State of the TIC Market: May 2010

I’m often asked how different segments of the San Francisco market are doing, and inquiries about the TIC market are at the top of the list. We’re almost halfway through 2010 (I know), so I thought a market update on our tenancy-in-common activity was in order.

The bottom line: The TIC market is definitely hurting a bit, but it’s not in dire straits by any means. There are, however, two key factors that have contributed to the weakness in the TIC segment. The first is that the condo market has declined, so buyers who may have once only been able to afford a TIC are now looking at the possibility of a condo purchase. And second, if there are less qualified buyers in general these days, there are even less qualified buyers for TICs. The most common TIC loan type—the fractional, or individual loan—carries a high interest rate, has a 25%+ down payment requirement, significant cash reserve requirements, and is only available in adjustable-rate form.

There are 203 TIC interests on the market to date, and they’ve been sitting on the market for an average of 72 days, at an average list price of $646,467. And there are 82 TICs in contract (two are above $1M). A total of 117 TICs have sold since the beginning of the year at an average of $594,637. (So clearly there’s room to come down in price for the current average list price.)

A bulk of the TICs purchased since January sold for under their asking prices—something to consider when you’re making an offer on one. The most prominent example of this pattern was over at 2461 Post (at Baker), a 5BR/3BA TIC unit with two levels listed in May 2009 at $950,000. It sold this past March for for $777,000.

If you’re considering a TIC purchase because you think you’ll get more space or a better neighborhood for your money, you could be right. But consider all the angles, and know that if you’re buying a TIC interest with a fractional loan, it’s likely you’ll be selling a TIC interest with a fractional loan. That means your resale buyer pool will be limited to those who can meet those strict requirements. And the jury is out regarding which lenders will continue granting fractional loans by the time you’re ready to sell. Make sure you work with a very experienced, knowledgeable real estate agent, mortgage broker/lender, and title company. And have an attorney review key documents. It might cost you a few hundred dollars for a legal review, but you can’t imagine the headaches those few hundred dollars may save you in the long run.

Fractional TIC Loans Thrive in San Francisco Market

I was surprised to hear recently that lender NCB recently suspended its fractional loan program. Which made me think: Are fractional loans here to stay? Are buyers risking the ultimate integrity of their multi-unit TIC ownership by assuming the individual loans will be available when they are ready to sell?

Fractional loans are apparently performing quite well, thank you, according to Sterling Bank’s Henry Jeanes. He says that Sterling is committed to offering its fractional loan product, a decision fueled by the consistent popularity of TIC interests among San Francisco buyers (particularly of the first-time variety).

Jeanes is presently seeing about five TIC loans closing per month at Sterling, and 15-20 loans closing monthly among all the lenders. Many clients he’s worked with who can afford less than, say, $800,000, are still turning to TICs, as TICs still offer more bang for the buck (especially if you’re looking for a quintessential Victorian/Edwardian flat, for example).

Jeanes expects more fractional TIC lenders to enter the market in the future; the borrowers for these loans are attractive in that they meet stringent financial requirements. (Full doc, and a minimum of 700 for a credit score, for starters.)

Lenders are also fairly careful about how many of these fractional loans they authorize. So I’m thinking that if the loans continue to perform well, there may be less of a risk such loans will ultimately disappear. Indeed, 249 TIC interests have sold so far in 2009, at an average price of $616,573.

But before you run out and start going to open houses for 3-6 unit TIC interests, do your homework. Get a sense for the details, and know what you’re getting into. TICs are not for everyone.

TICs Loans Available, But Affordable?

I’m being contacted regularly by buyers in the $400,000-$500,000 price range, who are exploring real estate purchase possibilities. Many such individuals have been renting for a while, and are starting to feel that owning their first home is within reach.

Though condo prices are declining, the bulk of the units in this range currently on the market are tenancy-in-common (TIC) units in 3+ unit buildings. (This is an ownership scenario wherein you own an interest in a building, not the unit itself.

TIC units in this price range will typically involve “fractional” financing—all owners obtain individual loans. (This is in contrast to the traditional TIC loan of the past, wherein all owners were on one group loan.)

The TIC interests themselves are priced within first-time home buyer range, but how many buyers can actually qualify for these fractional loans?

A quick check with Henry Jeanes over at Sterling Bank reveals that TIC buyers for fractional loans will have to meet the following requirements:
– Minimum of 20% down (rates are at 7.25% with 20% down; they get lower as your down payment increases)
– Credit score of 700 (for W2 employees)
– Proof of at least six months of reserves on hand, post closing.

Of course, sellers are working within the confines of these requirements, and it is possible for buyers to negotiate rate buydowns and other financial incentives in order to complete a sale. And some sellers are able to offer slightly lower interest rates on renovated buildings in which a lender like Sterling is already providing the underlying commercial financing. (This is the case at 450 Vallejo at Kearny, a five-unit TIC offering.)

But it’s good to for first-time home buyers to know the initial cost of ownership for these types of purchases.

TICs: Trending Toward Tumult

Popular among first-time home buyers in San Francisco, tenancy-in-common (TIC) ownership traditionally lets two or more individuals share building ownership through a group loan. You don’t technically own your unit in a TIC arrangement–just a percentage of the building. The goal is to ultimately condo convert the building, so everyone can officially own their unit. The conversion process is complicated, lengthy and fairly expensive, so the cons sometimes outweigh the pros in TIC situations.

There’s a fair amount of risk in TIC ownership–especially when dealing with 3-6 units–mostly related to you being tied to other owners with respect to paying mortgage, property taxes & other expenses. And if someone wants to sell his or her TIC interest, the entire group loan has to be refinanced with the introduction of a new TIC partner.

Therein lies the rub in the new lending environment: Everyone has to qualify for the new loan. In the past, this hasn’t been too much of a problem, as loans were easy to obtain for the most part. Now, however, I’m hearing of TIC partners not being able to qualify for a refinanced loan due to tighter lending restrictions. This is a real problem for the TIC interest sellers, as they will have to work with their group to facilitate a new loan. In other words, those partners who can’t qualify for a new loan can’t simply be forced to sell. The seller is on the hook.

I’m shying away from recommending TIC arrangements in 3-6 unit buildings, at least until the loan market shifts toward the positive. It’s increasingly challenging to convert larger buildings to condominium status, so you’re looking at years of TIC ownership before (or if) that goal is ever reached. And though there are widely used “fractional” loans available–wherein TIC partners can obtain individual loans–I have reservations on those in terms of future availability