San Francisco Chronicle
Buying before selling backfires for this couple
Sunday, December 10, 2006
When Laurian Rhodes and her husband, Sluggo, bought their first house 2 1/2 years ago, they did everything right, according to real estate protocol.
Veteran punk rockers, Laurian, 36, and Sluggo, 47, aren't what would be characterized as the new San Francisco buyers -- upscale professionals with fat paychecks. Together they own and run a picture-framing franchise on Lombard Street, and Sluggo performs with his band, the Grannies. But having just given birth to a baby daughter, Laurian was eager to do the right thing for her family's stability.
"We'd lived in a big, rent-controlled apartment in Noe Valley for 10 years, but I thought, 'We have to get into the market,' " she recalls. "There was this sense of urgency. It seemed like the smart thing to do."
So they took what at the time seemed to be a relatively risk-free path. They bought a single-family home (not a more risky condo or TIC) in an affordable but up-and-coming neighborhood -- the Excelsior district. (Real estate agents had begun dubbing this neighborhood the "new Bernal Heights," which in turn had become the "new Noe Valley," which in turn had become the "new Pacific Heights.") In the conventional wisdom of the moment, any neighborhood in San Francisco was just a couple of degrees of separation away from multimillion-dollar mansions.
The couple also felt they chose judiciously. The home, a renovated Victorian they bought for $615,000, had many charms: light streaming in the windows, spacious rooms, high ceilings, a modernized but still vintage kitchen, a huge attic serving as a master bedroom and a wonderful backyard. Sure, it didn't have parking, but street parking wasn't a problem in this neighborhood. And sure, technically it was listed as a one-bedroom since the attic was unwarranted, but it was a far cry from other homes in their price range.
"I was seeing uninhabited, disgusting filth pits that were going for $100,000 over the asking price," says Laurian, amusement registering in her big blue eyes. When she saw the little cottage, Laurian says, it was the first decent deal she'd found. "Sluggo didn't even see the inside of it -- I just videotaped it for him."
Despite three strong over-asking bids, the couple's no-contingency offer was accepted. As was becoming increasingly common, they used 100-percent financing, which included a second loan at 10 percent interest.
For the first couple of years, the house seemed to fulfill its promise of financial security. Laurian and Sluggo were able to refinance and extract $20,000 in equity. Early this year, when they were deciding whether to move, they had the house appraised again, and its value had risen to $725,000. But Laurian decided the best thing would be for the family to cross the bay to Oakland. "I thought, if we were going to spend $3,000 a month, we might as well have twice the square footage."
Again the couple did what had become the new norm: They went out and bought a house before they put their old home on the market. They got a big fixer-upper in North Oakland for $630,000 and a construction loan in order to spend some $100,000 for remodeling.
The plan was to have the finished house appraise at $775,000 (thereby gaining $40,000 in equity). With this higher value, plus the proceeds from the sale of their old home, they could get a single traditional mortgage with 10 percent down. Even if the loan was for more, the ability to have a single low-interest loan would lower their monthly payments.
Deciding that the re-fi appraisal had been a little overgenerous, Laurian and her real estate agent settled on a list price of $715,000 for the Excelsior district house. But as soon as the property hit the market, it became apparent that something was wrong.
"Nobody was coming to see it. Hardly anyone was showing up at the open houses," she says. They lowered the price repeatedly -- from $715,000 to $695,000, then to $675,000. Even with a little creative PR campaign and a posting on Curbed SF and Sluggo's MySpace page, they got no takers. They were about to lower the price again, to $650,000, when Laurian realized they'd reached their limit.
"Since we'd refinanced at $635,000, we couldn't afford to sell it for $650,000 and still pay the Realtors," Laurian says.
The couple has pulled the home from the market and decided to rent it to some friends for a year. "We have some other friends who say they want to buy it, so we're not too worried." In the meantime, they say they'll have to transfer the debt on their new house to a negative amortization loan, which allows for lower monthly payments in exchange for increasing the overall debt.
Should they have done things differently? Laurian is the first to admit that they might have made wiser choices. "We're not experts -- we don't have money," she says with a laugh. "I studied creative writing in college. Sluggo's a musician."
One can chalk up their predicament to the naivete of artists, but it's also true that they chose the real estate road most taken. Most agents want to stage their listings, and stagers generally hate staging a property without getting the owners to move out. That means that sellers must either move out and rent or buy based on an estimated sale price of the old home.
For families with children, for whom moving twice can seem egregiously inconvenient, "Buy now, sell later" has become increasingly common. What's more, in the era of bidding wars, the buying process was so time consuming and unpredictable that buyers who sold first sometimes found themselves stuck, unable to find a new home.
Creative financing has also made the practice more accessible. Less-than-affluent homeowners can easily get loans for new homes before selling their old ones.
But according to John Asdourian of McGuire Realty, the incoming president of the San Francisco Association of Realtors, it wasn't always so. "In the old days, it was the $64,000 question," he says. "And even now it's not doable for everyone. A lot of people are too risk-averse."
Indeed, some agents who have seen real estate cycles come and go caution against buying before selling. Linda Harrison of Pacific Union Real Estate says she tried to steer her clients away from buying before selling even during the hot market. "It's always been risky. I feel like I have to be brutally honest with clients that they have to think in terms of the worst-case scenario," she says.
"And I have clearly told a few: 'You cannot do this. You don't have the courage. Your finances won't allow you. Or you've already leveraged your current place.' And sometimes I even tell people they can't sell at all because they can't afford it."
Even in cases where clients are adamant about buying first, Harrison says she makes sure clients understand that they must protect themselves financially. "I tell them, 'You can't afford not to have this sell. And that means your home has to look its best, which means staging -- and it means we have to price it very realistically.' "
Has the market changed such that there are lots of homeowners stranded between two markets? Not surprisingly, real estate agents I spoke to claim not to have many such tales from their own clientele, but they say they've heard stories secondhand.
Asdourian offered a wild guess that 10 to 15 percent of San Francisco listings were languishing on the market or being pulled from the market to become rentals. All the real estate agents stressed that sellers who had already bought new homes were increasingly having to accept offers that fell short of their expectations.
One of Asdourian's clients put his home on the market at about 4 percent below what he had thought would be his minimum, with the expectation that the home would go for more than the asking price. Instead, the client got one offer just under asking.
In another recent sale of a San Francisco condo, the seller expected a sale price of about $650,000, and the real estate agent persuaded her to list the home at $625,000. In the end, the place sold for $590,000, with the seller carrying $13,000 in closing fees. Ultimately, the seller received $75,000 less than what she expected.
Indeed, the happiest buyer-sellers I spoke to lowered their expectations from the start. In a declining market, it's better to have a house hit the market at little below the going rate than play catch-up later. Either way, it's probably wise to think twice before using a refinance appraisal as a benchmark for a listing price.
"I've seen them way too high and way too low," says Asdourian, adding that they can be off by hundreds of thousands of dollars in either direction. "For a lot of brokers, they're seen as sort of academic."
For her part, Laurian seems philosophical about her new financial conundrum: the month-to-month double mortgage.
"Savings? Who has savings? We live month to month. Someday maybe we can retire by selling our house and moving to an even more podunk place. We'll be in Montana pitching a tent. But we're artists. It's never been my goal to be rich."