All Deeds Must Record At Same Time for Condo Conversion

As the current crop of TICs converts to condos, I’m seeing many owners listing their TIC interests prior to the actual condo conversion of the entire building. This means the buyer is expected to step in at the tail end of the condo conversion and work with all existing owners as they refinance and everyone completes the conversion process.

In other words, whether there’s a group loan or fractional financing in place, all new condo deeds have to record simultaneously. If there is one owner in the group who doesn’t have a loan, that owner needs to wait until everyone’s refinancing/new purchases are completed prior to obtaining a condo deed. [Read more…]

What You Need to Know About TIC Ownership

Given the competitive real estate market in San Francisco, many buyers are considering tenancy-in-common (TIC) units. These differ from condos in a few fundamental ways. And the Board of Supervisors recently approved TIC legislation that could affect the ability of many owners to ultimately convert their TIC units to condos. (For more details on the legislation, click here.)

Quite honestly, if you’re purchasing a unit in a 3+ unit building right now, it’s likely you will not be able to condo convert due to conversion restrictions. So here are the key things you need to consider about TIC ownership:

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. (And if the recent condo conversion legislation prevails, the condo lottery will be halted for the next ten years, and buildings with more than four units won’t be able to convert once the lottery ban is lifted.)

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.

You’ve Won the Condo Lottery–Now What?

The annual condo lottery took place in San Francisco earlier this year, resulting in suddenly lucky TIC owners winning the right to start the path to condo conversion. I thought it would be a good time to take a look at the TIC and condo markets and give everyone a heads up on what to expect–whether you’ve just won, or may be on track to win next year.

Things are a bit more complicated in the current economy, and that means buying and selling TICs or condos can present their own sets of challenges. If you’ve just won the lottery, you’re probably a couple months in to the conversion process. And all your TIC partners are excited about what they’ll be doing after you’ve converted the building. Many TIC owners have held their properties for far longer than they’d ever dreamed, so moving the family out of that one bedroom now finally feels possible. Others love where they live and will just appreciate owning their own condo.

It’s important not to overlook every detail as you take a step closer each month to conversion. For example, if more than half the units in your building are rented vs owner occupied, you’re going to have to work through that detail so it doesn’t become a roadblock during a refinance or sale. And everyone’s ability to refinance will depend on how much equity exists.

Both the TIC and condo markets are doing reasonably well, particularly in high-demand neighborhoods that provide easy access to public transportation, restaurants, retail areas and freeways. A total of 496 condos and 63 TICs sold in the first quarter of this year. Compare that with 403 condos/63 TICs sold in the same quarter of 2010, and we’re looking at some pretty respectable numbers. So I believe we’re heading into an increasingly better market where these types of properties are concerned.

The best tip I can give condo converters is to do your homework up front. You’ll need your resources up front (attorneys, contractors, surveyors, etc) and now would also be a good time to chat with your favorite Realtor and loan rep so you have a heads up on what to expect at the time of conversion. Get a sense for your building’s value, as well as what your own unit would be worth as a condo. And recognize that all TIC owners have to work together regardless of what happens. I often consult with building owners about these situations, and I have a strong team in place. So feel free to give me a shout anytime, and we can find a convenient time to talk details.

Sorting Out Post-Condo Lottery Confusion

Whenever San Francisco holds its annual condo lottery in February, the winning homeowners put their game plans together. Some immediately embark upon the condo conversion process, while others quickly decide to sell.

My colleagues and I have noticed a few listings coming on the market that are being classified as condos—but which are really TICs in buildings that recently won the lottery. It’s important to note that until a building is fully converted and all units are officially condos, you can’t call a TIC a condo. Even if everything is on track for condo conversion.

This is a good distinction to make if you’re a buyer who’s not interested in completing someone else’s condo conversion. And sellers, it’s important to recognize that condo conversion does incur quite a few fees, so expect buyers to factor those costs into the price they pay for your TIC.

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.'”

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.