Condo Conversion Can’t Come Soon Enough

The annual condo conversion lottery took place last week, with more than 2,000 property owners hoping that they’d win the right to convert their tenancy-in-common (TIC) interests to condos. However, under existing regulations, only 200 units were selected for conversion—leaving most owners out in the cold.

A recent story in The Bay Citizen notes the currently diminished TIC sales and loan markets. Sales are down, and not many lenders are participating in the more popular “fractional” loans that grant TIC owners individual mortgages (as opposed to the more traditional group loans, wherein all owners share the same mortgage). Indeed, TIC sales have decreased gradually since 2008. At that time, 436 TIC interests sold for an average of $628,295. A total of 407 TICs sold in 2009, at an average of $602,325.

And in 2010? Only 273 TICs changed hands, at an average of $579,048. The softened condo market has become more attractive to buyers who at one time could only afford TICs. More importantly, qualifying for a fractional TIC loan is difficult, as they carry down payment and cash reserve requirements. They also have substantially higher interest rates than regular loans. Additionally, many buyers also aren’t into adjustable-rate mortgages these days, and the few lenders who offer fractionals don’t provide 30-year fixed products.

There are 125 TICs on the market right now vs 582 condos and 462 single-family homes. So the TIC market is substantially smaller. But I think the larger issue lies in the fact that there are many, many owners (more than 2,000, anyone?) who would otherwise like to sell their TIC interests—but can’t.

I’m talking about those owners with units in 3-6 unit buildings who are still on group loans. These individuals never dreamed that almost five or ten years after purchasing their portion of the property, they’d still be sharing a mortgage with other people (especially given the turn in the economy over the past two years).

Frighteningly, many owners are now unable to sell their TICs because doing so will retrigger a refinance for the group—and the group can’t qualify due to diminished values and stricter loan requirements. Perhaps these owners went into a purchase with only 10% down, and now do not have enough equity to refinance for either a group or fractional loan.

One couple I met in 2009 had purchased their TIC interest in Corona Heights in a four-unit building several years prior. We discussed the possibility of selling their TIC and buying a larger home. Unfortunately, the group couldn’t qualify for a refinance, so everyone was essentially trapped in their TICs. The rare good news, however, came last week when the group “won” the lottery after entering it for seven consecutive years. 

The couple to whom I spoke can now put plans in motion for acquiring a larger home that can accommodate them and the two children they’ve had in the interim. But unfortunately for many other TIC owners in San Francisco, having the ability to sell will probably not be a reality until they can get through the city’s conversion system.

One of my real estate predictions for 2011 is that our new, more moderate Board of Supervisors may finally make some headway with all the groups that oppose lifting the 200-unit annual cap on conversions. We’ll see if that comes to fruition. Ironically, the objections to easier condo conversion from tenants’ groups and others who are concerned with preserving rental stock are not having much effect on the numerous, newly renovated TICs that are coming on the market and selling fairly easily with fractional financing.

I’m all for preserving rental stock; I’m a landlord myself. But when I see tenants in San Francisco paying upwards of $2,500/mo for a two-bedroom apartment in a central neighborhood, I start wondering if it might make more sense for them to purchase a home. TICs, as you can see by the average sale price, are not exactly in the luxury price range. Most are below $500,000–which essentially is San Francisco’s middle class.

It’d be nice to clear out the conversion backlog and free up some of these units so more buyers in this price range would have a place in which to live and invest.

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