Many buyers are considering tenancy-in-common (TIC) units these days, given the cost of real estate in San Francisco. TICs are typically priced lower than condos, and you can generally get into a neighborhood that you might not be able to afford were the property a condo.
But before you run out to see that two-bedroom condo in Cole Valley listed for only $699,000 that you saw on Redfin, you need to know the TIC basics.
A TIC is different from a condo. Multiple individuals share ownership. Each individual has the right to reside in a particular unit, but does not own the unit itself. And all owners share title. You essentially own a percentage of the building. With a condo, you own your unit and a percentage of the common area—and you’re the only one on title.
Condo conversion prospects are limited. San Francisco regulates how many TICs can convert to condo status. There’s currently a moratorium on condo conversion for about the next nine years due to recently passed legislation. It’s important to note that if you’re purchasing a three- to four-unit TIC building now, you’ll have to wait until the lottery ban is lifted before you can pursue condo conversion. And even then, the backlog will be so large that it will take quite some time to win the lottery. Also, it’s no longer possible to condo convert a building with more than four units. (Two-unit buildings are not required to go through the lottery and have a different path to condo conversion.)
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. 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.
Fractional financing is not the same as a conventional loan. There are no fixed-rate 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 become more competitive.
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.