Many buyers who start out looking for a condo in San Francisco often end up deciding that they’ll join forces with their friends or family members to purchase a two-unit building. This can be a good decision, but it’s important to be aware of the key factors to consider when deciding whether such a group purchase is possible—or a good idea.
Here’s what you should discuss before you take the plunge into the two-unit building market:
You’ll need to have shared goals. The biggest advantage of a two-unit building is the process by which you can condo convert. (It typically takes 1.5-two years.) Make sure all the owners are on the same page about wanting to condo convert, if that’s the ultimate goal. If you’re all in it just to own a two-unit building for a few years and then re-sell the property, that’s fine, too. Just make sure everyone knows what the end game is.
All buyers should be financially compatible. It’s ideal for all buyers to be in similar financial situations. You will have many shared expenses, particularly if you plan to condo convert the building. And you’ll want to make sure you have sufficient financial resources when it comes to maintaining the building and dealing with necessary repairs. Remember: You’ll each own half of the common areas, so it’s not great if only one buyer can afford to pay his or her share of the roof replacement.
You should all share similar attitudes about maintenance and repair. For every homeowner who calls the plumber at the first sign of a leak, there’s one who lets it go until the kitchen floods. If you’re the type who sketches out a repair and maintenance plan for each year, it may not be a good idea to team up on a two-unit building with someone who ignores the rotten wooden siding and hopes it’ll go away on its own.
Your loan will be different. Your choices will be either a shared loan on the building, or two fractional loans. Both loans will carry adjustable rate mortgages, but the rates and requirements will be different. The traditional group loan requires that all buyers get preapproved together, and this factors in everyone’s qualifications and credit scores. If one buyer defaults on the mortgage, all buyers are held responsible because it’s a shared loan. Buyers using a fractional loan would be individually preapproved and would not share a loan. It’s more common for buyers who already know each other to get one loan on the building and then refinance into condo loans within two years after pursuing condo conversion. I recommend looking into the details for each loan option, and seeing which one will make sense for your situation.
Put a TIC agreement in place. Even if you’re planning to condo convert, I highly recommend having the basic TIC agreement in place for the interim. You never know what can happen prior to conversion, and having this legal document to refer to can help simplify things.
Vacant two-unit buildings aren’t a bargain. You will probably end up spending as much on a vacant, two-unit building with equal-sized units as you would were you to purchase an individual condo. Vacant two units are very close in value to condos, due to the direct path to condo conversion.