Published in the SPOSFInews March 2014 edition
If you knew you were going to be selling your building in six months, what steps would you take to secure the highest possible sales price? The following is my “Top 10” list of items to assemble and to consider before putting your rental property on the market. They’re roughly in order of importance, but in some buildings the order may vary depending on specific conditions.
Assembling supporting documents
1. Leases: By far the most important documents you can have are copies of leases for all tenants. Without a written lease for all tenants, the value of your building is significantly reduced. In San Francisco, tenants can make insane claims of supposed rights. Unless you have a written lease that specifically states what those rights are, a tenant’s spurious claims can decrease the value of a sale and scare off potential buyers.
2. Estoppel Certificate: This document gives the buyer critical information on the relationship between the owner and a tenant. Without it, the first time many new owners discover that one or more of their inherited tenants is “protected” (with all the attendant rights) is after it’s too late to do anything about it. Protected tenants can decrease the value of a building by $50,000 or $100,000. If you have these certificates in hand before the sale, indicating that none of the tenants are protected, you are far more likely to get the highest price for the building.
3. Building plans: Go to the Department of Building Inspection (DBI), 1660 Mission Street, and check the microfiche files on your property. If plans for the property exist, it’s a good idea to go through the slow process of getting copies for your own records. In some sales, I’ve found that these building plans have uncovered opportunities to exploit unrented space that the current owner did not know was possible.
4. The 3R Report: The Report of Residential Building Record is generally considered the definitive source for the number of allowable units in a building. It also lists incomplete permits that can devalue a building at the time of sale. It’s an essential disclosure form and can be ordered online through DBI. It’s also a good idea to know what the city has on record about your building.
5. UST Clearance: Article 21 of the S.F. Health Code requires owners of real property in San Francisco with underground storage tanks to remove them at their expense. Back in the day, such tanks were often used to store oil for heating buildings. If you purchased your building after July 1992, this would have been covered in the sale. In any case, proof of UST clearance is a good investment.
6. Expense documentation: If you can document historical expenses, your agent can identify areas for various passthroughs that a new owner may be able to take advantage of to increase rents.
7. Inspection reports: The most helpful ones are contractor’s, termite, and sewer inspections. Keep in mind, however, that inspections may uncover and document problems you may not want or cannot afford to address. Of particular concern is the termite inspection, which must be filed with the state, and once done becomes public record.
8. Record of complaints with DBI: Often, a building has a significant history of DBI complaints on record. If so, it’s far better that you, the seller, find out what the complaints are before the buyer does. Fortunately, there is a simple way to see what’s on record by going online. Review the complaints, determine if they are valid, then take the appropriate steps.
9. Should I do a tenant buyout? A vacant unit is nearly always a positive for the sale of a building. Given that a unit delivered vacant is generally worth far more than one with a long-term or protected tenant, it may be worthwhile to consider a tenant buyout. But tenant buyouts can be tricky, and are best approached with the guidance of an attorney.
10. What, if any, improvements should I make? The most frequent question I get is, “What improvement will give me the greatest return on my investment?” The answer varies according to the building and one’s budget, but there’s no question that wisely considered improvements can make a big difference in both a building’s appeal and ultimate sales price.
By attending to these 10 things well before putting your property on the market, you’ll be in a stronger position to get the best sales price possible.
Terrence Jones is a Senior Broker Associate with TRI Commercial and specializes in the marketing and sale of investment properties. His business specialty is San Francisco rent-controlled apartments. He has extensive experience with properties with special circumstances.
For a no-cost, no-obligation comprehensive valuation of your apartment building, contact Terrence at (415) 786-2216 or by email at firstname.lastname@example.org.