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.