State of the TIC Market: October 2012

A total of 144 TICs sold from June 1 – October 16th, 2012, with an average of 65 days on market and a median sales price of $602,000.

By comparison, more than 1100 condos sold in the same time period. Buyers obviously prefer condos, with the appeal being individual unit ownership and the availability of historically low, fixed-rate loans.

The most popular—and least risky types—of TIC sales are still occurring in two-unit buildings, as these properties have a much more direct path to condo conversion. After that, buyers appear to be open to TICs in three- to six-unit buildings offering fractional financing. (You can’t condo convert more than six units.)

Condo conversion wait time still remains an issue, with owners of three- to six-unit buildings hanging out for many years in anticipation of lottery wins. Owners of new TIC buildings are resigning themselves to the fact that they will probably never have the opportunity to condo convert in the course of their ownership, which affects TIC resale value along with a variety of other factors.

First and foremost is location; buyers are willing to purchase a TIC if it gives them entry into a central, desirable neighborhood that wouldn’t otherwise be affordable. Neighborhoods that saw the most TIC sales were Noe Valley, Twin Peaks, Eureka Valley, North Panhandle, and The Mission. Most of these TICs were in the one- to two-bedroom category.

But equally as important is the type of loan being offered. The traditional group loan for 3+ buildings has been largely replaced by fractional financing. Buyers are avoiding purchasing TICs in 3+-unit buildings offered through group loans, with very few exceptions.

For example, of the 55 TICs in contract in 3+-unit buildings, only a handful reportedly had group loans. And of the 144 sold, only about four changed hands with a group loan in place. A look at current listings in this category reveals that they are not receiving offers, even if the loan has a very low interest rate. And of the 40 TICs that were withdrawn or have expired since June, almost half had group loans.

Cash buyers are jumping into TIC purchases, but these sales are happening in buildings where fractional financing is being offered. And cash buyers are typically snapping up units in neighborhoods like Russian Hill or Noe Valley, where it’s a challenge to find, say, a two-bedroom view condo for the same price.

I’m not seeing investors flocking to purchase TICs; most tenant-occupied TICs have a very challenging time selling.

Financing options for TIC buyers continue to be led by fractional loans from Sterling Bank or NCB. In the rare group loan scenario for 3+-unit buildings, sellers are arranging for the existing TIC owners to qualify for fractional loans so they can refinance concurrently with the new TIC buyer into individual loans.

If existing TIC partners aren’t willing or able to go the fractional route, TIC sellers can consider providing seller financing. Or, they can hope that a buyer will come along who will be comfortable dealing with a group loan and who will have sufficient cash to cover the homeowner’s portion of the loan. (This option is only available if the group loan is assumable. If not, the group will have to refinance into a new group loan, which could be challenging.) Resale success in these non-fractional scenarios is unlikely; most such TICs ended up being withdrawn this year.

If you’re planning to buy or sell a TIC, it’s critical to do your due diligence up front so you’re aware of all the details. Please contact me at ebermingham@zephyrsf.com/415.823.4656 if you have any questions. I have an excellent team of resources in place that includes lenders, attorneys, and title companies.

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