Millennials' New Weapon in Bidding Wars: Parent's Home Equity

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Call it the mortgage merry-go-round: Parents refinance their home to fund the full cost of their son or daughter’s desired home. This allows the child to compete as a desirable all-cash buyer in an area where bidding wars are common. Then, when the purchase closes, the child refinances the new home and pays the parents back.

Sellers often prefer cash because transactions can close quickly without making a deal contingent on financing. This is particularly important in bidding wars: If the purchase price is above the list price and appraised value, it may be tricky to get a loan, said Kas Divband, a Washington, D.C., agent with Redfin. Mr. Divband said he has worked on six deals where the buyer was relying on a parent’s mortgage to make an all-cash offer.

The strategy is also evidence of how difficult it is for millennials getting into the housing market for starter homes, where competition is the fiercest. Even those with high-paying jobs and hefty down payments are losing out, particularly in cities with strong job markets for young people, such as Washington, Boston and Seattle, said Nela Richardson, Redfin’s chief economist.

Educating him on how to talk to his parents was probably the most difficult part Mr. Coffman said, since it wasn’t every day their son asked for $2 million. The athlete worked with a loan officer who vetted him before the purchase and also handled his parent’s line of credit.

Redfin agent Cody Coffman recently worked with a 20-something Olympic athlete who paid $2.8 million for his first home, a newly built five-bedroom house in Los Angeles’s Venice neighborhood that was listed for $2.758 million. His parents took out a home-equity line of credit, or Heloc, to give him the full purchase price, allowing him to beat out four other offers.

“Educating him on how to talk to his parents was probably the most difficult part,” Mr. Coffman said, since it wasn’t every day their son asked for $2 million. The athlete worked with a loan officer who vetted him before the purchase and also handled his parent’s line of credit.

This move will not work for everyone. Parents must have enough equity in their homes to make a refinance worth it, and the same goes for the child’s new home. Both parties must be willing to take on the added hassle and cost of two loans. And mixing family and money is often fraught.

Here are a few more things to keep in mind:

• Loan options. Parents have several options for using the equity in their homes, including a cash-out refinance, which allows borrowers to refinance an existing mortgage plus an additional amount and take the difference out in cash; a home-equity loan, which is a loan against the value of a home, including a second mortgage; or a Heloc, which works like a credit card, allowing homeowners to qualify ahead of time and withdraw funds when the child is ready to close.

• Finance fail. The biggest risk is that children won’t qualify for a loan—or as big a loan as expected—especially if they pay above the asking price or the market cools. To help avoid this outcome, let the lender know your plans ahead of time, Mr. Divband said. It may be more convenient to use one loan officer for both transactions.

Note that some lenders want buyers to live in a home for three to six months before refinancing. An alternative is a delayed-financing mortgage, which allows a buyer to purchase the home in cash and refinance the day after closing for up to 80% of the value of the home, said Peter Lucia, a production manager at Brecksville, Ohio-based CrossCountry Mortgage.

• Think like a lender. Parents should do the same kind of due diligence as a lender, including vetting children’s finances. Tim Manni, a mortgage expert with NerdWallet, a San Francisco-based personal-finance company, recommends working with a lawyer to draw up a family loan agreement setting out repayment terms and other stipulations. Buyers may also want to get a home inspection.

• Consider the costs. A purchase mortgage or a refinance would typically cost about 2% of the loan value, Mr. Lucia said. Most closing costs would apply to two loans instead of one. Luckily, prepayment penalties are rare on primary-residence loans, though they might apply on investment properties, Mr. Lucia said.

• Tax tips. Givers must report gifts of more than $14,000 per person per year under federal tax law, though an individual must pay taxes only after exceeding the $5.49 million gift-tax exemption, which is a lifetime limit. Interest on the first $1 million of a purchase mortgage is tax deductible, versus only the first $100,000 on a home-equity loan or line of credit. Both parties should consult a tax professional.

Corrections & Amplifications
Givers must report gifts of more than $14,000 per person per year under federal tax law, but an individual must pay taxes only after exceeding the $5.49 million gift-tax exemption, which is a lifetime limit. An earlier version of this article failed to make it clear that an individual owes this federal gift tax only if the lifetime limit is exceeded. (Oct. 13, 2017)

By Leigh Kamping-Carder

Appeared in the WSJ October 13, 2017, print edition as 'Tag-Team Mortgage Financing.'

URBAN OASIS: DOLORES HEIGHTS

Anchored by the exceptional 2015 renovation of Dolores Park and neighboring San Francisco's oldest intact structure, Mission Dolores Chapel, this protected enclave offers residents a genteel lifestyle perched above the current gentrification pulse of the Inner Mission.

The context of Dolores Heights, like the context of the city as a whole, is a tapestry that only grows more intriguing as new elements are added to the weave.  The steep, 400-foot hill itself is more of a definition rather than a destination, framing Noe Valley to the south, Dolores Park to the east and the Castro to the west. From afar it's a rustle of walls and rooflines, green trees and straight asphalt. Many streets within Dolores Heights are dead-end cul-de-sacs connected by steep staircases with beautiful views. Ed Hardy, a resident and renowned antique dealer, happily notes that Dolores Heights remains "relatively warm, sunny and fog-free by virtue of Twin Peaks blocking the strong winds and fog found almost year-round in San Francisco."

Award Winning  Dolores Heights Residence

Award Winning Dolores Heights Residence

"Today this affluent and tranquil neighborhood is mixture of Victorians, apartment buildings, and detached houses gently rolling down the hill to the recently renovated 13.7 acre Dolores Park that serves as the hub of neighborhood activity and leisure."

The Sky house  Liberty Street

The Sky house Liberty Street

Dolores Heights  Special Use District

Dolores Heights Special Use District

Today this affluent and tranquil neighborhood is a mixture of Victorians, apartment buildings, and detached houses gently rolling down the hill to the recently renovated 13.7 acre Dolores Park that serves as the hub of neighborhood activity and leisure.  But that was not always the case as "residents of the hill fought bitterly over location of the streets the city was preparing to cut into the sides of the hill," wrote The Chronicle in its 1958 piece describing the early 20th century in Dolores Heights. "Everyone wanted the paved street to be at the level of his house - not that of the house across the way, which might be 20 or 30 feet higher or lower." The result was that some streets are split by retaining walls between lanes. Others filled in on one side but not the other.  While families in the area staked their claim with affection and care, mid-century builders slapped in product with no thought for their surroundings.

Now, new houses must align with the guidelines of the Dolores Heights Special Use District established on January 10, 1980 by the San Francisco Planning Commission "to encourage development in context and scale with established character and landscape.”  Resolution #8472 further stated, “Dolores Heights is listed in the Urban Design Element of the Comprehensive Plan as one of five examples of outstanding and unique areas which contribute to San Francisco’s visual form and character and in which neighborhood associations should be encouraged to participate in the cooperative effort to maintain the established character.” 

While this twelve block gem sits atop its protected perch, the neighboring Inner Mission district beats to the drum of the current tech boom as the latest invasion of cash flushed millionaires snap up real estate that is home to the city’s Mexican and Central American immigrants.  Mark Zuckerberg’s purchase on 21st Street at Fair Oaks in 2012 signaled the beginning of this district's gentrification trend as developers have rushed in pushing property values upward to meet the demand of “time constrained” techies who have an insatiable appetite for move-in condition homes.

CaenLucier tip: While there is still much value growth potential for the Inner Mission neighborhood, we recommend that savvy, long term investors dive in while the property values have yet to skyrocket the way they have in Noe Valley over the past decade.

BLUE CHIP HEIGHTS

2865 Vallejo Street

2865 Vallejo Street

1997 - Sold for $1,825,000

2003 - Sold for $2,750,000

2014 - Sold for $6,995,000

2016 - Sold for $7,450,000

"These numbers show one thing for certain. Time is your friend when owning a home in San Francisco and blue chip property protects value in a downturn and takes the most advantage of a market cycle taking off again."

2002  Pacific  Ave #4

2002 Pacific Ave #4

1998 - Sold for $1,000,000

2009 - Sold for $2,400,000

2011 - Sold for $2,720,000

2014 - Sold for $3,900,000

2016 - Sold for $4,200,000

Pacific Heights known the world over as San Francisco’s premier neighborhood is home to hundreds of architecturally significant residences, quaint shopping districts, and iconic views of the Golden Gate Bridge and the San Francisco bay. Since 1996, the median price of a Pacific Heights single family home has increased 367% from $1,200,000 to $5,600,000 with the condominium market showing a 286% gain from $375,000 to $1,450,000 in 2015. There have been downturns during this time, most notably the precipitous value drop in 2009-2011; but a long term real estate hold in this blue chip neighborhood has always been a wise investment. Even so, buyers often hedge and play the market timing game.

“In 30 years in this business, I do not know anybody who has done it (market timing) successfully and consistently, nor anybody who knows anybody who has done it successfully and consistently.” So were the words of John Bogle, founder of the Vanguard Group of Investment Companies. Over the past twenty years, we have noticed a strange phenomenon with intelligent and successful individuals in the San Francisco’s high end real estate market. For an inexplicable reason, very few tend to buy real estate when it is on sale. This is when the truly savvy take advantage of the window to buy at a discount and ride the market when it turns. Time after time in a hot market we hear, “I am going to wait until the market cools off to buy a home.” And yes they do wait…and wait…and wait! Most would agree that timing the bottom is luck. Which is why we see most of these “smart” buyers wait until the market turns and fervently chase each other back to the multiple offer market place. Makes sense right? Uh?

The reality of purchasing a home often relies on factors outside of market economics. A job transfer, an equity event, a marriage, more kids on the way, divorce, downsizing are some of the life events that call for a new home. Our advice to our San Francisco clients today who are looking at a mature market cycle is to protect themselves by specifically buying blue chip real estate. Buy in Pacific Heights! Practice time honored fundamentals. Location, location, location. Buy the least expensive house on the best block. Get into the 2000+ sqft condominium market. Of the 2,694 condominiums in Pacific Heights only 427 are 2000 sqft or more. This is a relatively safe sector since buyers are increasingly getting priced out of this neighborhood's single family home market and alternatively choosing to stay by purchasing a large condo.  Playing defense in a hot market is an astute way to build confidence and be prepared to strike when the right property comes to market. In the last twenty years the Pacific Heights market has topped twice. First in 2001 concurrent with the dot-com bust with a median price of $3,684,000 then in 2007 at a median price of $4,037,000. The market did take approximately five years each time to climb back to these peak prices. The current market the Pacific Heights median price is 38% above the 2007 top at $5,600,000.  How about that!

What to make of these market cycles when coupled with the lives we lead from our homes? These numbers show one thing for certain. Time is your friend when owning a home in San Francisco and blue chip property protects value in a downturn and takes the most advantage of a market cycle taking off again.

CaenLucier Tip: We encourage you to take our thoughts into consideration and listen to our seasoned professional advice when purchasing in any part of the market cycle. A bet on Pacific Heights real estate is one that we will continue to encourage for a solid part of your financial portfolio and a place to enjoy your life!

CIVIC-CENTRIC

This exciting hub of culture and diverse city living has seen meteoric increases in property values as new mixed-use developments signal a shift towards a sophisticated, yet hip, gentrification.

SFJAZZ Center  201 Franklin Street

SFJAZZ Center 201 Franklin Street

When San Francisco commissioned Arthur Brown Jr. to design City Hall in 1913, he went into his bag of tricks from his studies at the Ecole des Beaux-Arts and modeled this civic landmark after Paris' Les Invalides to create an architectural axis to anchor the city after the 1906 quake.  CaenLucier narrows focus this month on Hayes Valley and the fortuitous flurry around the Civic Center. When Ron Conway rattled the cages of Ed Lee's offices, Doug Shorenstein's bet on mid-Market paid off with Twitter deciding against abandoning the city. With Benchmark Capital already across the street in the Warfield Building, it was game on for the tech sector effect on residential values. In an odd way, the 1989 Loma Prieta earthquake followed by Art Agnos' tenacity to tear down the freeways reinvigorated two iconic San Francisco districts... The Embarcadero and Hayes Valley.

Hayes Valley has seen a renaissance like no other neighborhood in town. While the blue collar to white-ish collar transformation of Noe Valley, Potrero Hill, and Bernal Heights has been noteworthy over the past five years, Hayes Valley is truly where the action happens. Traci des Jardin and Bill Russell-Shapiro put their money down on Jardinerre and Absinthe, respectively, in the late '90's. In 2012, Randall Kline gifted our city, and particularly Hayes Valley, the Mark Cavagnero designed SF Jazz Center, adding to the internationally lauded opera, symphonic, and ballet companies that culturally anchor the Civic Center. The neighborhood now bumps to a new beat, a beat that embodies hip refinement and satisfies the intellectual curiosity of San Franciscans. Like many districts in town, Hayes Valley has been a hot bed for new development. With over 300 new units in the past four years and another 500 debuting and under development, it's go time for investors and astute residents to invest in this re-imagined neighborhood.

555 Fulton

555 Fulton

388 Fulton

388 Fulton

450 Hayes

450 Hayes

300 Ivy

300 Ivy

CaenLucier investment tip: The numbers don't lie. In the last three years of this robust market, the median price of neighborhood condominiums is up 38% ($830,000 to $1,150,000) and the single family home sector has climbed 54% ($1,550,000 to $2,400,000) CaenLucier is confident that this district has a continued sustainable and attractive growth curve.  Please consult us for leading edge opportunities in this neighborhood. We look forward to sharing our expertise in your pursuit of adding real estate to your portfolio.

Call Stacey at 415.450.8465 or Joe at 415.260.9791 for more information on this cool part of the city!

TECH-TONIC SHIFT

St. Regis   Built 2005

St. Regis  Built 2005

706 Mission   Estimated Early 2019 Completion

706 Mission  Estimated Early 2019 Completion

181 Fremont   Estimated 2018 Completion

181 Fremont  Estimated 2018 Completion

When the Four Seasons Residences first came available for sale in 2001 as a repurposed office building, few of the city’s high-end residential agents gave the project much notice. Shockingly after all, it was on Market Street! The St. Regis refined the model a few years later cozying up to SFMOMA at 181 Minna Street followed by Millennium Partners doubling down their bet on the neighborhood and building the first luxury “resident-only” Millennium Tower at 301 Mission Street in 2009. Downtown certainly had come a long way since 1984 when pioneer Ned Spieker developed the city’s first mixed use office/residential building (32 units) at 611 Washington Street across from the Transamerica Building and home to Tommy Toy’s fashionable Chinese restaurant.

"We highly recommend taking a serious look at this constrained market niche for an excellent long-term investment"

Fast forward to 2016…two more ultra-luxury residential projects will break ground this year signaling the maturation of the Yerba Buena+SOMA neighborhood and firmly establishing this new hub of sophisticated living in San Francisco. Between these two buildings, 181 Fremont Street, Jay Paul Company’s mixed-use office/residential tower, and the Millennium Partners 706 Mission Street residential tower, 258 more units will be added to the existing stock of 660 residences at the Four Seasons, St. Regis and Millennium. The 2018 completion date of Salesforce Tower and the Transbay Terminal coupled with the continued march of Class A office development will forever shift the nexus of city living, culture, fine dining and commerce from the traditional slopes of Pacific Heights and the venerable corridors of the Financial District.

CaenLucier Market Tip: Only 17% of the aforementioned full service concierge condominiums measure over 2500 sqft. We highly recommend taking a serious look at this constrained market niche for an excellent long-term investment and the exciting prospect of living in San Francisco’s singularly true cosmopolitan neighborhood.

We look forward to hearing from you for a private consultation.