Anyone who stays current on California real estate knows that the state is facing a serious supply and demand issue. There simply aren’t enough homes on the market, and those that are available get snatched up before the ink on the “For Sale” sign dries.
While the state as a whole is facing a serious problem, it’s even worse for people who live in the Bay Area. Prices are going up on both homes for sale and rental properties, and the number of available properties is going down at a dramatic rate.
The crisis has gotten so bad that over half of Bay Area residents have considered moving because of the rising housing costs.
This has created a dilemma for homeowners and landlords alike. Take a closer look at the crisis from both standpoints to understand what you can expect if you are interested in Bay Area real estate.
The Rising Cost of Real Estate – A Homebuyer’s Dilemma
In August of 2017, the median price of a single-family home in the state of California soared to $565,330. That was an increase of 7.2 percent over the course of a year. The Bay Area is much worse, though, with the median price going to $856,200, which is a 10.2 percent increase.
While the prices might scare some buyers away, others are jumping at the chance to pick up real estate as soon as it hits the market. Homes that went up for sale in San Francisco this August spent a mere 15 days on the market. That’s 10 fewer days that homes spent on the market a year ago. To say that buyers are motivated would be the understatement of the year. They can’t wait to get their hands on real estate, so people are flying into closings as fast as they can.
Because buyers are so willing to sign on the dotted line, the prices will continue to go up. The supply cannot meet the demand, and buyers are paying for it.
Since the problem is with supply and demand, there is hope that the supply problem can be fixed, and that will drop the prices. Starter home supply, which includes new and pre-owned homes, tends to expand between the months of October and December. Historically, those months have been exceptionally good for San Jose. When looking at 2012–2017, the city averaged the highest spike in starter home availability. In fact, the city reported 42 percent more starter homes in the fourth quarter than in the second quarter over the course of that time.
San Francisco also does well when it comes to starter homes at the end of the year. Historically, it’s had 33.7 more starter homes available at the end of the year than in the second quarter.
As a whole, the Bay Area performs much better than the national average. Nationally, starter home availability only increases by 7 percent in the fourth quarter when compared to the peak second quarter.
While people can expect an insurgence of starter homes, it might not be as big as it’s been in the past. The starter home market went down in the third quarter across the Bay Area. While the supply has gone down, the prices of these homes have gone up.
The issue has been made worse by the heavy competition going after these starter homes. It’s not just new families or retired people who want to downsize. It’s also investors, and that is making prices soar.
This is best illustrated by looking at a home that recently sold in Sunnyvale, California. The four-bedroom, two-bathroom house is less than 2,000 square feet, and it could easily be considered a starter home. It was listed for $1,688,000 and ended up selling for $2,470,000.
That’s almost $800,000 over the asking price.
That raises a serious question. How can anyone afford a home in the Bay Area, starter or otherwise?
It’s possible that the market will see its normal insurgence of starter homes during the fourth quarter of this year, and that will cause the prices to drop naturally. Starter homes will become more affordable, and the market will correct itself.
However, it’s possible that won’t happen, which is leading people to look into home sharing.
Home Sharing in the Bay Area
Home sharing is no longer just for college students or young people. It’s gaining steam with people of all ages in the Bay Area.
Homeowners and renters are connecting with each other in an effort to save money. Homeowners can make their mortgage payments easier with the help of renters, while renters can find affordable housing.
You might wonder why renters have to find a way to save money in the Bay Area. That is because of the second crisis that’s going on in the Bay Area. This crisis is all about rising rent costs.
Rental Issues in the Bay Area
Rent isn’t just going up in the Bay Area, but this region is among the hardest hit. Prices are going up all over the Bay Area, and it doesn’t look like there is relief in sight.
In September, the average rent went up to $2,050 for a one-bedroom apartment in San Jose. That is 2.5 percent higher than it was a year ago.
It’s been even worse for people who rent in Oakland. Rent rose 5.4 in the past year, going all the way to $1,780 for a one-bedroom apartment.
These are just a couple of examples of what is going on in the Bay Area. Almost every city in the Bay Area has experienced some kind of increase.
One of two things will happen because of the price of rent. First, some people might leave the Bay Area all together. While rent is rising all over California, the Bay Area is experiencing a bigger crisis than most other regions. Many people will escape the Bay Area and seek refuge somewhere that charges less for rent. Some might even leave the entire state of California in an effort to save money.
Those who choose to stay will face the second issue. They will likely have a tough time making their rent payments. The cost of rent and bills will put a bigger dent in their gross income, so they will have to struggle to make their payments.
This puts landlords in a difficult position. They want to fill their rental properties, but they also want to make sure that people can afford to pay. Fortunately, there are some things that landlords can do to protect themselves during this difficult time.
Be Smart When Choosing Tenants
The tenant screening process is more involved than ever before. Now, you can choose each person wisely, ensuring that you fill your rentals with people who can and will pay.
The tenant screening process should consist of several steps. First, you need to look at the person’s income. As a general rule., it’s best to get tenants who only spend around 50 percent of their gross income on rent and bills. Due to the real estate market in the Bay Area, though, you might have to adjust that a bit. There’s a good chance you will have to rent to people who spend 60 or 70 percent of their income. That’s OK, as long as the tenant checks out everywhere else.
A tenant background check is also critical. Determine if the person has a criminal record and a history of evictions. You can also verify the social security number and address history of the tenant. Dig as deep as you can to find out everything possible about the tenant. This will give you a much better idea of who the renter is and if the person can be trusted.
Credit checks are also critical. This is where you will get a much better idea of how responsible the tenant is. If someone has a low credit score or lots of issues on the report, it’s an indication that he or she will not pay the rent on time. The person might start out paying every month, but he or she will start slipping over time. Run a tenant credit check ahead of time to make sure you only rent to creditworthy applicants.
You also want to check the person’s references. Landlords can be sloppy with this, and that’s a mistake. Take the time to call the references that are listed and ask the relevant questions. You can learn quite a bit about a person by checking the references.
Get a Large Enough Deposit
Many landlords require that people pay a deposit that it is the same amount as the rent. That’s actually a mistake. Some people will skip out on the last month’s rent since they think they’ve already paid it via the deposit. They’ll do this even if you explain that is not acceptable.
While this can happen at any time, it’s more likely to occur in this difficult rental climate. Many renters don’t have a lot of extra money, so the idea of skipping out on that last month will be even more attractive.
That’s fine if they leave the place in perfect condition, but that usually isn’t the case. Then you have to use the deposit to fix the place, so you’re out the last month’s rent.
Avoid this from happening by charging more for a deposit. If the rent is $2,000 a month, charge a deposit of $2,500 or $3,000. That will give you a cushion in case the person skips town.
Make Rent Payments Automatic
Automatic rent payments make it easier to collect rent and make it more likely that your tenant pays on time. When the payments come out automatically, your tenants will be less likely to juggle the budget and put the rent last.
An online rent collection system can use ACH debit or online bill pay to collect the rent. Have the tenant sign up for the system as soon as he or she moves into the rental. Set up a payment date, and then the tenant will know that rent isn’t just due on a certain day. It will come out of the bank account on that day. If the person doesn’t have enough money in the account, the online rent collection system will charge a fee. People will want to avoid the fee, so they will be much more likely to pay the rent on time.
This also makes it easier on landlords. Think about how much better your life will be when you don’t have to run down tenants every time rent is due.
Have Consequences in Place
No matter what you do, some people will pay late from time to time. You need to come up with consequences for late payments and follow through. You should include the consequences in your tenant lease agreement and also communicate them to your tenant.
Reporting the tenant to the credit bureaus is an excellent consequence, especially if you only rent to people with good credit. People are not going to want to ruin their credit, so they are more likely to pay on time, even when dealing with the rising prices in the Bay Area.
Advertise Vacancies Immediately
With rent prices going up, landlords have money to make. It’s essential that you keep your properties full. If a tenant leaves on his or her own or due to eviction, you need to fill the property back up immediately.
When it comes to rental vacancy advertising, less is definitely not more. You want to hit all of the major social sites, including Facebook, Twitter, and Craigslist. You also need to put your listing on the major rental sites, including Rent.com. Go all out with your vacancy listings so you can attract renters immediately. Then, you can put potential renters through the screening process and pick the one that is the best fit.
The Bay Area is in crisis, but all hope is not lost for renters, homebuyers, and tenants. Supply and demand will eventually even out, and prices will go down. In the meantime, people need to be smart when buying and selling homes, just as they need to use the right strategy when renting property. The right strategy will protect your assets and your livelihood.
About the author
Matt Angerer is the Founder and President of VerticalRent. He enjoys writing on a variety of topics that help Landlords, Property Managers, and Renters across America. He is particularly interested in helping renters understand their local marketplace, pick the best places to live, and find an awesome roommate. Since 2011, VerticalRent has grown to service over 100,000 landlords and renters across America.