patrick.net

Not a guru here, but I happen to know the answer to your question 1.

If you don't have earthquake insurance, (or if you have one but underinsured, or the ultimate insurer aka the state goes broke), you are outta luck.

First of all, ALL earthquake insurance policies sold in California is now backed by the state. I looked into this a couple of years ago when earthquake insurance became available again. However, the horror story is, the state is the ultimate backer, since no insurance company wants to take on that risk themselves after 1989. And you know how state compensation goes? They will look at the average prevailing repair/rebuild rate of the entire state and reimburse accordingly, which means, if you are in an extremely expensive area like Bay Area, your will be hugely under-reimbursed if you need to do major repair or rebuild. The deductible is in the tens of thousands, and by the time you hit the deductible, the reimbursement is so lousy that you might as well have no insurance at all. I ran some numbers on the policy and determined that there is almost no circumstance in which I can come out ahead. And here is the other risk, if there is a big one, do you trust the golden state's ability to pay you back?

Now, if you have no earthquake insurance and your building is significantly damaged, the HOA will raise money from existing owners through special assessment. There of course will be some tax relief, but don't count on the fed/state/city to repair or rebuild your home, in case you haven't received the memo, this country is broke.

2. Because of #1, and because I believe USD will become trash, I urge you to put as small of a down payment as possible and lock in a FIXED rate, so that you can pay back with worthless USD later. Put your money elsewhere to retain its purchasing power.

3. If you can manage to put as small of a dp as possible, since your purchase loan is non-recourse, say, after you put down 3% and you are under water, you can always strategically default, little skin off your back. And if the big one hits and repair bill is too high, just walk.

Hey OO,

Thanks for your reply. That was very helpful. Yes, I do realize the country is broke. But they are spending money in New Orleans, so why would this be different? Anyway,
I dont make a very high income, single guy (although it will increase every year, I'm a 34 professional) and I need to see how little I can put down and see what my mortgage payments would be with a 30 year. Isn't there a rule that it shouldnt be more than 40% of you pre-tax monlty income? I have to admit the earthquake insurance makes the "just walk from a high repair bill" very tempting.

sf_peasant says

Is there a ratio of mortgage to income?

Some people still believe it is "whatever you can afford". Good luck trying to talk sense with them.

sf,

did you go to New Orleans after Katrina? If you are using New Orleans as the yardstick of rebuild performance on federal aid, then I am afraid the Bay Area will be completely devastated after the big one.

If I were you I'd put 20% down on a 15-year FHA loan.

3.25%! $600/mo in interest costs starting out.

You can also pay double payments to pay off the loan in 5-7 years.

sf_peasant says

I have my eyes on a 1 bedroom apartment for 400K (with parking), and wonder if it makes sense to put more downpayment (50% down) and get a shorter mortgage like 15 years or should one put less down(20% down) and get a longer 30 year mortgage.

200K cash is great for a business start up IMO. Make money with your money don't flush it. just open up another breakfast place in SF (The Mission Maybe). you'll clear $1500 bucks min a day serving pancakes and eggs and fake bacon to tattooed hipsters in skinny jeans and metal in their faces. heck you'll be hiring their friends so color your hair purple too.
or open up a boutique and sell the jeans for $400 bucks a pair. Or open up a tattoo/piercing parlor....I could go on,... why buy a condo in SF?,.. what a waste.

The type of loan is a trade off. The longer the terms, e.g. 30 years, the risk is to the bank since it's hard for them to predict interest rates for so long. But, you pay more over all for your place if you add it all up.
Is this a condo with fees, or an apartment as you call it? Those fees are money down the toilet.
Eventually you will be able to get some of your principal back, you could reverse-mortgage it in old age, or sell it someday. I do not think you will lose very much money from owning it.
If I were in your shoes, I would put less down and invest some of the rest.
$200K in Vanguard high yield muni bond fund is yielding 4.17% tax free today, as an example.
My attitude is keep some powder dry if you buy a place. If the condo fees are high, that's a problem.

klarek says

sf_peasant says

Is there a ratio of mortgage to income?

Some people still believe it is “whatever you can afford”. Good luck trying to talk sense with them.

Of course it is "what you can afford" - but that alone is a statement that says nothing. What does "can afford" mean? I personally think that you take your average income over the last 5 years (if you are like me, a freelancer with huge swings in income) to determine your average income. Take 25% of that...that's in my definition "what you can afford". These days the banks have gotten so conservative anyways, that you won't get a loan for more than that anyways. It's finally how it should be. Wells Fargo won't just give you money for "WHATEVER you can afford".

I don't know about Klareks "WHATEVER you can afford" thing but he is something else. Don't listen to him. :)

We ended up getting earthquake insurance for our house anyways. It's $1200/year - $60k deductible. I still think its "worth" it. It's really for the worst case scenario in case the house gets trashed. In my case, after my 60k deductible, my structure is insured and the house would be rebuild to code. Better than nothing, I think. After all, if the house gets trashed and you don't have insurance, you still owe the bank the loan amount but you have no house to live in. In the end, its a personal decision. I am more on the safe, overinsured side of things, always have been. There are enough factors in my life that are not sure and up in the air so I go safe where I can. I don't think $1200/year is terribly expensive anyways. One sushi dinner a month less and you got it. :)

Thanks for all the coments guys. The places I am looking at are Tenancy in Common and the HOA dues are typically 125-150$ a month. No doorman, no elevator, no pool, no fancy lobby. Tpyically 3-6 units per building. The scale I like.
Katy Perry- I dont want to open a breakfast place, and servve bacon or hash brown. But thanks.
SF Ace- a bigger downpayment effectively means a smaller interest rate, but the main benefit is that you've borrowed 120,000 less per year- the interest of that is about 5,000$ itself. If i put 20% down, I may not qualify for home loans. And no risk of investing moeny and losing it if you put it all in your home. I dont see it coming down much in the long run.
Sub Oink-is that 25% of pre tax or take home? I dont have college loans, car payments, kids, cats, gold fish nothing. Zilch. I think even 50% shoudl be fine.
SF Geotech maps--Im looking online to see the soil types. (I am an Architect, I work with Structural, Civil Engineers daily) and see the footing types too. I dont want to buy in the mission bay or marina, so I think its ok- the bulk of the City did OK during Loma Prieta in 89- and I cant afford corner properties- row houses with windows at front and back only- are already "braced" to some degree- so that helps.

Thanks all.

If you are someone with discipline, it is ALWAYS better to take out the maximum loan you can (that is below your affordability).

The reason is, the longer the time frame, the higher the risk of interest rate hikes, and the bank is shouldering it. Especially right now, when the rate is at an historical low of 3.5-4%, how much lower do you think the interest rate can get in the next 30 years? Lock in a 30-year rate, and if it goes lower you can ALWAYS refinance.

Save that money that you would have otherwise used to pay mortgage and invest in something else to beat that 3.5-4%, it is not that hard especially if USD is going to the toilet. The extremely low mortgage rate is a generous subsidy by the government, and TAKE IT. Will I loan you money for 30 years in USD asking for only 4% return? Hell no, I demand at least 12%.

So let's say you can afford to put 50% down, don't. Set aside the 45% and invest in something else, and put only 5% down, let bank take the risk. As I said before, if the big one hits, and the repair bill is $100K, you just walk, it is a non-recourse loan. If you put 50% down, you can't walk anymore.

shrekgrinch says

sf_peasant says

I have my eyes on a 1 bedroom apartment for 400K (with parking),

[making retching sounds in the bathroom in response]

How much do you think it should be worth ShrekGrinch?

OO,
I agree with everything you say. If I put 5 or 10% down, I wouldnt be able to afford anything in SF based on my current income. It will increase and has been every year, but it not today. There is a rent / income ratio, correct?
I'd have to move to another City- and quite frankly after going to some open houses today and seeing what 375 or 400k gets you- Im tempted to. I have no business buying here.

Remember that you need earthquake insurance yourself - not just the complex. If the complex has earthquake insurance, it only covers the building and common areas. Your own personal items aren't covered, nor are living expenses if you have to be somewhere else for the 2-3 years it will take to rebuild (if you ever get back in there).

$400k seems steep, but that's a luxury home where I live.

Quote: I have my eyes on a 1 bedroom apartment for 400K (with parking)

I don't live in San Francisco, but $400k for a 1-bedroom sounds ridiculous unless the property is on the Playboy mansion's grounds. For that price, you could get a really nice houseboat and have some cash left over for dockage.

44' Sea Ray SEDAN BRIDGE
Year: 2007
Current Price: US$ 369,000
http://www.bradfordmarineyachtsales.com/yacht-sales-44-sea-ray.html

Or get an older houseboat for a fraction of the price.
48' MARINE MANAGEMENT MOTOR YACHT
Year: 1978
Current Price: US$ 189,000
http://www.bradfordmarineyachtsales.com/yacht-sales-48-marine-management.html

San Francisco has a bay, right?

It seems to me that you are already assuming that the place WILL get destroyed in an earthquake (or severely damaged). Why would you buy a car just to run it into a tree (unless you are testing tree/car relationships)? Perhaps this is a reason you should be renting, regardless of the prices. Rather than buying earthquake insurance, you rent and let a larger pool of people distribute the risk (the state and the landlords). You pay the 'price' of not having equity, which is apparently a losing play until the market hits bottom (which could actually be negative numbers when disposal of a building becomes a liability to the land it sits on).
As a reference point to reality:
http://www.upmls.com/commercial.php?view=1059228

I agree 100% with @Dan8267 "I don’t live in San Francisco, but $400k for a 1-bedroom sounds ridiculous unless the property is on the Playboy mansion’s grounds. " I know right?! COME ON. I see clearly that this is nearly 500K for a very small place (that is not anywhere near Nob Hill.) Let's get real here, the real estate bullshit (smoke and mirrors bloated market) in my view has passed, and isn't ever coming back. Best advice from me? Buyer beware! It is up to you to do what is right for you. I personally have no personal interest in any of these options.

This may seem cocky but if your worried why would one want to live there?

I live near D.C. where R/E "values" are unrealistically high compared to the rest of the country and Id say anything near $400k for a 1 BR ( ONE!!!???) is insane. Would you rent it for $4000 a month? If not, you're overpaying. A 1 BR would only sell to a.tiny % of the population....the market for that would be so limited. Just rent; you'll never make money on that deal!!

I live in the Bay Area. When I look at most 1 bedroom condos, they are much less than 400K. I go back to Patrick's equation. If I can rent it for less than the monthly expenses of buying, why on earth would I buy it?

1. I can't help but wonder that you couldn't get a better deal than 400K.

2. How much would it cost to rent the same place?

3. A huge earthquake in the next 10 years has some unknown probability of happening. Then the cost of it is another unknown. The chances that prices will continue to fall is fairly certain.

My question to you is, why get in that game at this time???

I'm not a guru or neru or anything like that. BUT OMG 400k for a 1 bedroom apt? I love SF no doubt wonderful people there. Just a point of reference here. NYC rents are tumbling. I am hoping for the nice people in SF at this point that you will benifit in some way.

Try looking at NYC and see what is happening there. I must admit I have a lack of knowledge of the SF market. I could look into it of course. The weather is wonderful. That much I do know.

For 400k in phoenix. For example. I could get a 5 bedroom 3500 sq foot house with a pool without trying hard.

In Detroit. I could get a 5000 sq ft house with no problem. I could go on and on the Florida housing market etc.

True you may not get all of the great people you have in SF to party with. I never bought into the location, location pitch for buying. The only time I buy into the location, location pitch is for my own sales purposes.

If you're burning to flush 200k of inherited money go ahead I guess that's the lifestyle you think you want.
some of us have to work for a living. we look at things differently. I don't have another 200k+ coming at me anytime soon. you sound like you do. I wish I had rich grandparents also.

Take the 200k and buy two (or three!) rental houses in the suburbs of Phoenix (or Vegas, etc.) where the houses are near the bottom.

That 200K will give you at the bare minimum 2K a month in net rental.

Use that 2k to rent a place or pay the mortgage. Rent is better as you won't lose anything (other than possible your life) when the next Big One hits.

Well, that's the best I can offer as I well into bottle of decent Aussie Mer.

sf_peasant says

I have no business buying here.

Stop this mental exercise right here.

sf_peasant says

Sub Oink-is that 25% of pre tax or take home?

Pre tax

SubOink says

sf_peasant says

Sub Oink-is that 25% of pre tax or take home?

Pre tax

The Bank will lend you up to 30-33% depending on what loan you get, I think FHA was even 35%. (pre Tax)

In my opinion. My best guestimate. Prices are still heading into negative equity. Just kills me to see people getting upset about that. I expect it from the interest lovers pan pizza news people. Not people that have actual common sense and their wits about them however.

Its nothing but a win for the common folk. You can do just about anything the big cons can do just leave out the cash and deal in whats real.

I agree with ArtimusMaxtor. Prices are heading into negative equity already there for many around the US. I have a serious issue with any suggestion to dump 200K into a rental. I wouldn't do it. As real estate continues to fall through the floor as it is so are rentals swiftly becoming a major risk in my view. As people are tight on money and jobs are disappearing 2K or even 1.5K is a thing of the past in many areas for single family average houses let alone anything else. I don't know what 200K buys in some areas but I know damn well I wouldn't pay 2K a month for a 200K place. In this economy, which clearly is not on even ground. The new unemployment numbers are brutal at over 9% weren't we at 10% during the Great Depression? Credit is key and cash is king. I'd pay off debt and I would BANK the rest ...and rent.

The places I am looking at are Tenancy in Common and the HOA dues are typically 125-150$ a month... Typically 3-6 units per building.
sf_peasant,
There is another dynamic at play with TICs. Even with a fractional loan, the choice is not yours alone. The whole building will have to be insured through the HOA. Remember, your co-tenants can also 'walk', even if you don't want to; this becomes an even greater liability if there is a common mortgage as the mortgagee can go after any party.
A third possibility that you should consider is a small multi-unit building (2-4 units). With the down payment you have amassed, you should be able to get a better owner's unit and will come out ahead financially with renter's carrying most of the mortgage. The FHA loan limit in SF for a four-plex is $1,403,400.

See your right anything even in income property for the most part is a loss right now. Your going to have to squeeze your tenants to make it. Not to mention razzle dazzling them.

Its a buyers market right now is a misnomer. It's not. It's not a sellers market either. The key thing is not to get anxious.

It's not a buyers market due to declining values. It's not a seller market due to the fact there are no buyers. Thats more like whats going on.

I would like to take a hard look at apartment rentals with fixed pricing. It's just ludicrious to me that you can dicker on the price of a house. However on the rental on an apartment unit. They call the cops if you try to negotiate rental agreements. Just dosen't make sense.

Their stubborness is costing them watch as rents decline. Thing is why sign a lease? In a market where you can wait and get something even better next month. I just can't see that. Being anxious gets you screwed more often than not. Sometimes you have to wait for the right deal to drop in. Casually looking for what you want.

After a while it becomes habit and you really dig for the deal. You do that. You hit the right deal. Something that makes you say to yourself hey I'm not a jackass after all. I actually did get something that was more than worth while. Then you might start living your life like that. I like to meet people like that. They usually don't want anything from you. Because they can do it all on their own.

One more thing you mentioned the word depression. People made it during the depression. Believe it or not. Some made it big to. Looking at the financial news for your future just ain't never gonna get it. They have their own interests and its their game. They could care less about you. Truth.

They act like they like you. They even have feelings for you. They will even tell you they care. However. They never show up to pay your rent or mortgage or even buy you dinner. That should tell you something. They probably have never even bought you coffee. HAHAHA

The financial news. The news has never really done anything much for your life. If you take a good look at your life.

All these things have never bothered me. Because I have a free mind that can come up with all kinds of very workable ways of living.

I was in the car business at 27 years old with my own car lot. Buying and selling cars right along with the big dealers. I'm older now of course. Thing is. I just said hey this is easy enough I'll get a partner and do it. Cash for the bonds. The wholesale licence. See there was even more to it and it got fairly large. I got bored with it. My partner was an asshole. Doing stupid stuff so I got out of it. Sure enough stupid went under.

Partners can be fun however. I have had some I really love even to this day.

So in a market like this one. Your never going to be one of the big guys so called. To tell you the truth I don't even want to know them. It's to much of a strain trying to beat the whole world I am sure. See way to much competition.

The infrastructure and civl unrest would result in a mass exitous. away from the area, to result in a much smaller population.

Just the two bridges being knocked down would take years to rebuild and in the mean time 10,000 of thousands business would go out, to think so locally as ones house is to miss the BIG picture, I mean if you know that the bay area is going to have a MASSIVE quake, it is going to be a larger worry then about whose paying for your home, HOW YOU ARE GOUING TO EAT and survive both the event, and then the after math. That would be your priority. I am sure, you will agree.

sf_peasant says

Is there a ratio of mortgage to income?

For a traditional 30-year fixed loan, usually the bankster requires that your mortgage-related payments (PITI, I believe) be no more than 28% of gross income and that your overall debt be no more than 36% of gross income. I believe certain other programs allow 31% of gross income -- not sure what FHA allows.

SubOink says

We ended up getting earthquake insurance for our house anyways. It’s $1200/year - $60k deductible. I still think its “worth” it. It’s really for the worst case scenario in case the house gets trashed. In my case, after my 60k deductible, my structure is insured and the house would be rebuild to code.

Sometimes the calculation works, sometimes it doesn't. I have heard of people paying more than SubOink's quote and having twice the deductible at $120K. I believe a lot of people's repairs were projected to be within the $120K deductible, so the insurance would often net them nothing. It's worth getting a structural engineer to look at your place and see what they think the damage could be. Not all "retrofitting" is effective or the same, so it's worth making the call.

sf_peasant says

row houses with windows at front and back only- are already “braced” to some degree- so that helps.

I believe this is a myth, and proper retrofitting requires that your property have independent bracing. Check with your structural engineer.

I will address the TIC issue separately.

EBGuy says

sf_peasant,
There is another dynamic at play with TICs. Even with a fractional loan, the choice is not yours alone. The whole building will have to be insured through the HOA. Remember, your co-tenants can also ‘walk’, even if you don’t want to; this becomes an even greater liability if there is a common mortgage as the mortgagee can go after any party.

Yes, a lot of people did not address the TIC issues, probably because most people outside of San Francisco are not that familiar with TICs. When you buy a TIC, you are buying into a community and a group of owners more so than in a condo development. If your co-tenants decide to say "screw it, we're not rebuilding," you may be on your own.

You need to have a good idea of what your rights are with a TIC and you may want to consult a lawyer, because this is a specialized area of the law. Your realtor will try to convince you it's not a big deal, but it can be, especially with respect to the risks you are concerned about. It is absolutely not the same as a condo, and you are much more on the hook for your fellow tenants-in-common than you would be for a condo.

Also, if you are not part of a 2-unit TIC, it gets harder to do a condo conversion. If you have 5 units, it might be virtually impossible to do it. TICs may seem cheap, but there are high risks.

A third possibility that you should consider is a small multi-unit building (2-4 units). With the down payment you have amassed, you should be able to get a better owner’s unit and will come out ahead financially with renter’s carrying most of the mortgage. The FHA loan limit in SF for a four-plex is $1,403,400.

Yes, although in SF, you still have rent-control issues to think about, and general anti-landlord regulation environment. There are better cities in which to invest this way than SF.

Dan8267 says

I don’t live in San Francisco, but $400k for a 1-bedroom sounds ridiculous unless the property is on the Playboy mansion’s grounds.

Yes, you don't live in San Francisco. :) There were 1BR condos for sale for up to $900K or so during the boom in the so-called "luxury condo" buildings. Lots of those started being sold for $700K in the initial price drops, and some of the developers started renting some of the units too.

sf_peasant says

I have my eyes on a 1 bedroom apartment for 400K (with parking), and wonder if it makes sense to put more downpayment (50% down) and get a shorter mortgage like 15 years or should one put less down(20% down) and get a longer 30 year mortgage. I prefer the former, as one would pay less interest over the span of the loan and build equity faster…

No offense, but the upside on a 1BR TIC is not that great. It's basically forced savings, because you will not get a huge amount of return. You may be better off using a smaller downpayment and investing your money wisely somewhere that's more liquid, rather than locking it up in the highly illiquid property market and facing high transaction costs to retrieve it. You need to do the math here and consider your life situation and make sure it makes sense to lockup a substantial part of your portfolio in a poor investment.

SubOink,

did you look into the fine print of your policy on insurance payout?

I guess you took the 15% deductible at $60k, which means your structure is valued at $400K. The $400K is the max payout if, god forbids it, your house is leveled. I have no idea what your house' sq ft is, but in today's environment, to be completely code compliant, you are still looking at $200-250/sq ft, and in case of a massive hit which will lead to massive rebuild in the area, be prepared to pay $350/ sqft for today's dollar. Which means, if in the worst case scenario your house is leveled, you can only rebuild something slightly more than 1000 sqft. That is the worst case scenario.

Now, more practical scenario. Since I just finished remodel, so I have a very good idea of how much things cost. For most cases, if you are already code compliant, unless you are situated on the faultline, the chance of your repair going over $60K is slim. But even if your repair bill goes over $60K, it doesn't mean your policy will reimburse you based on how much you actually spent. It reimburses you based on how much a comparable project in California costs. So if you repair a foundation for $30K, but the average CA foundation repair of the same scope costs $20K, you will only get $20K.

The devil is in the details, so I'd highly recommend you to study the fine prints on payout calculation, procedure and play with different assumptions.

OO says

SubOink,

did you look into the fine print of your policy on insurance payout?

No, I never look at fine prints...but that's because my wife is the insurance agent :)

That's the fear Cyoc. Thats only the fear however. See you can play with this. However it's serious biz. I repeat we have all the assets here. WE DID THE LABOR. So. It take someone determined to do all of this. Say some down home N.C. politicians that don't want to play B.S. anymore. I am in a very determined manner. See. I have time for chat and pleasantries always. I am a people person. But when it comes to Biz. I want to get it done and right and not screw around with it.

This is a land more of rules that anything else. Thats ok. See the thing now it to determine what we want. Follow thru. The big mistake here is to think that you have no resources. That just is not true. My God the people you educate should be able to do something with all of that.

It's the labor that we always talk about but never have as far as industry. You simply rethink what your teaching in the Universities. This country has enough people to be self-contained. We don't really need outsiders anymore. Hey we have sports. I like football and playing just as much as the next guy. Baseball I could care less. I like contact sports.

So we need to stop spinning our wheels in the paper. Get something real going. There is no way you can tell me that these Universities can't turn out the talent.

artimus maxtor, i cant understand any of your mystical ramblings.

i think this thread has been dominated by probability of an earthquake, largely due to my questions.
and based on that logic--nobody should own any property in SF. never ever.
even in 89, when we (or i should say, they, as i wasnt here then) had the big one, not all buildings were levelled. a lot were destroyed in the marina on reclaimed ground, by ruptured gas lines and fire, more than the earthquake.

Nothing mystical about it. This is opportunity knocking I feel. The whole housing situation. Jobbless etc. Its a time of opportunity and not of dread. See. We have the opportunity now. We offer it. No second fiddles. NO SECOND STRING. hahaha. I hate second string I am way to good for that. Always have been.

I would defnitely put 50% down if you can afford to. Payout a lot less in interest.