On Buying A 2-Unit Building in San Francisco
Is Two Better than One?
At one point it may occur to you that you should buy a 2-unit building in San Francisco (rarely will you hear the term duplex in the City for some reason). You may think that you’re going to get more space to live in or that you can have your real estate cake and eat it too by being able to live in one unit while renting out the other. Perhaps, you want to do the whole extended-family living thing. You may be more savvy and have savvy-minded real estate friends who you’ll pool your money with and buy a 2-unit building so that you can convert the place into condominiums after a few years.
The next thing you may notice is the prices for these two units can vary wildly — from just over (maybe even under) a million dollars to things that are $7-$10 million if not more. What gives? This section goes over some of the reasons why values do vary so much and what you should think about when considering a scenario that could work for you.
Two Houses, Very Much Unlike
Two-unit properties in San Francisco encompass a wide range of buildings and various opportunities. While buying or selling them can be straightforward, it often requires more analysis and consideration. Through the Pandemic and the market shift in 2022, two-unit properties have remained strong and steady in the market, with median and average prices ranging from $1.5 million to $2.3 million+ for an entire building.
The variation in price and quality for two-unit buildings can be attributed to scarcity and the regulatory state, that can give rise to specific circumstances for a given property (e.g., little incentive to maintain low rental income buildings vs. huge incentives to get a building ready for condo conversion buyers). Specifically, rent control and eviction control laws in San Francisco.
HOW DOES IT ADD UP?CASE STUDY:
Does 1+1= 2? Or 1? Or maybe 3?
Usually, a property’s location, size and finishes carry the most weight in determining property values. In San Francisco, you may have already seen that for some property types at least, these traditional factors take a back seat to those related to a building’s history — TICs being valued less for example are a good example where a property’s legal distinction separates it from being a condominium otherwise.
Similarly, two-unit building market values will have more to do with factors that exist apart from just location, size and finish level. Valuing a 2-unit building ill depend far more on a two-unit’s tenant history (if any) and its legal zoning. Consider what you may see on the open market below and the questions that come to the forefront of our minds...
Consider The Following Fictional Examples
Listing Number 1: The Tenant-Occupied Fixer at 123 Fiction Lane
Two unit, Victorian/Edwardian fixer property delivered with tenants. Fantastic, central location close to parks, green space, public transit. Property has deferred maintenance and upside potential in rents, unwarranted space rented to tenants claiming protected status. Extra deep parcel. Sold as-is. Probate sale with court confirmation needed, offer date to be announced. List price: $995,000.
Listing Number 2: The Two-Unit Living Like a Luxe House at 789 Fiction Lane
Stunning renovated centrally located home with modern finishes, vast wine cellar, solar panels, air conditioning. The four-level home has 4 beds, 6 full baths, 2 half baths. A noted home for its design, curb appeal and noted architect. Renovation to the highest detail with high-end, luxury finishes on a quiet, treelined street with underground power lines. Multiple outdoor spaces, top-line kitchen and second kitchen on lower, walk-out level. Oversized parcel with secluded garden, views. Superior location. Legally a 2-unit building that lives like a single-family home. List price $7,995,000.
What Did We Read Into The Listings?
The Kinds of Questions We Would Ask About 2-Unit Listings
Is any part of the 2-unit building tenant occupied? If so, what are the rents? How long have the tenants been there? Do they claim any protections under San Francisco‘s Rent Ordinance? Is there a willingness to consider a buy-out?
Because tenants have a raft full of rights under local rent laws, if both units are tenant-occupied, then valuing the property becomes more a matter of calculating rent and/or will depend on the odds of whether the any of the tenants will leave anytime soon or their willingness to negotiate a buyout as changes in ownership won’t reset tenant rights. What‘s more, when you see the terms ’upside potential‘ or ’banked rent increases‘ available, be mindful of not only the optics involved but with the practical caps of any allowed rent increase and the fact that you can only realize market rate rents for a space only if a tenant voluntarily leaves of their own accord (or by agreement) as most just-cause evictions will likely restrict the ability to re-rent a just-vacated unit for a number of years.
Is the building vacant? If so, how did that come about? Was there an Ellis Act? An Owner-Move-In eviction? Is there a ‘bad’ eviction history?
A vacant building would seem to the jackpot — the ability to set market rate rents, the ability to condo convert, perhaps to use the entire space as a single-family space — but not so fast. If there was a recent Ellis Act eviction that displaced long-term, protected tenants then re-rental rights may be impacted or outright prohibited depending on the circumstances. The ability to evict tenants may be constrained by decisions made years ago such as a previous owner move-in eviction that forever designates that unit as the only one that any future owner can reoccupy. The more restrictions and limitations a property has (which will be in the disclosure documents or with the Rent Board), the less the property’s value will be absent other qualities.
Is the 2-unit also listed as or used as a single-family house?
Merging two units into one without the city’s permission is considered a cardinal sin these days.
If you encounter a listing where the marketing or agent-only comments read something to the effect, ‘legal two-unit building that lives like a single family,’ be on guard. This probably means there have been changes done to the property like eliminating a second kitchen or taking down walls that may run counter to approved plans or permits. If this is the case, there’s a persistent (but, perhaps, unlikely) risk that city authorities could penalize any future owners with fines and penalties while also requiring that future owner ‘correct’ the issue even though they bought it that way. This is also why some agents are loathe to post pictures of some listings. Ironically, there is also the flip side to this phenomenon where some agents will not post pictures of an unwarranted unit online either for fear they wander into this realm.
Can a 2-unit building convert into condominiums? Has the building been remodeled?
The highest and best use of a two-unit property is to become two condominiums, at least that was the case in San Francisco starting in the 2000s where the sum of the parts was greater than the whole. And while there are also many times where someone’s single-family house vision/use is really that special it outweighs the combined value of 2 condominiums and/or the pervasive risk that the city would make you reverse, that adage still holds true most cases. If a property can convert into condominiums and a developer knows that, they will often upgrade and remodel the property where it ends up selling on par or even higher than a comparative condominium would sell for. If not, well, read below.
How to Value a Two-Unit Building Compared to Your Goals
Two-unit buildings will draw all kinds of buyers, each with very distinct end-use goals. Here is a survey of the buyer types and what they're after. The more restrictions there are on how much you can use a building the greater the discount is.
What’s a Two-Unit Building to You and Your Goals?
Single-Family Use? Two-unit buildings typically have more usable existing living area that will often surpass living area sizes for single-family homes and most condominiums, making them ideal for modern, space-intensive living. Rather than wait years through the permitting and approval process for an addition, remodeling already-existing space is, by comparison, faster. This is why many people want to buy a two-unit building to use it as a single-family structure. You will see these on the MLS and among record sales even though it is frowned upon by the City’s Planning Department and the the Department of Building and Inspection.
Family Compound? Changing demographics along with various cultural traditions emphasizing extended family living are just some of the factors behind why many families focus on buying a two-unit building. WIth no desire to convert into condominiums or to use any of the property as a rental income source, these buyers will care less about past eviction history and may be more willing to use such devices as the Ellis Act or an Owner-Move-In or Relative Move-In eviction so everyone can live near each other. These folks are usually savvy and have bought and sold real estate before.
Have Your Real Estate Cake and Eat it Too? Living in one unit while renting out the other unit to supplement your income by collecting rent to offset any mortgage and property tax costs is something many folks want to be able to do. While being a property manager is its own thing, many folks like having the flexibility of having spare space (see Family Compound), the ability to use the space for guests, relatives or work space. One avenue we must caution you about is doing any short-term rentals in a spare unit and or doing corporate rentals as the City has created various regulations and limitations on that type of use for properties you should read up on. See the City’s website on Short Term Rentals here.
2 Units to 2 Condos (eventually). By far the most common reasons for buying a 2-unit building is to convert them into condominiums. Developers may buy a 2-unit fixer and remodel them into 2 TIC units that are eligible for conversion (see more below on how to confirm a building’s history). Other folks may be a group of friends buying together, or, in some cases, folks who came together through chance because a building was marketed as 2 TIC units.
Thus, 2-unit buildings where there have been no ‘bad’ just-cause evictions of previous tenants who claimed any kind of ‘protected’ status (as based on age, ’catastrophic‘ illness, or disability after living at a property for a minimum time (5 or 10 years), can bypass the (suspended) lottery and move towards subdividing the property into two legal parcels from a single structure where you end up with two condominium units each with their own parcel number and property deed. This will add a great deal of value to each (new) condo as each living space gets its own deed. This process does remove both units from the auspices of rent control, which is why the City limits subdivisions.
Note: the terms ’disability,‘ and ’illness,‘ are defined by multiple sources of law and the interpretation the Rent Board and the City’s Administrative bodies will use is deliberately broad (see generally, SF Admin. C., sect. 37.9 et seq., SF Subdivision C., sect. 1359(d); Cal. Government C., sects. 12955.3, 12926(i),(k); and 42 USC 12102(2)(A)(2)).
Income Property? Unless a property is being delivered vacant you can kiss the chances of ever collecting 100 percent of the ‘projected’ rent that you may see advertised for a building especially if a commercial agent is the listing agent because existing tenants have the right to stay put. Unlike other places and states where contract privity is broken with existing tenants when an owner sells, new owners in San Francisco simply step into the shoes of the departing landlords. This means all of the leases, month-to-month tenancy, and any promises the previous landlord may have made to tenants survive. There are no resets of any of the leases or lease commencement dates with any existing tenants carrying over from the last owner. Thus it is very important to look at rental information documents like the landlord's statement
Have We Seen This Book Before?
Most of the decision factors that help folks value most residential properties like houses or condos apply in the 2-unit context, but there are others to look at related to past tenant history and the restrictions that could attach to a property from actions and decisions that may very well predate your interest in the property.
Diligence Documents to Examine for a 2-Unit Building
The hope is that the listing agent would have gathered some of the following materials for review, but you can never be too sure. Unlike buying a house, condo, TIC or co-op, the stakes for 2-unit buildings (like multi-unit income properties) are higher as there may be people living onsite and the issues, questions and answers may not be obvious. So here are just some of the places where we can find clues as to how much leeway and how much value you have with a given 2-unit property in San Francisco.
ORIGINAL DISCLOSURE DOCS
Landlord-owners and their agents are obliged to provide a disclosure package for these types of listings. These should include copies of leases and any agreements that the landlord had with tenants that do not appear in the lease documents. Usually these will be in emails, notes and exchanges with the tenants and landlord. Those agreements will carry over to a new owner too. If we are lucky, tenants will also complete a tenant estoppel document whereby they will indicate what their understanding of the lease relationship is (i.e., month-to-month, who pays what bills, etc).
Also, beware if there is an unwarranted unit or any other complaints showing up on the 3R report or on the property’s online profile, which you can check here.
SELLER-ANSWERED DISCLOSURE DOCS
San Francisco sellers are required to answer and provide various disclosure forms by law and by practice. Among those forms is a Vacant Unit disclosure for any vacant units onsite that lists how that unit came to be vacant. Other forms like the Transfer Disclosure Statement and the San Francisco Seller Disclosure Statement along with other rental property information sheets are key to examine.
PRELIMINARY TITLE REPORT
Preliminary Title Report entries showing Ellis Act evictions or Owner Move-In Evictions as encumbrances.
Notices of Restrictions on title that the City may have insisted upon preventing mergers, separate sales, or subdivision (i.e., converting into condos)
These types of entries are public information. While you may not be able to see the actual documents themselves (that's where title companies and reports come in handy), these types of documents can be found online by using the Assessor Parcel Number for a given property here.
RENT BOARD INFORMATION
Information about San Francisco landlord-tenant buyouts, tenant complaints, adjudications and eviction records are kept by the Rent Board in their subterranean offices at Van Ness and Market Streets.
The staff is very helpful and, depending on how busy they are and the property, they should be able to pull up information about any landlord-tenant cases, for cause and just-cause eviction records, buyout agreements, if any departing tenant claimed protected status and whether or not a tenant claimed the right to return to a unit they were displaced from within a certain number of years.
While information is electronic, it is air gapped and is unavailable online so it is one of the instances where you have to go investigate in person, which is a good thing as the staff can help put things into context for you, not to mention all the handouts they have too.
Some potentially relevant links and pages to consider
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