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October 10, 2016

First-Time and Luxury Home Buyers Embrace “Permanent” TICs

Once seen as a stepping stone to condo ownership, tenancy-in-common (TIC) interests have become widely acceptable to San Francisco home buyers as “permanent” TICs. But it’s not just the first-time home buyers who are getting into the TIC game. Luxury buyers are also jumping in.

The fact that condo conversion probably won’t be a future option for TIC owners in buildings with three or more units doesn’t seem to be slowing TIC sales.

The median citywide year-to-date price for a TIC interest is $970,000, with buyers paying all cash in a quarter of those sales. Most of these TICs were situated in buildings with three or more units.

The 33-unit Park Lane in Nob Hill, a renovated apartment building transformed into 33 TIC interests, is responsible for doing its share to jack up price averages. Five of its TICs sold in the $2,350,000-$5,150,000 range. Indeed, luxury buyers do seem to also be embracing TICs; 14% of this year’s sales closed for above $1,500,000.

TICs saw their fair share of overbidding in the third quarter, with 60 percent of all units selling for more than the list price. Three TICs even managed to sell for more than 20% over asking, activity that seems to be happening in popular neighborhoods like the Mission, Pacific Heights, Inner Sunset, Mission Dolores and the Haight.

The TIC market is continuing its roll into the fourth quarter, with 33 TICs in contract and 64 active listings.

This current market activity is surprising in light of far-ranging condo conversion limitations. Buyers would typically purchase a TIC in a three- to six-unit building with the goal of eventually converting the building to individual condos. (Two-unit buildings that are 100% owner occupied have a much easier path to condo conversion.) Though owners agreed to share title with their neighbors—and for quite some time, a mortgage—it was understood that the owners would enter the city’s condo lottery and pursue condo conversion. TICs were (and still are) less expensive than condos, and buyers were willing to temporarily assume the risks involved with TICs in order to achieve condo ownership.

But the city adopted legislation in 2013 that threw a wrench into future condo conversion: TICs formed after April 15, 2013 now face an uncertain future. The condo lottery is currently suspended through 2024. Even then, it will resume for only two- to four-unit buildings.

That means most TIC owners can expect to share title with their neighbors throughout the life of their ownership. They can also expect an inherently narrower resale market, as buyers have to qualify for “fractional,” adjustable-rate TIC financing and there are only a handful of lenders currently offering these types of loans.

So what’s keeping the TIC market alive? The buyers getting into TICs appear to be very well-qualified financially, which minimizes some of the risk of missed mortgage or property tax payments. And TICs continue to outdo condos when it comes to location and space.

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