State of the TIC Market: Q1 2010

It’s always interesting to check in on the tenancy-in-common (TIC) market in San Francisco. And it just so happens that this segment of the housing market continues to be very popular.

A total of 67 TIC interests sold in the January-March timeframe, at an average of $576,140. All but a handful were located within 3+ unit buildings. The least expensive was a standalone garden cottage on 7th Avenue in the Richmond, which sold for $250,000, and the most expensive was a 2BR/2BA TIC in a six-unit building in Cow Hollow. Hayes Valley, the Lake district, and Russian Hill led the way in sales volume.

The average price in Q1 2009 for the 49 TIC interests sold was $710,582. Prices have definitely come down since then.

There are currently 73 TICs in contract—a healthy number that bodes well for the next quarter’s sales. But 189 TIC interests are on the market right now. But with 702 condos also competing for buyers’ attention, it seems to me that the TIC market will slow down a bit in the Spring. I believe the Spring will bring out many new buyers—I’m getting referrals on a daily basis for new buyers aiming to make a purchase in the next three months—and most would rather take advantage of the lower condo prices than get involved in more complex ownership scenarios.

I think the TIC market has decreased in risk with the advent of fractional financing. However, the open question is how long fractional loans will be available, which may or may not bode well for those who own properties through this method of financing. Resale prospects are limited for TICs with fractional financing, as the pool of buyers that can qualify and afford fractional loan program is small.

If you find yourself considering a TIC purchase, please do yourself a favor and have an attorney review the TIC agreement and other critical documents before you remove your document review contingency. Work with your agent to investigate all the details so you know what to expect going in to the purchase. The bottom line is that TICs can work well for buyers who are looking to get into the more popular neighborhoods where condo prices have escalated. But it’s still important to do your due diligence at all turns.

Join Next Week's Condo Conversion Rally at City Hall

My friends at Plan C are organizing a rally on the steps of City Hall next week, in support of expediting condo conversion. Here’s the lowdown, straight from Plan C:

“Please join Plan C at 8:15AM on Wednesday, Feb. 3, on the City Hall steps for a rally to support condo conversion reform! As many of you know, the condo lottery drawing happens at 9AM on February 3, and we’ll be done in time for you to attend the lottery itself.

You may have read within the last few months in the Chronicle and in the Examiner that the mayor’s office is considering again the possibility of a condo-lottery bypass initiative for qualifying TIC owners.

As you are already aware, expediting the conversion of owner occupied TICs to condominiums would help bring ownership and mortgage relief to middle income San Franciscans and has the potential to bring significant revenue to the city during this time of budget and financial distress. The revenue collected could have a meaningful impact to the city’s bottom line and has the potential to save crucial city jobs and services from further cuts.

The expediting of TICs to condominiums would be facilitated by the payment of a specified fee to the City that is higher and in addition to the usual mapping and permit fees collected from winners of the current condo conversion lottery. The fee would likely only be available to owner occupied TICs that are lottery eligible.

The proposed fee for the bypass of the lottery hasn’t been set, and we would like to again call on you for your input. The fee has to be low enough for TIC owners to be willing to pay it (and to be fair) – but also high enough to be meaningful to the City’s budget deficit. Initial discussions concerning the development of this initiative have considered fees in the $20,000-40,000 range per unit or 5-10% of a unit’s value.

As usual, we encourage you to email the supervisors (particularly your supervisor) on the need for condo reform by going to our Plan C Web site and clicking on “‘Contact City Hall.’”

State of the TIC Market in San Francisco

Despite their risky and complex nature, tenancy-in-common (TIC) interest sales made a strong showing in 2009.

A total of 403 TIC interests sold last year, for an average of $603,780. Units spent an average of 92 days on market (DOM), and that lengthy timeframe doesn’t seem to be shortening. Of the 403 TICs sold, 162 sold in the fourth quarter of 2009, at an average of $586,755. September and October saw 73 TICs selling, and surprisingly, 89 interests sold in the last two months of 2009. Buyers apparently weren’t slowed down by the holidays in this property category, either.

Though two- and three-unit buildings were popular—with 26 and 25 interests selling, respectively—the big winner was the six-unit building category. A total of 42 TICs sold in six-unit properties. Ultimately, all but 51 TICs were sold in 4-21-unit properties in the fourth quarter of 2009, meaning an awful lot of buyers qualified for the restrictive and often costly fractional/individual financing used on such properties.

As we head into 2010, I’m seeing 66 TIC interests in contract at an average list price of $568,561, and they’ve spent an average of 140 days on market.

There are 97 TICs on the market now, ranging in price from $330,000 for a 2BR/1BA interest that just came back on the market in a seven-unit building in Nob Hill, to a “house-like, eco-friendly” 2BR/2BA listed at $1,295,000 in a three-unit building that features Alcatraz and Bay views.

On the downside, it’s taking an average of 20+ years to condo convert three- to six-unit buildings purchased now, according to TIC attorney specialist Andy Sirkin, who recently gave in an-person update at our sales meeting. And for existing TIC owners who have been in the lottery multiple times, it’s looking like seven-year lottery candidates will be the big winners this year. So if you’ve been in the lottery for less than seven years, it’s unlikely you’ll “win” the right to condo convert this year (or, actually, next year).

Sellers, note that if all your ducks are in a row and your property presentation and financing details are solid, there is a good chance your TIC interest will sell—but it may take time to land the right, qualified buyer. It’s critical to have your financing, legal, title company, and Realtor team in place and on the same page before you come anywhere near putting your property on the market.

And buyers, consider TICs if you understand all the details involved (and of course, can qualify/afford the financing offered). There’s a lot of homework to do up front, and I pretty much give my buyers in this property category an unofficial seminar—and insist that they speak with a real estate attorney—before they (and I) are convinced TICs are the right option for them.

More Condo Lottery Craziness

Tickets for San Francisco’s annual condo lottery go on sale Monday. And there’s something you should know, as per my friends at Plan C: The City may be denying additional lottery tickets to buildings that qualify with the minimum qualifications. (Generally, this means one owner-occupied unit for each of the last three years in 2-4 unit buildings, and three owner-occupied units for each of the last three years in 5-6 unit buildings.)

Historically, lottery priority and the issuance of additional tickets have required that one of the qualifying owner-occupants have been owners (but not necessarily occupants) during each of the previous lottery losses.

The change for the last couple of years and for 2010 is that the Department of Public Works (DPW) appears to have a new interpretation of written law. To establish priority credit (additional tickets), DPW is requiring that each of the qualifying owner-occupants be the same original owner occupants that were unsuccessful in past lotteries.

Simply put, your building might qualify for the 2010 lottery and receive one ticket, but unlike in years past, may not be entitled to additional tickets based upon unsuccessful previous lottery participation.

Plan C is reaching out to see if there are other TIC groups where this situation is likely to have an impact. If you’re facing the same issue, or would face this issue if one of your fellow TIC co-owners were to sell their interest, let Plan C know and they’ll put you in contact with other similarly situated people. Send them an e-mail at info@plancsf.org.

Fractional TIC Loans Thrive in San Francisco Market

I was surprised to hear recently that lender NCB recently suspended its fractional loan program. Which made me think: Are fractional loans here to stay? Are buyers risking the ultimate integrity of their multi-unit TIC ownership by assuming the individual loans will be available when they are ready to sell?

Fractional loans are apparently performing quite well, thank you, according to Sterling Bank’s Henry Jeanes. He says that Sterling is committed to offering its fractional loan product, a decision fueled by the consistent popularity of TIC interests among San Francisco buyers (particularly of the first-time variety).

Jeanes is presently seeing about five TIC loans closing per month at Sterling, and 15-20 loans closing monthly among all the lenders. Many clients he’s worked with who can afford less than, say, $800,000, are still turning to TICs, as TICs still offer more bang for the buck (especially if you’re looking for a quintessential Victorian/Edwardian flat, for example).

Jeanes expects more fractional TIC lenders to enter the market in the future; the borrowers for these loans are attractive in that they meet stringent financial requirements. (Full doc, and a minimum of 700 for a credit score, for starters.)

Lenders are also fairly careful about how many of these fractional loans they authorize. So I’m thinking that if the loans continue to perform well, there may be less of a risk such loans will ultimately disappear. Indeed, 249 TIC interests have sold so far in 2009, at an average price of $616,573.

But before you run out and start going to open houses for 3-6 unit TIC interests, do your homework. Get a sense for the details, and know what you’re getting into. TICs are not for everyone.

TICs Avoid Foreclosure Wave

Last week, our reader The Real Estate Whisperer asked about the health of the TIC loan industry.

TICs apparently have an excellent track record when it comes to foreclosures, according to Henry Jeanes at Sterling Bank—one of the primary TIC lenders. Jeanes confirmed that apart from one TIC owner in Oakland who was heading for foreclosure (which was ultimately avoided), Jeanes isn’t aware of any lenders foreclosing on a TIC interest.

Good news, particularly with the mix of group and fractional loans. Jeanes attributes the loan success to the strict TIC loan requirements.

Capp Compound Seeks Crafty Buyer

428cappFor those yearning for an Arts & Crafts-style compound in the heart of the Mission, 428 Capp will certainly do the trick.

This two-story home with a rear carriage house sits on a 6,125 square foot lot right at Capp and 19th Street. It was last sold for $1,085,000 in October 2006, but is now listed at $1,295,000.

All the architectural trappings are there—stained glass, massive brick fireplace, and lots of woodwork. The property is being sold with plans and permits for a major remodel to both structures, and a variance to turn the carriage house into a second living space.

There’s also four-car tandem parking. I’m thinking this could be a great opportunity for some sweat equity, my friends. The front house is perfectly livable, but the idea of a compound in the sun belt sounds good to me.

TIC Lender Targets Noe Valley

Word on the street is that Marin-based Circle Bank is planning to open a branch on Noe Valley’s 24th Street. The bank reportedly believes the demographics in Noe and its immediately surrounding neighborhoods are very similar to that of Marin (no shock there).

With 229 TIC interests having sold since January for an average price of $622,606, it doesn’t appear the TIC market is drying up. Circle’s fractional loan product is the go-to loan for TIC purchases in 3+ unit buildings. (Fractional loans allow TIC owners to be responsible for their own, individual loan vs. all owners sharing a loan.)

I’m betting that fellow TIC and fractional loan specialist Sterling Bank, located at Church and 24th Street, can’t be too happy about its future neighbor. What do you think, Noe neighbors?

Condos vs. TICs: The Condo Wins

There was a time when condos were worth substantially more than TICs. Well, the gap has narrowed as the San Francisco market has softened.

A look at two-bedroom units in the city with parking reveals that condo prices have declined to the extent that they may be the more obvious choice. For example, in the under-$1M category for two-bedroom TICs with parking, the average selling price from April 1st was $621,125, with an average of 1,052 square feet.

On the condo front, the averaged sale price was $671,360, with an average of 1169 square feet.

Though TIC interests will usually provide more space for the money, I think there’s something to be said for owning your property independently. In the current economy, being on title with other owners is more of a risk than it was when TICs first became more popular many years ago.

TICs Loans Available, But Affordable?

I’m being contacted regularly by buyers in the $400,000-$500,000 price range, who are exploring real estate purchase possibilities. Many such individuals have been renting for a while, and are starting to feel that owning their first home is within reach.

Though condo prices are declining, the bulk of the units in this range currently on the market are tenancy-in-common (TIC) units in 3+ unit buildings. (This is an ownership scenario wherein you own an interest in a building, not the unit itself.

TIC units in this price range will typically involve “fractional” financing—all owners obtain individual loans. (This is in contrast to the traditional TIC loan of the past, wherein all owners were on one group loan.)

The TIC interests themselves are priced within first-time home buyer range, but how many buyers can actually qualify for these fractional loans?

A quick check with Henry Jeanes over at Sterling Bank reveals that TIC buyers for fractional loans will have to meet the following requirements:
- Minimum of 20% down (rates are at 7.25% with 20% down; they get lower as your down payment increases)
- Credit score of 700 (for W2 employees)
- Proof of at least six months of reserves on hand, post closing.

Of course, sellers are working within the confines of these requirements, and it is possible for buyers to negotiate rate buydowns and other financial incentives in order to complete a sale. And some sellers are able to offer slightly lower interest rates on renovated buildings in which a lender like Sterling is already providing the underlying commercial financing. (This is the case at 450 Vallejo at Kearny, a five-unit TIC offering.)

But it’s good to for first-time home buyers to know the initial cost of ownership for these types of purchases.

TICs vs. Condos on 3rd Ave

617_3rdMy broker tour brought me to Third Avenue between Balboa and Cabrillo this week, to check out two TICs and one condo all listed in a similar price range. 673 3rd (above) is a 2+BR/2BA Edwardian TIC, listed at $895,000. This top-floor unit has been recently renovated, and is about 1725 square feet. Though it has one-car parking and storage, there’s no outdoor space. That’s because the other, first-floor unit—soon to be on the market after its own renovations are complete—spans two levels, and has a deeded garden. (The master suite is on the garage level, so a shared yard would obliterate any sense of privacy.) Stay tuned for this lower unit: It’s about 2,000+ square feet, has two-car parking, and is expected to be priced at about $100,000 more than the top floor.

673_3rdNext up was 673 3rd, a 3BR/2BA first-floor TIC unit priced at $819,000. This unit is also remodeled, and has a solid floorplan. The landscaped garden is shared, and the owner of the whole two-unit building will stay on in the top unit to complete a condo conversion.

692_3rd692 3rd enjoys the best curb appeal of the three. It’s a 3BR/1BA, top-floor unit with a large, deeded undeveloped attic space. This will close as a condo, and the unit’s listed at $835,000. It seems the owners of the building will stay on and live in the lower unit.

New Twist on TICs in NoPa

215cole Got a three-unit building you want to sell, but don’t want to tread the choppy waters of the multi-unit TIC ocean? Take a tip from the sellers over at 215-217 Cole in the North Panhandle: Create an “airspace” subdivision of a three-unit building. Turn the top unit into Parcel A, and designate it a planned unit development, or PUD. Turn the middle and lower flats into Parcel B, and market them as two TIC interests. Then you can end up selling a two-unit building—much more marketable than three units due to the condo conversion requirements—and a PUD, which can be sold in a very similar manner to that of a condo.

Both parcels can, according to the disclosure documentation, “share the use and enjoyment of the land and certain elements of the building.” There’s one association that is then subject to a declaration which governs the building. Everybody pays monthly association dues as specified in the disclosures.

In the case of 215-217 Cole, the top unit was sold as a PUD in December for $775,000 after being on the market for 208 days. What remain are the two units, priced at $809,000 and $805,000 and first listed in November 2008. The units were in contract recently, but the deal fell through.

A word out there to prospective buyers: Consult with an attorney before you consider an ownership arrangement such as this one. It’s worth paying for a consultation so you know what you’re getting into.

Buyers Just Not That Into Luxury TICs

church Got a luxury tenancy-in-common (TIC) building you’re ready to sell? Keep this in mind: Buyers are just not into luxury TICs these days.

TICs were traditionally a way for first-time home buyers to get into the housing market. So TICs priced well above $1M are facing particular challenges.

Case in point: 1278-1282 Church in Noe Valley. These three TIC interests hit the market in July 2008. Though the developer did a great job with the floor plans and finishes, the property has had poor sales luck. The two-level unit with the deeded yard sold for under the $1,395,000 asking price in September. But the other two units were withdrawn in December. (Both had accepted offers at one point, but the contracts fell out.)

The top unit is back on the market for $1,165,000, but the owners haven’t officially brought the middle unit on; they may rent that out if no buyers materialize. Its last official price was $1,179,000.

But in an age of loan defaults and job losses, do buyers want to be on title with other owners? Condo prices are dropping, and buyers have their pick of units in this price range (not to mention houses). Though many TICs did sell for above $1M over the past year, many more such listings have been withdrawn.

TICs: Trending Toward Tumult

Popular among first-time home buyers in San Francisco, tenancy-in-common (TIC) ownership traditionally lets two or more individuals share building ownership through a group loan. You don’t technically own your unit in a TIC arrangement–just a percentage of the building. The goal is to ultimately condo convert the building, so everyone can officially own their unit. The conversion process is complicated, lengthy and fairly expensive, so the cons sometimes outweigh the pros in TIC situations.

There’s a fair amount of risk in TIC ownership–especially when dealing with 3-6 units–mostly related to you being tied to other owners with respect to paying mortgage, property taxes & other expenses. And if someone wants to sell his or her TIC interest, the entire group loan has to be refinanced with the introduction of a new TIC partner.

Therein lies the rub in the new lending environment: Everyone has to qualify for the new loan. In the past, this hasn’t been too much of a problem, as loans were easy to obtain for the most part. Now, however, I’m hearing of TIC partners not being able to qualify for a refinanced loan due to tighter lending restrictions. This is a real problem for the TIC interest sellers, as they will have to work with their group to facilitate a new loan. In other words, those partners who can’t qualify for a new loan can’t simply be forced to sell. The seller is on the hook.

I’m shying away from recommending TIC arrangements in 3-6 unit buildings, at least until the loan market shifts toward the positive. It’s increasingly challenging to convert larger buildings to condominium status, so you’re looking at years of TIC ownership before (or if) that goal is ever reached. And though there are widely used “fractional” loans available–wherein TIC partners can obtain individual loans–I have reservations on those in terms of future availability

Condo Conversion Isn't Getting Any Quicker

No surprises here. Three- to six-unit building owners have the right to pursue condo conversion through a lengthy and time-consuming lottery system. A total of 1,844 TIC units applied for conversion this year. Unfortunately, the cap is still set at 200 conversion approvals.

Better yet, there are 2,100+ TIC units expected to apply in 2009. At this point, it’ll take an average of 24 years to condo convert for a 2010 applicant.