Whenever a gaggle of new units hits the Noe Valley market offering 2BRs in the $400,000-$500,000 range, I start receiving inquiring emails from various prospective home buyers. I explain to everyone that the units are tenancy-in-common (TIC) interests, and then am usually asked to explain how TICs are different from condos. From there, I’m either scheduling a showing or being told that TICs are not an option.
So I thought I’d cut to the chase and write a public service blog post that will help any buyers out there who are curious about the TICs at 226 27th Street in Noe Valley. I viewed four of the units this week on broker tour, and have also been watching the former apartment building being renovated over the past several months.
226 27th Street is a ten-unit TIC building originally constructed in 1963. There are one-, two-, and three-bedrooms available, and all have covered independent or tandem parking spaces. Prices range from the high $300,000s for the 1BRs, to the high $400,000s for 2BRs and into the $600,000s for the 3BRs. Monthly HOAs are in the $385-$578 range. There are in-unit washer/dryers and a small yard for a common area.
Here are shots of a typical kitchen and bedroom in the building:
Nothing fancy, but decent space. The living/dining areas are fairly small, as are some of the bedrooms. The proposition here is reasonable space in a convenient location, half a block from the J Church and about a ten-minute walk to the BART 24th & Mission station. There are also many restaurants and shops nearby. (I live around the block, so I can personally attest to that fact.)
Obviously, the prices are much lower than the typical condo prices in the neighborhood. So why not run out and purchase one of these units? Here are the key things you need to consider (applicable to 3+ unit TIC buildings):
A TIC is different from a condo. Multiple individuals share ownership of a property in a TIC. Each individual has the right to reside in a particular unit, but does not own the unit itself. Rather, each person owns a percentage of the building. With a condo, you own your unit and a percentage of the common area.
The TIC holy grail has traditionally been condo conversion. San Francisco regulates how many TICs can convert to condo status. There is such a backlog in the system at this point, that it’s important to note that anyone purchasing a three- to six-unit TIC building now will probably never be able to condo convert. You can’t legally convert more than six units into condos.
You need “fractional financing”—or cash—in order to purchase a TIC. TICs traditionally had group loans, where all owners shared one mortgage. However, fractional financing has taken the place of group loans over the past several years. These types of loans are different from those you would obtain for a condo or house. Only two or three lenders offer fractional financing. So if you’ve been preapproved for a condo or house loan, you will need to get preapproved separately for fractional financing.
There are still risks to owning a TIC, despite not sharing a loan. The bank can’t foreclose on the whole building if a co-owner defaults on his or her mortgage. (This is the case for a TIC group loan, by the way.) But there are still certain risks to be aware of. For example, property taxes are a shared effort, and everyone is on the hook if one co-owner suddenly can’t pay his or her portion of the property taxes. Additionally, a contractor who didn’t get paid for one of your co-owners’ kitchen remodel can slap a mechanics lien on the property, for which all owners are then responsible. But the main legal risk, according to a prominent attorney in the field, is that if there’s a dispute where a court will be called upon to interpret and implement the TIC agreement, it will have less guidance than a court interpreting a condo’s HOA documents, as there’s more law on the subject.
What are the basics on this fractional financing? There are no fixed-rate, 30-year loans—only one-, three- and five-year adjustable rate loans, with a minimum of 20% down payment. You also need proof of six months’ of mortgage payments in reserve in a bank account and high credit scores. Interest rates may be a bit higher than that of a more traditional condo loan, though the fractional loan rates have come down a lot. (They’re currently below 5% on the 5-year adjustable rate mortgages.)
Resale value will not be as strong as that of a condo or house. The main reason behind this fact is that you will be reselling a TIC interest, which has a smaller buyer pool. Buyers will need to qualify for the fractional financing, and will also need to be comfortable with the risks involved with TIC ownership.
So why even consider a TIC? Despite the risks, they offer more space and a better location than a condo at the same price point. If you think you may be interested in pursuing such a purchase, contact me and we can talk.