Ready for the adventure of buying San Francisco real estate? The city’s incredible job market, high-paying tech jobs, and very tight housing supply have made it the most expensive place to buy a home in the country. While you are undoubtedly already prepared for high prices, make sure you’re also ready for the competition. You’ll be up against all-cash buyers, homes that sell for way over list price, and possibly unfamiliar ownership options like co-ops and tenancy in common (TIC) properties. The COVID-19 pandemic also affected the Bay Area housing market in unusual ways – yet another factor that makes buying a home somewhat challenging.
Because buying a house in San Francisco is different from anywhere else, you want to be prepared. Here’s what you need to know including a step-by-step guide and tips to prepare you for the unique real estate market.
San Francisco Price-to-Rent Ratio | Does it Make Sense to Buy a House in the Bay Area?
The first step to preparing yourself for the San Francisco housing market is understanding the real cost of renting vs buying. While there are many benefits of owning your own home that have little to do with short- or long-term finances, it’s still good to know: Is it cheaper to buy or rent in San Francisco?
One way to answer this question is by looking at the price to rent ratio in San Francisco. This ratio compares the median home value to the median annual rent. The lower the ratio, the more favorable it is to buy a house over renting.
A ratio of 1-15 indicates it’s more affordable to buy, a ratio of 16-20 means it’s usually better to rent, and a ratio of 21 or higher indicates it’s much more favorable to rent.
The national price-to-rent ratio is 18.27. The San Francisco price-to-rent ratio is 51.79 – the highest in the country.
With an average mortgage payment of $5,200 and average rent of $3,200, renters in the Bay Area pay around $2,000 less than homeowners.
Just remember that doesn’t tell the whole story. When buying a house in the Bay Area, you can enjoy predictable housing payments that won’t be affected by rising interest rates and rent prices. While most rental units in SF are covered by rent control which limits rent increases by a certain amount each year, rents still go up year after year. Tenants only enjoy rent control if they stay in their apartment long-term. In 2019, the allowable increase was 2.6% while the allowable increase from 2022 to 2023 is 2.3%.
Buying means being housing secure without the risk of losing housing (or being forced to pay market rent) due to a bad landlord.
How to Buy a House in San Francisco
The process of buying a house in San Francisco can be long, stressful, and different than buying property in most cities. Here’s everything you need to do, step by step.
Step #1. Determine How Much You Can Afford & Set a Budget
The critical first step to buy a home in San Francisco is determining how much house you can afford. There are a few ways to do this.
A general guideline you can use to budget for buying a home is the 28/36 rule that’s used in the mortgage qualification process.
- Housing costs (including insurance, taxes, interest, and principal) should not exceed 28% of your gross income.
- Total debt payments (including housing payment, credit cards, car loans, etc) should not exceed 36% of your gross income.
This is a good rule of thumb to use, but make sure you factor in the hidden costs of owning a home. Buying a house in San Francisco often means paying HOA fees, condo fees, or TIC fees. The monthly HOA or condo fees can be anywhere from $200 to $2,000+ per month with an average of around $400-500. Property taxes and insurance can easily add another $1,000 per month – and that doesn’t include maintenance, repairs, and upgrades.
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How Much Does it Cost to Buy a House in San Francisco?
Home prices vary significantly by neighborhood, of course, but it’s helpful to understand the average home price in San Francisco as you prepare your budget.
The San Francisco median home price was $1.85 million in August 2022. Overall, the median sales price for the Bay Area was $1.265 million – up 18% year-over-year. In fall 2020, the median price in the Bay Area was $1.1 which was still up 17% from 2019!
Thinking of buying a condo in San Francisco? The median price peaked at $1.185 million in March 2020 and dropped below one million during the COVID-19 pandemic but climbed back to $1.1 million within three months.
Keep in mind median home prices aren’t the best measure to use to determine how much you’ll need to pay. The median price is just the point where half of all homes sold for more and half sold for less.
What is the salary needed for buying a house in San Francisco? According to a recent report, you need an annual income of at least $350,000 to buy a median-priced single-family home in the Bay Area – and that’s with a 20% down payment. Only about 14% of San Francisco residents have the qualifying income to buy a house in the city.
Step #2. Choose a Loan Program & Get Pre-Approved for a Mortgage
Before you start house hunting, it’s crucial that you take the time to get pre-approved for a mortgage first. This step is important anywhere, but it’s vital when you buy a home in San Francisco where sellers routinely receive all-cash offers and expect a fast closing.
A normal pre-approval may work, but it’s a good idea to get a pre-approval with full underwriting. This is a step beyond pre-approval and it means that all the underwriting for your loan is done except the underwriting on the property. After your submission with documents and checking your credit score, you will receive a letter of commitment that makes your offer much stronger because you can close in as little as 7 days.
Take the time to choose a lender with a loan option that fits your needs. You will likely require a jumbo loan, but you may need a lender accustomed to your specific circumstances. For instance, if your compensation package includes restricted stock units, look for a lender with experience underwriting mortgages involving RSUs. Depending on the type of ownership you are looking for, you may need a specialty mortgage product like a TIC mortgage or a co-op loan.
Tenancy-in-Common (TIC) vs Co-op vs Condo: What’s the Difference?
Before you get started with financing and your home search, make sure you understand ownership options. The type of ownership can affect the home price, financing, and your rights.
Unless you are buying a single-family home, you will most likely be dealing with one of three types of ownership.
This is the most common option. You will have title to your unit and the right to use common areas. You will be bound by the condo association’s rules and regulations and pay an HOA fee. As long as the building meets underwriting standards, you can finance a condo with a traditional mortgage.
You will own a percentage of a multi-unit building. You will have a monthly fee and the right to use common areas, similar to a condo building, with rules you are bound to under the TIC agreement. You can’t use a traditional mortgage as major banks will not make loans on TICs. You will need to look for financing through a smaller, regional bank. You can expect a higher interest rate and a higher down payment requirement.
This type of ownership has some risks. While each TIC owner has their own home loan, the entire building is responsible for insurance, taxes, and other expenses and units are not technically owned by individuals. The biggest risk involves property tax payments and possible default by another co-owner.
A co-op building is owned by a private company. Buying into the co-op involves buying shares in the building’s corporation. There is usually a large monthly fee for the right to live in the building. You will also have additional requirements including an interview and approval by the board of directors (other owners). During the interview, you will need to provide your financial information.
Financing to buy into a co-op usually requires working with smaller banks with less attractive rates and terms. A co-op is more expensive than a TIC, but they are usually better maintained and there may be less risk as owners are usually required to have substantial liquid assets to be approved.
Step #3. Choose a Buyer’s Agent
With financing crossed off your list, you’re ready for the next step: hiring a buyer’s agent. It’s always worthwhile to hire a professional real estate agent to represent you: their commission is paid by the seller and their job is to protect your interests. Your agent helps in many ways:
- Guides you through the San Francisco home buying process
- Helps you find a neighborhood and home based on your criteria
- Offers honest advice based on years of professional experience and expertise
- Helps you craft the strongest offer with recommendations on terms and contingencies and comparative market analysis
- Negotiates on your behalf
This guide is helpful with tips for choosing a buyer’s agent to represent you.
Step #4. Go House Hunting in San Francisco
Now you’re ready for the most exciting part: house hunting! Given the competitive nature of the San Francisco housing market and limited inventory, make sure you go into house hunting prepared.
If you are a first time home buyer in San Francisco, make sure you have realistic expectations. Focus on the features that are absolute musts and deal-breakers. Your real estate agent can help you explore neighborhoods that are the best fit for your budget, lifestyle, and requirements.
When you attend open houses, use it as an opportunity to scope out your competition including the number of potential buyers attending and whether they seem to be looking for a home or investment property. It’s also a good time to get disclosure packets from the listing agent that warn about known preexisting conditions like dry rot and foundation issues.
Where is the best place to buy a house in San Francisco? The best neighborhood will depend on your budget and what you’re looking for. As a general rule, you may want to avoid the sought-after and well-known neighborhoods if your budget isn’t essentially limitless. Work with your agent to prepare a list of neighborhoods and be realistic – you might not get your first, second, or third choice. Don’t be afraid to explore unfamiliar neighborhoods!
It helps to think about not only your current lifestyle but also the future when you buy a house in San Francisco. A trendy neighborhood like South of Market is great when you’re single and young, but you may hate it when you’re ready for a family. Because SF is actually a much smaller city than many realize, don’t be turned off by the idea of buying a home in the San Francisco suburbs!
Once you find a home you love, be prepared to move fast.
Step #5. Submit an Offer on a Home
Have you found a home that fits the bill? When you’re ready to make an offer, be aware that things work a bit differently in SF than you may be used to.
San Francisco Listing Prices & Offer Dates
Some sellers accept offers “as they come.” This is the way it works in most places: buyers simply submit an offer and wait for it to be accepted, rejected, or for a counteroffer to be sent. These sellers usually use “transparent pricing,” a pricing strategy that involves listing their home for around the price they expect to get.
However, you’ll often see homes with an offer date, usually around two weeks after the home is listed. On the offer date, purchase offers are submitted and typically reviewed with a response same-day. Interested in a home with an offer date scheduled? You’ll definitely need to put in your best offer because you’ll only get one chance.
That’s assuming there is no pre-emptive offer.
A pre-emptive offer happens when a prospective buyer submits an offer ahead of the offer date. This is usually only done in a very competitive market and it’s not common. Pre-emptive offers have short deadlines, forcing the seller to choose between accepting that offer or waiting to see what they will get on the offer date.
A very common phenomenon you’ll see with San Francisco housing prices is homes intentionally underpriced. A home may be listed for far below its expected value to spark a bidding war and get as many offers as possible. When buying a house in San Francisco, it’s not uncommon to see the home you have your eye on sell for double the list price. During the first quarter of 2022, nearly 62% of Bay Area homes sold over list price.
Contingencies in Your Offer
What’s accepted as normal in most markets, such as a 60-day closing or an inspection contingency, can make it hard to even get your offer taken seriously in SF. Likewise, what buyers consider deal-breakers elsewhere, such as major foundation damage, termites, dry rot, and outdated electrical, may not even raise eyebrows in the Bay Area.
It’s very common for home buyers in San Francisco to waive all contingencies that allow them to back out of the purchase without losing their deposit. That means making your offer contingent on a satisfactory inspection, an appraisal at or above the sales price, and/or financing can be tricky unless you’re willing and able to offer more money.
Bay Area home buyers often expect a fixer-upper or come prepared with a budget for renovations and repairs. Be prepared for foundation cracks from earthquakes and tremors, outdated 50 amp electrical, failing galvanized steel plumbing, dry rot, and other problems that still have buyers lining up.
If you are going to have contingencies, keep them as short as possible such as 72 hours for inspections and less than 10 days for financing. Be prepared to close as quickly as possible to improve your chances of getting your offer accepted. A 7-day close is ideal, but aim for 14-21 days or less.
Step #6. Close on Your New House
It may take you a few tries, but once you finally have an offer accepted, you will be officially under contract!
If your contract has a contingency period, this is when you schedule a home inspection and appraisal. In other regions, issues found during the inspection can reopen negotiations, but this type of contingency is uncommon in the Bay Area.
Other important things happen during escrow so your transaction can close. This includes finalizing financing, a title search, and more. When the escrow requirements are all met, you will sign all the paperwork that transfers loan proceeds, your earnest money, and ownership. During this closing meeting, you will also get the keys to your home!