State of the TIC Market: August 2011

The tenancy-in-common (TIC) market in San Francisco has seen its share of ups and downs. I’m happy to say that this market is alive and well—and actually thriving—despite economic uncertainty.

That’s because the rise of fractional loans has enabled buyers to purchase a building together without having to be on the same loan. The latter has always been the inherent huge risk in a TIC situation. The goal of purchasing an interest in a 3+ unit building was always that of converting the building to condos down the line. However, given the constraints of doing so, buyers have given up on that goal. They’ve been happy purchasing a TIC that will provide more space than a condo can offer in a central neighborhood in the city. And they can live without the threat of losing their building in the event one of their TIC partners on the group loan experiences financial hardship.

A total of 198 TIC interests sold from January-July 2011, at an average of $696,622. The least expensive unit was a tenant-occupied, 1BR/1BA garden TIC in a three-unit building in Lone Mountain that changed hands for all cash at $115,000. At the other end of the spectrum was the 4BR/3.5BA two-level townhouse in a five-unit building with massive views in Pacific Heights that sold for $3,185,303. So clearly, even buyers on the high end are realizing that purchasing a TIC may get them the space and location they need.

There are currently 125 available TICs on the market, and about 59 in contract. Most involve fractional loans, and the market for TICs with group loans is not a very popular one. Again, economic uncertainties are giving buyers pause when it comes to stepping into a group loan. As a result, existing TIC groups are attempting to refinance into fractional loans if they can afford to do so.

The most popular neighborhoods for TICs year to date have been Nob, Russian and Telegraph Hills; Noe and Eureka Valleys; NoPa; Pacific Heights and the Mission. These neighborhoods have many multi-unit buildings and continue to be the most likely bets for TIC inventory. They’re also some of the most desirable areas in San Francisco, which is a plus for buyers who want proximity to public transportation, shops, cafes, and parks.

The fractional loan market is pretty much run by Sterling Bank and NCB. So you don’t have your pick of lenders. The good news, however, is that fractional loan interest rates are much lower than they were a year ago (6-7%). For example, a five-year ARM with 25% down will likely let you attain a 5.25% interest rate. Yes, fractional loans require at least 20-30% down, substantial cash reserves, good credit scores and are only available in three-, five- and seven-year ARM flavors.

TICs have generally been anywhere from 10-20% less expensive than condos, but that can vary depending on the number of units in the building. For example, a two-unit property really does stand a chance at condo converting fairly quickly in two to three years. But 3+ unit buildings require a very different, very time-consuming path to condo conversion. As a result, you’ll see more of a discount. (And note that Sterling only lends on buildings with a max of 15 units.)

TICs aren’t for everyone, and I typically sit down with my clients and discuss the ins and outs before they even bother with fractional loan preapproval. I’ll also be giving a TIC seminar in September in conjunction with Sterling Bank, so stay tuned for that info. And don’t hesitate to contact me if you’d like to attend. I can follow up with the date and time.

State of the TIC Market: Q1 2010

It’s always interesting to check in on the tenancy-in-common (TIC) market in San Francisco. And it just so happens that this segment of the housing market continues to be very popular.

A total of 67 TIC interests sold in the January-March timeframe, at an average of $576,140. All but a handful were located within 3+ unit buildings. The least expensive was a standalone garden cottage on 7th Avenue in the Richmond, which sold for $250,000, and the most expensive was a 2BR/2BA TIC in a six-unit building in Cow Hollow. Hayes Valley, the Lake district, and Russian Hill led the way in sales volume.

The average price in Q1 2009 for the 49 TIC interests sold was $710,582. Prices have definitely come down since then.

There are currently 73 TICs in contract—a healthy number that bodes well for the next quarter’s sales. But 189 TIC interests are on the market right now. But with 702 condos also competing for buyers’ attention, it seems to me that the TIC market will slow down a bit in the Spring. I believe the Spring will bring out many new buyers—I’m getting referrals on a daily basis for new buyers aiming to make a purchase in the next three months—and most would rather take advantage of the lower condo prices than get involved in more complex ownership scenarios.

I think the TIC market has decreased in risk with the advent of fractional financing. However, the open question is how long fractional loans will be available, which may or may not bode well for those who own properties through this method of financing. Resale prospects are limited for TICs with fractional financing, as the pool of buyers that can qualify and afford fractional loan program is small.

If you find yourself considering a TIC purchase, please do yourself a favor and have an attorney review the TIC agreement and other critical documents before you remove your document review contingency. Work with your agent to investigate all the details so you know what to expect going in to the purchase. The bottom line is that TICs can work well for buyers who are looking to get into the more popular neighborhoods where condo prices have escalated. But it’s still important to do your due diligence at all turns.

State of the TIC Market in San Francisco

Despite their risky and complex nature, tenancy-in-common (TIC) interest sales made a strong showing in 2009.

A total of 403 TIC interests sold last year, for an average of $603,780. Units spent an average of 92 days on market (DOM), and that lengthy timeframe doesn’t seem to be shortening. Of the 403 TICs sold, 162 sold in the fourth quarter of 2009, at an average of $586,755. September and October saw 73 TICs selling, and surprisingly, 89 interests sold in the last two months of 2009. Buyers apparently weren’t slowed down by the holidays in this property category, either.

Though two- and three-unit buildings were popular—with 26 and 25 interests selling, respectively—the big winner was the six-unit building category. A total of 42 TICs sold in six-unit properties. Ultimately, all but 51 TICs were sold in 4-21-unit properties in the fourth quarter of 2009, meaning an awful lot of buyers qualified for the restrictive and often costly fractional/individual financing used on such properties.

As we head into 2010, I’m seeing 66 TIC interests in contract at an average list price of $568,561, and they’ve spent an average of 140 days on market.

There are 97 TICs on the market now, ranging in price from $330,000 for a 2BR/1BA interest that just came back on the market in a seven-unit building in Nob Hill, to a “house-like, eco-friendly” 2BR/2BA listed at $1,295,000 in a three-unit building that features Alcatraz and Bay views.

On the downside, it’s taking an average of 20+ years to condo convert three- to six-unit buildings purchased now, according to TIC attorney specialist Andy Sirkin, who recently gave in an-person update at our sales meeting. And for existing TIC owners who have been in the lottery multiple times, it’s looking like seven-year lottery candidates will be the big winners this year. So if you’ve been in the lottery for less than seven years, it’s unlikely you’ll “win” the right to condo convert this year (or, actually, next year).

Sellers, note that if all your ducks are in a row and your property presentation and financing details are solid, there is a good chance your TIC interest will sell—but it may take time to land the right, qualified buyer. It’s critical to have your financing, legal, title company, and Realtor team in place and on the same page before you come anywhere near putting your property on the market.

And buyers, consider TICs if you understand all the details involved (and of course, can qualify/afford the financing offered). There’s a lot of homework to do up front, and I pretty much give my buyers in this property category an unofficial seminar—and insist that they speak with a real estate attorney—before they (and I) are convinced TICs are the right option for them.

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.