Mission Walk will begin accepting applications for 66 below market rate (BMR) condos at 11AM on December 5, 2009. Despite an oversubscribed lottery last year, seven (7) three-bedrooms and fifty-nine (59) two-bedrooms remain available.
This time around, “applications will be processed on a first completed-first served basis.”
UPDATE (11/25): With respect to an interior shot, the best we can do at the moment:
UPDATE (11/25): A plugged-in reader reports: “I’m in contract at Mission Walk as well as a CPA and current renter and have to share my thoughts…“
Will begin accepting applications? Does this mean no lottery? Christmas comes early for some people.
[Editor’s Note: Correct.]
Woo, hoo, a true BELOW MARKET unit always takes weeks to sell!! NOT.
Instant Negative Equity, with upside limits? Sign me up!!!
Buyers of any such units = Idiots.
funny that Tipster can call anyone interested in a BMR an idiot but when I called him one for making the comment above my post was removed.
Slight Hypocrisy!?!?!
[Editor’s Note: If the best you can do is “Tipster=Idiot” you’re in the wrong place.]
Tipster, why are you always so F’n negative??? Your rants are getting very old.
I’m not a buyer for this complex but I think it’s great for small families able to purchase a 3 bedroom condo for under $300k.
Everybody has a slump now and again. Maybe Tipster thought he was still posting on the TIC thread?
What was worthwhile about what Tipster wrote, in any way? LOL.
Dear Mr. Editor,
I agree my comeback added no value to the conversation. My point in writing this response was to highlight the lack of value Tipster was adding by calling everyone interested in this project an “idiot”.
Similar to my comment, his post provided no evidence, research or useful information. He merely felt the need to mock an entire group of people who are struggling to survive in San Francisco and trying to provide a safe home for there families.
Again, the word hypocrisy comes to mind. I was only mocking an individual while he went ahead and mocked hundreds of families. What value did his post add? Why was mine removed and his allowed to remain?
I hope during this time of Thanksgivings you and your blogging cohorts will take a few moments to focus on the positive and try to avoid disrespecting others because they aren’t as well off or because they don’t have the means to buy a $1M flat in Noe or Pac Heights.
At a minimum be consistent in what and why you remove posts. The last of my $.02…another reader lost.
[Editor’s Note: With a post that just provided our readers with the heads – and hopefully a leg – up on 66 new below market rate homes, we’re feeling pretty good about focusing on the positive and adding value.
Now do we agree with what tipster wrote or how it was written? No. But do we think questioning the economics of BMRs in general is fair game? Yes. Regardless, and as always, we ask that you attack the argument rather than the individual.]
tipster’s post did have some content, namely that purchasers of BMR units take on non-trivial downside risk without gaining commensurate upside potential.
I would add that risk imbalance and having to pay the same HOA dues as market rate condos make BMRs a dubious proposition vs. renting. Perhaps someone more options-literate than I could model this…
Karl, with respect to “mocking an entire group of people who are struggling to survive in San Francisco,” you might want to consider that he’s pointing out a danger of “instant negative equity.” That doesn’t sound like mockery; it sounds like a warning. The reason is that the set of people “struggling to survive” is not in any way, shape, or form equivalent to the set of buyers. No one’s forcing people at gunpoint to buy because they’re “poor.”
Well, at least not yet.
Apparently Tipster doesn’t get to say “Negative Instant Equity” or “Idiot” without modelling anything any longer. Have you been reading the fabricated stuff he’s been writing lately? Small wonder the benefit of the doubt is gone. I warned him.
http://www.ci.sf.ca.us/site/moh_page.asp?id=48083&mode=text
[Editor’s Note: Buy A BMR…For $10K More Than Bank-Owned At Candlestick Point.]
In the past, I usually didn’t have a problem with tipster’s rants; I thought some were actually funny. Lately, I think he’s gone a little too far. Every thread on here, he’s usually 1 of the 1st to post (early in the AM) and 99% of it is all negative.
It went from being funny to scary fast.
There’s gotta be better things in life to worry about tipster. Adding 66 new BMR condos in a decent location is a huge plus for the city and future owners. Would you rather them move to Vallejo or into Hunters Point for an affordable place?
Tipster: in all honesty, I hope you have an enjoyable holidays.
Okay, I’m a little confused; just for the sake of argument, let’s assume that the people buying one of these units buys into “instant negative equity” and is underwater inside of eighteen months. Let’s also assume that they plan to stay in the unit for a while and aren’t going to move in the next four to six years or so (if they were, then I agree they’d be better off renting). Keep in mind that the Mayor’s office requires that the buyer puts up a 10% down payment.
They still have a place to live, and they aren’t paying rent. Next year, they’ll ask for a reduction in their property taxes to reflect the fact that their property is worth less. If they stay on in the place for a while, the property will increase in value, and they’ll be “above water” on their purchase money mortgage. Because it’s a BMR unit, they won’t make out on wild appreciation in value once the market recovers and prices increase, but they knew that going in. I’d also argue that those wild price appreciations aren’t going to happen in the foreseeable future anyway because the bubble has popped and faded away already.
So, and I’m sure that someone will point out that I’m missing something important, the only thing a buyer would miss out on is the opportunity to use cash-our refis, HELOCs and all that jazz to immediately realize their positive equity (which as I’ve said, isn’t going to happen anyway). They’ll incur an opportunity cost equal to the premium they’re paying over renting.
I say: so what? Is someone in a family of three “with a household income of no more than $74,600” really going to be in a position to invest the money they’d otherwise have available if they weren’t paying a mortgage and eventually save up enough that they’d be able to buy an equivalent market-rate unit? Probably not.
Brahma (incensed renter), I think you’ve summed it up well. But this was also tipster’s original point. If the market continues to decline over the next few years and the buyer wants to or needs to sell during that period of time, it is going to be very painful. That is a huge downside risk. On the other hand, if things turn up and/or the buyer stays in the unit for a long time so as not to be underwater, he avoids the downside but he also misses out on the upside because of the BMR resale rules. So today’s buyer takes on significant downside risk with little to no upside potential. Not a good investment!
I disagree with tipster that all BMR buyers are idiots. I can see this making sense for a trust fund baby, like Chris Daly, whose reportable “income” is technically within the limits but is not really so, or for someone whose income has taken an immediate but short-term hit such as a grad student. In other words, this may pencil out to cheaper than renting for those who really are not concerned about the downside risk.
[Editor’s Note: Buy A BMR…For $10K More Than Bank-Owned At Candlestick Point.]
Berry Street and Candlestick Point. Need a car. Don’t need a car. Apples. Oranges. You just love you some Tipster man. LOL.
Implied put + DPA = no downside risk
Some people really have a hard time getting their heads around the limitations on realized appreciation of BMR units. What are the 2 BR going for? Prob about $250K. What are all the other 2 BR on Berry? At least $480K (800 sf @ $600 per). That’s $230K less for the BMR. Five year hold = $46K more unit for your family per year. Also, they are allowed some appreciation. What are 5 year CD paying now – 2.5% to 3%. They are probably allowed this appreciation in the unit. They get the tax deduction and the leverage – they are getting their appreciation on a leveraged $250K, not on the $25K they would have kept in a CD.
I understand there are some wacky things going on in the market right now. I don’t think buying a BMR is a stupid move at all for people in the right set of circumstances. And this is a much nicer area than where many BMR are located.
I actually don’t think it is that bad of a deal.
Assuming a 3 person family (say with a babe) making 90% of median, around $75K a year.
They buy a 2 room place for 245,000. 10% down is 24,500, or $16,500 after the tax benefit.
Assuming a 5% loan, and a $500 HOA, I get a monthly cost of ownership of $1,550.
Depending on comparable rent, with the above assumptions it’s not a totally crazy bet.
I think potential BMR appreciation is tied to comparable units performance, and a ratio is applied to determine allowable gain. But if the underlying assumptions are that everybody who buys anything right now can’t afford to, that they’ll have to sell in a year or so due to job loss, and that no appreciation is likely to occur within the next five years or more, then you can see why they might have a hard time getting their heads around any potential appreciation.
Will someone explain the advantages of BMR units when we already have rent control and other things in SF to keep housing prices down? I don’t understand the logic of BMR units.
Why do people who ordinarily cannot afford to buy need a way to buy instead of rent? If the idea is that lower income folks otherwise do not have a way to build wealth (as is typically the argument for subsidized home purchases), I hardly think a BMR unit is a good way to build wealth, given its heavy restrictions and relative inalienability.
Furthermore, it seems house purchases rarely result in true wealth-building, unless you truly have investing skills and anticipate a real estate trend. Instead, for most people, house purchases typically function as forced savings (i.e. saving money using a 30 year fixed mortgage). If we want paternalistic policies that force lower income people to save money, there are better and cheaper ways to do it than to provide BMR units.
The tax deduction for someone at the requisite income level would be minimal.
Note that the income levels required for BMR would hardly be considered “lower income” in other cities. I’m not trying to suggest that these people are poor, either absolutely or comparatively.
Re the mortgage interest tax deduction . . . In my above example, a family of 3 making $75K, I get that the family would be paying roughly $11,000 in interest a year (plus whatever the property tax is about $3K I guess??). How much of that would be deducted? The calculator I’m using counts 25% of the total interest and property payments as a “tax savings”. What is the more appropriate amount for this hypothetical?
JimBob,
I agree with the overall principle that it is foolish and counterproductive to prop up housing. But, the BMR policy is a drop in the bucket of all the government laws promoting ownership.
We created the mortgage interest tax deduction in the 80s. We did away with capital gains tax on most home gains in the late 90s. The government actively promoted home ownership and encouraged and allowed banks to loosen underwriting. Now we have have outright gifts of 8K (and 10K from the state government earlier this year) being given to purchase a house and the fed taking unprecedented steps to keep interest rates low.
I agree. It’s foolish for the government to push people into home ownership.
But we all live under these crazy interventions . . . . and sometimes it’s best to play the government’s game even if one disagrees with the principle.
In fact, the BMR folks may be smarter than the MR folks, in these particular situations (buying a condo in SOMA).
Say 5 years from now the SOMA condo scene is flat to negative 5%. The people that paid full price, say the $480,000 for a 2bd on Berry, as suggested by OneEyedMan above, had a cost of ownership at $2,557 a month (assuming 10% down, and 5% interest rate and $500HOA). So over 5 years they will have paid $60,000 more to live in the same unit as a BMR family (which has a cost of ownership around $1,500, if my calculations above are correct). Of course, if condo prices fall 5% in 5 years, both groups would lose most of their down payment ($16,500 for the BMR person and $40,000 for the MR family).
I don’t know, seems like much less downside for the BMR folks.
Great commentary in this thread about the pros and cons of purchasing a BMR unit. However, speaking as a MR buyer on Berry Street, the 480K for a 2bd is stretching it… Yes, the market has come down, but the high 400’s will get you a 1bd, not a 2. Most 2bds are in the 600’s and are almost 1000 sf or more depending on the building and floor plan.
http://sfarmls.rapmls.com/scripts/mgrqispi.dll?APPNAME=Sanfrancisco&PRGNAME=MLSPropertyDetail&ARGUMENTS=-N554550181,-N235556,-N,-A,-N21291099
JimBobJones wrote:
Sure. Contrary to popular belief among the marketplace fundamentalists on socketsite, every rental in San Francisco is not rent controlled; a building constructed after 1979 does not have rent controlled units. Obviously, if you have a fixed mortgage on a BMR unit, your payment, and hence the amount you spend monthly on housing is fixed, which is a hell of a lot more “controlled” than a lease.
Also, even if you live in a rent controlled unit, landladies can still raise a tenant’s rent by a set amount each year based on a formula tied to the inflation rate. If you owned a BMR unit, and you have a fixed rate mortgage, your mortgage isn’t going to go up with inflation, in fact the amount of money you pay, in real terms, will go down over time, although I admit that inflation isn’t looking like it’s going to be a big thing in the foreseeable future.
All of the above assumes that you don’t have a landlady who skirts or outright ignores the law.
JimBobJones wrote:
I don’t understand the logic of renting and I’m a renter.
When one rents, you’re paying for housing but long term you’re not going to end up with anything to show for it. People say “well, you got a place to live for the month”. So? When you smoke crack or snort crystal methamphetamine, you get high for a while, but when you come down, your situation hasn’t improved and you’re out a lot of money.
Assuming the buyer of the BMR unit has a self-amortizing mortgage loan, if they are young enough when they buy, after making thirty years of payments, they’ll actually own the unit and won’t have to make any more payments other than the HOA payments. In other words, they’ll own a significant asset. They won’t have to move on a month’s notice at someone else’s demand.
The renter will have the pleasure of knowing that they contributed to the asset side of their landlady’s balance sheet.
“…explain the advantages of BMR units when we already have rent control…”
In addition to what Brahma said, recognize that almost none of that rental stock built prior to 1979 has had any upgrading since the Rent Control ordinance was passed at that time. Rent controlled apartments, speaking from 13 years experience in Lower and Pac Heights, are cold & drafty, poorly wired (one electrical outlet in each room, for example), have appliances dating from the early 80’s if you’re lucky, etc., etc. They are dumps: Not a dime is invested into rent controlled stock that isn’t mandated by the City Building Inspector. Give yourself a month in new construction, and you’ll never want to live in a rent controlled unit again (most of which were actually constructed 40+ years ago).
Friends who bought BMRs had lived in SF for a long time and knew they were going to stay. They were tired of living in rundown rentals or living with the possibility of eviction. They saw new units that they liked and could afford, and were excited to win lotteries for the units, so they bought and moved in.
Brahma (incensed renter) wrote:
> if you have a fixed mortgage on a BMR unit,
> your payment, and hence the amount you
> spend monthly on housing is fixed.
Only the mortgage “can” be fixed for 30 years (most BMR loans are not fixed for 30 years)Property taxes still go up 2% a year for BMR units (rent control has kept apartment rent increases under 2% a year on average for the past decade), and HOA dues will still increase (with no cap) and you still might get a big bill if the HOA does not have enough reserves for a big repair…
“..HOA dues will still increase (with no cap)”
Mission Walk is entirely BMR, so at least there you won’t have owners who are making $500k/year wanting a 24-hour concierge staff, earthquake insurance, rooftop swimming pool and a wine cellar pushing the BMR residents out on the street with HOA dues increases.
Rent controlled apartments are like a ’75 Chevy Nova that’s been driven every day. And they will never get better. That same formica countertop with knife marks will still be there in 20 years, when you’re in your 50’s or 60’s, along with the cracked linoleum flooring, and steam radiator that kicks like a mule.
(And that’s assuming that the Big One doesn’t take out most rent-controlled stock, or that the political climate doesn’t change and do away with rent control before you’re ready to move.)
Not a good investment!
and therein lies the problem. Once we remember that housing is CONSUMPTION and sometimes FORCED SAVING and not typically an overly wonderful investment then we’ll improve our country dramatically.
I think a BMR person could do just fine if they bought here and held for 15-30 (not 4-5) years. They will have consumed housing at a reasonable price. During that time they will have also had an excellent forced savings plan depending on their loan type.
also for Brahma:
mortgages can fluctuate wildly regardless if your Principal/interest rates are stable. as others mentioned, property taxes go up every year. So does insurance. So do HOA fees.
the interest portion might also rise or fall depending on what type of loan you use. Many SFers use variable or adjustable rate loans.
and depending on how you “buy” your home you may or may not end up with anything. Sure, you pay your landlady’s mortgage when you rent. (if she’s cash flow positive). if you own with a mortgage, you pay the banker’s bonuses. the outcome depends on the individual scenario. But I know a LOT of “homeowners” who have paid their mortgage for a very long time who don’t own anything.
I personally found that I had far more assets living in SF as a renter than a buyer, because I could rent comparable housing for so much cheaper and I funneled my money into other investments.
but here in the midwest I bought for cheaper than comparable rent.
I think renting is great.
I think owning is great (heck, I own myself).
but neither is perfect, and neither is necessarily better.
In this climate, IMO, it is “better” for most to rent. as things change, that might change.
to me the more silly thing is how complex SF has made it to secure basic housing. Jeez… we’ve got a lot of smart people on here and few of us understand the “best” way to buy a home. Is it TIC? buy a BMR? Buy market rate? Lottery? Ellis? etc etc etc. Artificial housing shortage based on poor and purposefully overly-complex zoning and “planning” that is hostage to special interests.
ex SF-er,
I agree completely. It’s the reason I moved from Chicago to San Francisco and left for Miami.
BMR unit rules promote a mix of units instead of gentrified areas accumulating only high end luxury units that are no use to the local labor force. Allowing development to be completely dominated by high end units degrades and destabilizes not only local labor markets, but even the ordinary functioning of society.
As with many things San Francisco has chosen to manage its BMR program in a way that is different from most alternatives in other places and which interferes with the market in a more heavy handed manner. To some extent buying into the SF BMR program as it now stands can be thought of as a long shot gamble that the program will in the future either be scaled back or ended altogether.
So I knew that only pre-1979 housing is under rent control and I understand the rent control argument (although some of that is a good argument for the anti-rent control people). But this is a tougher one:
“Assuming the buyer of the BMR unit has a self-amortizing mortgage loan, if they are young enough when they buy, after making thirty years of payments, they’ll actually own the unit and won’t have to make any more payments other than the HOA payments. In other words, they’ll own a significant asset.”
So, how long does the typical BMR buyer stay in their place? If they stay 15 years, they’ve only paid 26-27% of principal, so the forced savings portion isn’t so great. Plus they’ve been paying mortgage insurance for a large percent of those 15 years, since they only put 10% down (or alternatively a second mortgage or both). If they’re truly staying 30 years, maybe it’s not so bad a deal, but I’d love to know what the numbers are in reality.
In any case, maybe condo maintenance is cheaper than SFR maintenance, but people always underestimate maintenance costs over/after 30 years. That HOA fee could be more than expected when the building needs a new roof. When you rent, you don’t worry about these things — if a place is falling into disrepair, you can just move. As ex SF-er mentioned, housing is a consumable — that’s why landlords are allowed to take depreciation into account.
Btw, have we ever figured out what the allowable sale price increases are for BMR units? Do they beat inflation?
Note that no one has suggested that having BMR units is cost-effective as a social program. Would it be better to have market-rate rentals and subsidize those that we determine need subsidies? It’s funny, because I’m not even one of those crazy market-types you see around here on SocketSite. I’m just trying to figure out if encouraging the less well-off to be so heavily in debt is a good thing.
“BMR unit rules promote a mix of units instead of gentrified areas accumulating only high end luxury units that are no use to the local labor force. Allowing development to be completely dominated by high end units degrades and destabilizes not only local labor markets, but even the ordinary functioning of society.”
Wow, I didn’t realize Manhattan didn’t have an “ordinary functioning of society.” But seriously, you can only have so many high-end luxury units in any given place anyway (as you’re seeing by the “luxury” condo bust right now), unless you’re Manhattan, so I don’t understand why a mix of units is beneficial. There are plenty of non-luxury areas in the city of SF.
“I’m just trying to figure out if encouraging the less well-off to be so heavily in debt is a good thing.”
It’s a great thing for those who are collecting the interest.
Happy in SF – You need to get out a little bit more. My wife and I live in a rent-controlled 1BDR in the Marina. The building was built in 1927, and there isn’t the hint of neglect throughout the building. The owner and manager do a wonderful job of maintaining the building and keep it in great shape.
JimBob,
BMR is not encouraging these people to go heavily in debt. In fact, the underwriting seems to be far more stringent than a FHA loan. 10% down. Stringent doc and income verification. 5% in savings and limits on how much of the down payment can be in gift.
This type of subsidy is far more beneficial to society and the buyer himself than rent control. Rent control takes years for the renter to see real value. Here, the subsidy is on the purchase price, which makes the financing managaeble.
Here, a family of 3 making $75,000 a year can buy a 2 bedroom condo for $245,000. As I showed above, this is a cost of ownership of $1,550 a month.
Someone buying a MR unit, the exact same unit, would pay $600,000, according to SBMBGirl above, and their cost of ownership is $2,672.
I estimate renting to be $2,500 a month.
So over 5 years, assume the very likely situation where there is a 10% decline in price (or even 5%), and the owners lose their down payment. The 3 groups would have spent (cost of ownership plus down payment):
MR: $212,320
R: $150,000
BMR:$109,500
The BMR person does even better than a renter over 5 years! I think the BMR person may indeed do better in all situation from a price drop of 10% to a price increase of 10% (assuming this is within the allowable appreciation). The one situation where the MR does better than everyone else is big appreciation.
As far as goverment interventions go–this is a better one. The buyers are steady working class people that have good credit and can afford to buy a house at the right price and reducing the price (to $245,000 in our example!) is the best way to help someone out. Giving them a deduction on interest payments, for instance, encourages even higher house prices.
“Only the mortgage ‘can’ be fixed for 30 years (most BMR loans are not fixed for 30 years)”
BMR buyers are required by the city to get a 30 year fixed loan.
In my hypothetical, even a 10% appreciation over 5 years results in the following (assuming this appreciation is ‘allowed’ for the BMR folks):
The MR person gets $620,400 after the gain and the 6% realtor fee. So they pretty much make a $400 gain and get their down payment back. So they have a total cost of:
MR: $152,320
Same scenarios for the BMR folks, except they get $9,000 over their down payment back (I’m not a math guy so I hope I’m getting this correct). So, they spent the following over 5 years:
BMR: $84,000
And of course the renter pays $150,000.
So the BMR person comes out ahead even with 10% appreciation.
How are you making the comparison with a market rate unit? I couldn’t find any photos of these units anywhere. I’ve found that units marketed with no photos don’t usually have a positive surprise inside.
As for the hubub about me up above, I was rushing yesterday and didn’t explain myself. The “=idiot” wasn’t fair and those who called me out on it were correct, though it’s best to attack the argument, not the person.
My complaint is this: you give up certain rights when you take a BMR unit, because your monthly payment is much less than the market. When that’s true, it leads to scarcity. Here, there is no scarcity, so I conclude that the price is not below market, and so the buyer will give up rights AND pay a market, or even above market, rate.
The other question I have is about improvements on a place like this. The only way to get your money out of improvements you make will be if prices actually fall or stay very flat. So as things age, you’ll either leave them alone or pay, but lose that money too. So the arguments above, on how this place will be so much better than a rent controlled place lose some of their luster. You can throw away money on improvements to a rent controlled place too: your landlord will love you. And BTW, not all rent controlled places are dumps, and not all apartments are rent controlled. I don’t see rents rising for many years, so you can go rent a brand new condo and get a market based rent control called persistent high unemployment. My significant other is cheerfully paying the landlord $X for a brand new place, while the landlord pays $X+1000. God bless America.
I looked last night at photos from condos in Moraga, and they are running around $200K. One is pending at $188K. Much better schools, though obviously a longer commute. Not right next to the train tracks and a freeway. So if you stay for 20 years, you have at least some hope of making some money, though again, you have to be OK with a commute and living in the burbs, but there are advantages to that too. I suspect that’s where the former BMR money is going: way more upside all around, and your downside is mostly in the commute.
Anyone looking in SF probably owes it to themselves to spend a day poking around the just-over-the-bridge part of the east bay. Prices have come down to an astonishing degree, and you can bet the foreclosures are ramping up.
I’d be very interested to see the insides of these. I suspect that’s part of the reason they aren’t selling.
[Editor’s Note: With respect to an interior shot, the best we can do at the moment has been added above. And while not a very telling shot, we’d be willing to bet this is more a story about economics than interior design.]
JimBobJones wrote:
This is just so astonishing I don’t quite know how to respond to it except to say that this is the kind of thing I’m talking about when I refer to marketplace fundamentalism on socketsite. The only thing missing that would make it a perfect example is an ending railing against government intervention (i.e., the Mayor’s Office of Housing) in the perfect, efficient (in the Chicago school of economics sense) market, and an invocation of Milton Friedman or F. A. Hayek.
And I realize that I am not immune myself when the topic of the ever-extending $8,000 tax credit comes up. 🙂
Brahma, you still won’t find me agreeing with most of the marketplace fundamentalists here or ever invoking Milton Friedman or the Austrian school. I just don’t think BMR housing is a worthwhile endeavor in its current form (there are better ways), and I don’t see why mixed-income housing is necessary. Why are those two necessarily related?
“The other question I have is about improvements on a place like this. The only way to get your money out of improvements you make will be if prices actually fall or stay very flat.”
You can add the cost of improvements to your sale price. Some improvements get 100% value added (appliances, floors, fixtures, etc), some 50%, and some none.
I think my math is a bit off for the 10% appreciation in 5 years scenario, outlined above. These are my revised numbers (and I also haven’t included amortization–there would be some principal reduction for the buyers over those 5 years that I’m not taking into account–probably not much though):
MR: A $660,000 resale price minus $39,600 realtor fees = $20,400 gain, minus the cost of ownership of $160,320 [$2,672/month] leaves a total cost of ownership over 5 year of: $139,920.
BMR: $269,500 resale price minus $16,170 realtor fee leaves a gain of $13,330, minus the cost of ownership of $93,000 [$1,550/month], leaves a total cost of ownership over 5 years of: $79,670.
The Renter pays $150,000 over that period (assuming a $2500 rent).
I bet a BMR does better than a renter in almost all situations and does better than a MR person in all situations except those with over 15% appreciation over 5 years.
Also, I think some are engaging in stereotypes that the BMR folks are stretching or are poor or something. $75,000 a year may not be master of the universe levels but it’s not poor (and it could be temporary–imagine a young couple with a child and one spouse that hasn’t been working for the last couple of years and may go back to work, or the sole breadwinner was making 90K a year and now making 75K, but may make more, etc). And these people are far more qualified than many FHA people or young singles stretching to get into a market rate condo with only less than 3.5% down. Since they bought at a higher price and put more down the typical market rate condo buyer may be in more trouble going forward (in my hypothetical they pay over a $1,000 extra a month–the BMR person would probably qualify for this loan as well but he’s not stretching). My calculations certainly show that a BMR person will be better off than a renter or MR person in this type of unit under the most likely scnearios.
The government intervention to criticize the most are the loosening of underwriting for FHA and other government-backed loans. That encourages people to stretch and raises the price on housing for all of us. This program does not.
In fact, I find it a bit ironic for people to be claiming that this program is “paternalistic” and BMR folks are suckers for taking this bet. The people that are being paternalistic are those whose biases prevents them from seeing that this may indeed be a good deal for BMR folks under most of the likely scenarios.
I do lean toward Tipster’s advice though, in general. Most people are better off drastically lowering their cost of living. Maybe these BMR people should be renting or buying in Morago where their cost of owning or renting will be less than $1550 a month (but if one family member works downtown this would be sweet–and as Anonn says, you wouldn’t even need a car).
If people want to be paternalistic let’s focus our attention on the people who really need it–the market rate buyers of condos who are stretching to get in and betting on huge appreciation.
Did I mention that math is not my thing?
One more revision. The cost of ownership for a $600,000 purchase is $3,072 a month, not $2,672 that I previously estimated. I forgot to add in the same HOA that I did for the BMR unit ($500).
So that raises the total cost of ownership for a Market Rate (MR) unit in our 10% appreciation scenario to:
$163,920.
So it would be better to rent or buy a BMR unit under the 10% appreciation over 5 years scenario.
Sorry for the messy numbers. I was just surprised to see them and got a little excited trying to relate them.
I’m in contract at Mission Walk as well as a CPA and current renter and have to share my thoughts…
1st on Negative Equity:
The San Francisco Housing Redevelopment Agency guarantees that there is no risk of financial loss, because if my condo ever loses value (which could happen as it’s tied into the the AMI of the area which has never, repeat never dropped, since its advent – not true of the market) they will cover any drop. Therefore, their no risk.
When looking at the link to a BMR in which a comparable market rate home is being sold for less, I recognize this is unfortunate for the market rate seller (as he is losing a lot of money having bought it for a much higher price than the BMR – actually the bank, as it was already foreclosed on) it means very little for the BMR owner other than it will be difficult to sell (he hasn’t dropped in value at all since his reduced BMR purchase price).
In Mission Walks case, there are no, repeat not a single unit, that is comparable. All units in the complex are BMR, and the market rate homes in the area are currently selling for triple, repeat triple, the price (even in this down market) of a BMR. This area, SOMA, is not candlestick point.
2nd on Financial Benefits of Ownership:
The out of pocket expenses of owning a one bedroom at is about $200 a month more than renting a studio in Upper Haight. When considering the tax benefits I’m coming out over $300 a month superior to renting. Additionally, I’m building equity (with 3% avg. appreciation). Throw in an $8k tax refund… and I’m doing very well for myself in this deal.
I couldn’t buy a home without this program and feel lucky to be a part of it.
I have more to say to the haters, but I’ve got to get back to work…
Dear Moving on up…I’m your neighbor at 325 Berry, welcome to the neighborhood! You’re going to love being right on Mission Bay Creek. Seals and pelicans have been fishing and putting on quite a show lately!
Thanks for the welcome, AF.
That’s the holiday spirit!
Btw, you’ll start seeing people move-in the first week of December.
Congrats, Moving on up! As I posted earlier – this complex works well for someone in the right circumstances. Mission Bay is a very convenient neighborhood. Enjoy.
When considering the tax benefits I’m coming out over $300 a month superior to renting.
Moving on up… thanks for posting. I’m guessing you’re somewhat of an exception, though, rather than the rule. Good to see someone middle class be able to get into a home in Ess Eff. For everything to work as you say, I’m guessing you’re single (standard deduction much less of a hurdle), and as a CPA, you go nuts itemizing at tax time. Also, just to be clear, the marginal rates used in your calculations (for savings over renting) are the tax rates on your income AFTER pretax retirement contributions (if any) are deducted. Enjoy your new digs…
Even with NO TAX SAVINGS the cost of ownership would still be less than comparable rent.
In my example of a 2 bedroom sold at below market rate for $245,000, assuming a 15% tax savings on the interest and property tax instead of the 25% I originally used, the cost of ownership is still only $1,662/month. At a mere 5% tax savings, it’s $1,775 a month. With no tax savings it’s still only $1,831 a month. It’s also possible the BMR family earns more in the future and realizes a greater tax savings and get’s closer to that 25% that would bring their monthly cost of ownership down to $1,550. In any case, the monthly cost of ownership will range from $1,550 to $1,831–much less than the fair market rent as far as I can figure.
And the comparable rent would be a similar unit in SOMA–not the studio in the upper haight. From Move Up’s perspective, he’s getting better quality housing for a lower price–so yeah, the comparison is relevant to him. But when analyzing the typical benefit to a BMR buyer it understates the case.
We’ve had the discussion of what comparable rent is for 2bed SOMA condos in the past, to keep using my hypothetical since there seems to be so many 2 bedrooms left, and I thought my $2,500/month estimate for such units was pretty bearish. I’m open to the possibility that a two unit would rent closer to $2,000 a month in SOMA though.
The buyers of these places, at these prices, seem to be paying substantially less than renting and they seem to be better off than market rate buyers in most of the possible scenarios.
Coming from someone who has spent the last two weeks trying to qualify for this property, I have to say that the whole system is totally back asswards. Sadly, my fiance and I do not qualify because her severance took our annual income over the 77k limit. I started a new job a few months ago; she’s got a startup that hasn’t turned a profit yet, and we’ve both been collecting unemployment for 16 months and 10 months, respectively.
After speaking with lenders who specialize in getting loans for housing assistance programs in SF (through both the Mayors Office of Housing & the Redevelopment Agency), it seems that the vast majority of people who end up in these properties are either people like my fiance and I or trust fund babies w/ lots of cash. Under ordinary circumstances, my fiance and I make several multiples over the income limits, but due to taking some time off, starting companies, and recently starting back to work, there was a chance our 2009 income would be below the income limits, so we gave it a shot.
Apparently, the same folks who write the rules for rental assistance programs also write the rules for housing assistance in SF. While I went through this process 5 years ago as well and can say that things have gotten a LOT better, it’s still rife w/ this kind of unintended consequences. I’ve heard stories of BMR owners refinancing for the home’s market value and then taking the cash and running; I’ve witnessed BMR buyers slap down a $250,000 check for a deposit on a $350,000 property b/c 100k loan was all their 45k salary could get them. Where does someone who only makes 45k a year with the same job for 5 years get 250k? Well their family, of course. How is that okay? The housing authority only considers the past 3 months of bank statements to demonstrate “seasoned” funds. …and the required home buyer’s seminar covered this item several times, advising clients to be sure to get all the money they can from their family 3 months prior to submitting an application.
Does this system help people buy homes who couldn’t otherwise afford a home? Absolutely. Does this system help lazy rich kids buy homes? Absolutely. Change is coming to the system, but slowly. SF’s affordable home programs are light years behind other large cities, though, and that fact seems to fall on deaf ears in city hall.
Quietsnow – Somewhat shocking, but not surprising. People will always find a way to work the system to their advantage.
quietsnow: is it not the case that you have to take 10% of all your savings to count towards your income for the purposes of max income limit? eg if you make 60K and you have 200K savings, your effective income for max limit purposes is 60K+20K=80K possibly pushing you over the limit.
Happy in SF: I agree that you don’t get out much. I live in an older, rent-controlled building, as do most of my friends. The places are wonderful.
A couple could use some paint and appliance upgrades — mine included — but I don’t bother the landlord with such requests because I appreciate the fact that I pay about 20 percent under market and love my home. The building manager has said he’d ask for the upgrades and get them for me, but I told him it wasn’t necessary unless the owner wanted the place in better shape.
The newer places in SF, however, are hideous. Lots of cheap, tacky elements, and awful layouts. I wouldn’t rent one of them even if they cost less than my place and included rent control.
Here is a real world experience for those of you who are can only speculate.
We are a working family (both parents in social services) of 4, income around $75-80K per year. We have been renting the cheapest place we can find that has enough room for 2 small kids and a dog- 12oo sf, $1900 per mo, not incl utilities. The place is a dump–filthy carpeting and paint from late 80s, kitchen made from scrap material, appliances from late 70s, single paned windows that don’t even close all the way. Bottom tenant is crazy.
Thanks to family (working class, not fabulously wealthy), we can scrape together 10% on a new 1300 sf, 2br–market rate units in the same building are selling for 800k.
The unit has good quality features-kohler sinks, GE stove. If our mortgage comes through, our monthly payments will be around $1700- HOA, PMI (which we can eliminate in year 3 if we have paid down another 10% of the principal), and utilities included. Not only do we get tax deductions but the MCC program eliminates 15% of our interest payments. I think we are getting a darn good deal. If this purchase doesn’t come through, then SF loses another family that doesn’t make its money from the internet.
There are a few misconceptions touted above. One is that people are plunking down 250K on a 300K place. As far as I know, there is a cap on how much cash up front you can put down and it is way less than 70%.
We are not lazy rich kids. This 10% is my inheritance that I would have used for the down payment when my parents passed anyway. If the regular market doesn’t care where you get your cash why should BMRs be different. Actually, they are because you still have to prove that you have reserves that aren’t gift funds anyway so you have to have some sound finances. We have stable consistent income, excellent credit, retirement accounts, just not huge paychecks. The BMR is just giving us an opportunity to purchase what we can afford. We expect that our income will increase somewhat in the next 5 years. And will hopefully be able to trade up for a larger place but for now, this is better than renting for sure.
Quietsnow:
I am sorry but if you are both collecting unemployment, how does it make it a good time for you to buy. Plus you guys are starting new work?!
I don’t see how you would be good candidates for any purchase now.
Also, you guys are trying to take advantage of a temporary blip in a loss of income. I guess lots of people do it but it doesn’t make you sound like a suffering party here.
“…we’ve both been collecting unemployment for 16 months and 10 months, respectively…”
Quietsnow – Gotta agree with Family of 4. Perhaps now is not the best time for you to be even considering a purchase considering a prolonged period of unemployment. Perplexing indeed!
I walked by Mission Walk the other day and was invited in to take a tour of their models. The interiors are nothing fancy, but functional. Just what a BMR should be, in my opinion. Kitchen counters are Caesarstone, dishwasher/stove/fridge are white, washer/dryer is included. Units are either 2BR/2BA or 2BR/1BA, both of which include a deck. Square footage ranges from 782 to 1018. Some of the construction is definitely cheap-ish — really flimsy sliding closet doors comes to mind.
Based on the sell sheet I received, those who qualify can purchase a home in a nice neighborhood that is ~3.5x their salary, which is decent for SF.
Kind of sad that those who make $100K/yr would have to pay 5-6x their salary to purchase something comparable.
Ask a 5th grader what “ownership” means, and you will have the answer to this debate.