Inside San Francisco Real Estate

Gone are the days where you could buy any old piece of property and do okay.  The feeding frenzy is long over.  Nowadays, buyers must be smarter in deciding what to buy.  The old wisdom was “location, location, location.”  While we agree that location is still the single most important factor in real estate, a new reality is here and we want to share some tips with you on how to make a smart investment in real estate.

So what’s our new mantra? “Location, scarcity, desirability.”

Allow us to explain:

1.  Location – Yes, location remains #1 on our list but with some footnotes.  The characteristics of a location are not always static.  Just because you pick a certain spot doesn’t mean that spot will be the same 10 years from now.  The landscape around you could change radically.  Buyers should ask themselves how a particular location will change over time.  Are things getting better in the area?  Worse?  Busier?  More desolate?  Are businesses opening, closing, or maintaining?  A great way to protect yourself with regard to location is to look in well-established neighborhoods that have stood the test of time, have shown stability, and are not changing too much (unless it’s for the better).  While it’s true that you can profit from being a “pioneer” or an early settler in an area that is projected to grow substantially in the future, there remains an element of risk.  Sticking to tried and true areas minimizes that risk.

2.  Scarcity – This is the supply side of the supply/demand relationship.  An item’s value is directly related to its scarcity.  If you invest in a piece of real estate that is unique and is the only thing like it around, then you have scarcity working in your favor.  Scarcity is one of the reasons why San Francisco real estate has remained relatively stable while the rest of the country is battling huge decreases in value.  We have a lot of inventory that was built in the early 1900′s.  Many of those properties have character that just can’t be duplicated.  We can’t turn back the hands of time and build more 1900′s properties.  What is there is there.  That is scarcity.  Also, San Francisco is surrounded by water on 3 sides.  We have limited land to build on and that makes the existing housing stock have an element of scarcity that many sprawling cities just can’t compete with.  The best way to protect yourself with regard to scarcity is to look for properties in neighborhoods that have relatively static inventory levels.  If you buy a home in an area that is going to undergo a huge influx of inventory, be prepared to hold your property for the very long haul (10+ years to be safe).  Markets that saw big increases in inventory levels which screwed existing owners include Vegas, Phoenix, Miami and Tampa.  Don’t make that mistake.  Always think about the supply of homes out there that you are about to invest in.  If you want to buy a home where there are 500 others just like it, reconsider your decision.

3.  Desirability – This is the demand side of the supply/demand relationship.  When you are going to invest in real estate, it’s best to consider other people’s perspective of your home in addition to your own.  Maybe you like houses that look like UFO’s, but how does the market in general receive a home like this?  Mmmm, not too favorably.  So while you may have a killer location and scarcity (the only UFO home around), your new home also needs to pass the test of market desirability.  Otherwise you run the risk of having an investment that will never sell, essentially making it worthless apart from the intrinsic land value.  It’s good to be unique, but not so good to be eccentric.

Now that you’re thinking like a savvy buyer, here’s a quiz question for you:

While it could be argued that these new towers are doing great things for the area, it will take time for the inventory to absorb, temporarily making your condo less marketable.  Furthermore, who is going to buy your place when they can get a brand new one next door for the same price?  This is a tough lesson in scarcity.