John M. Lee: Why Do People Sell?

Regular readers of this column know I tend to be fairly quantitative when doing an analysis and I tend to present lots of facts and data to back up what I believe.

This month, I was thinking about the reasons people sell real estate in San Francisco. After examining my past few years of sales, I came up with the following analysis.

One of the main reasons people sell real estate is because they are getting up in age. Thirty three percent of my sales involve either an elderly person(s) moving into a retirement home or closer to families, or their family members, who are selling the property after the parents have passed away. The breakdown is actually 23 percent elderly selling the property themselves and 10 percent with the children selling after the parent(s) are deceased.

The elderly sell for several reasons. The tax law is extremely favorable because the first $500,000 of the sales price is tax exempt for a married couple who have lived at the property for two out of the last five years and $250,000 for a single person. Usually, they can pocket the profit tax- free, move out of the area and buy a home with cash. They can then live out the rest of their lives with the balance of the money.

Another advantage is if they purchase another home at an equal or lower price than what they sold their home for, and that county honors Proposition 90 property assessment basis transfers, they can maintain the low property tax basis they currently have, resulting in substantial savings.

What I have also found is that after the parents pass away, the children usually do not want to maintain and manage the property; especially if there are several siblings involved. They usually decide to sell the property, divide the profits and invest individually. The advantage with this for the seller is no capital gains payments and for the taxpayer the property gets taxed at a higher rate.

Also, many times, if the parents have not done any estate planning, the children have to sell the property to pay off probate taxes.

The next reason why people sell is for investment purposes. I found that 28 percent of my sales involve sellers who are trading up. They have examined their real estate portfolio and decided they can do better by selling what they have and purchasing something else.

Trading up or down depends on your investment objectives. Some people trade down to get a better cash flow. If you sell a smaller building and purchase a larger one, the cash flow increases. Some people are trading residential properties for commercial real estate because they are tired of managing residential properties, which are more labor intensive.

Others sell because they are moving and want their investment properties to be physically closer to where they are. Still, some sell because they have owned their property for a long time, have fully depreciated the value of the property and have to purchase something else to take advantage of a non-cash expense.

Twenty four percent of sellers have outgrown their properties. Most first-time homebuyers purchase all they can afford when they buy their first home. With the addition of a spouse or children, they need a larger home and have to sell their existing one. Quite a number of these sellers have also decided to move out of the City and purchase in the suburbs for perceived better schools and environment for their kids.

With the massive layoffs we have been experiencing in the Bay Area, I had assumed the number of people relocating would be much higher, but the relocation sellers only came in at 14 percent. These are people who have received job transfers or voluntarily decided to leave the Bay Area for other jobs in other parts of the country.

Real estate is an exciting investment in San Francisco. With the interest rates at 40-year lows, the market has remained very active the first two months of the year because we are still lacking good inventory. No matter which category you are in as a seller, March usually marks our spring selling season and it is a great and fun time to be on the market.

John M. Lee was recently honored for being Pacific Union's Agent of the Year at the California Street office. If you have questions about real estate, call him at (415) 447-6231 or e-mail johnlee@isellsf.com.