaning to just stay and enjoy until I really leave.