We haven’t seen it, have no insight into the all important TIC details (such as eviction history and financial position of the other “tenants”), and aren’t so sure about “the heart of the city!” But as a reader notes, it’s “[n]ot real estate porn but [it’s] definitely affordable.” And yes, affordability is in the eye (and wallet) of the beholder.
∙ $318000 Fabulous, Large, Bright 1 BR TICs [craigslist]
It looks like Carol Lloyd’s article on TICs was on the money – financing for them is becoming more available either to the group or as individual TIC loans. I’ve seen quite a few TIC properties which only require 10% down and an increasing prevalence of individual TIC loans. This is a major change from just 12 months ago when the individual loans were barely available and were too expensive to be practical and 20-30% down payments were required. The two leading legal firms dealing with TICs have a ton of info on their websites: http://www.g3mh.com/ – click on “articles” and http://www.andysirkin.com/. Also G3MH has been running a hot line with contact info for lenders who are offering individual TIC loans – call after business hours to 415/673-5610 and press *302 after the prompt. Yes, the wait for the condo lottery is going to be long, but with individual loans it cuts out the major hassle of TIC ownership though your loan cost will be a bit higher. Probably will be less TICs in 3-6 unit buildings coming down the pike though as most of them were created with an Ellis Act eviction in the past (the law changed to penalize buildings with Ellis Act evictions after November 2004).
“…Probably will be less TICs in 3-6 unit buildings coming down the pike though as most of them were created with an Ellis Act eviction in the past (the law changed to penalize buildings with Ellis Act evictions after November 2004)…”
I’m not so sure. As individual TIC financing becomes more widely available and the terms more appealing, the distinction between TIC’s and condos will continue to diminish, as will the incentive to condo convert. If anything, I’d expect the more favorable financing to lead to buyers becoming more amenable to the purchase a permanent TIC without any possibility of condo conversion.
If anything, I’d expect the more favorable financing to lead to buyers becoming more amenable to the purchase a permanent TIC without any possibility of condo conversion.
It all depends on the default rates. If TIC default rates are higher, rates will go up or loans won’t be made at all and then you see a slew of “woe is me – I can’t sell my TIC” articles.
FYI: A TIC is a tenancy in common, meaning a group of people buys the building as a whole and splits occupancy privileges of individual units by agreement. The problem with them had been that banks would only make one loan on the building, so if someone wanted to sell, the building had to be refinanced. If an owner didn’t make their share of the payments, the other owners had to cough up the balance.
Theoretically, with individual loans now offerred by a limited number of banks, none of these problems remain, but it will be interesting to see how carefully people read their loan agreements. I can only imagine how the banks have protected themselves and what surprises the owners of these TICs using these loans are in for.
And based on the legal fights that are sure to occur when one of the building owners is forced to turn the their share back to the bank, it wouldn’t surprise me to see them dry up entirely in a few years or be so unreasonable that no one wants them. And then: more “woe is me” articles.
Well, maybe there will be more TICs that are never intended to convert to condos, but that’s definitely not the case now. Most TIC’s are 3-6 units which intend to convert to condos and most of these were created with an Ellis Act eviction as it is pretty rare to have a vacant building of that size. With the new legislation penalizing Ellis Act evictions along with the protected tenant issue, you’re looking at a smaller pool of buildings to convert to TICs and then condos. As for higher default rates for TICs – I actually doubt it because they generally have to put far more down than a typical condo. As for lenders pulling out of the market – it might happen, but on the other hand this is such a small niche market and they are making pretty good margins above standard home loans that I think there’s going to be enough profit for lenders to stay in it. As for the rest of the building being on the hook when an individual TIC unit goes upside down – they’ll probably lose some HOA fees when the bank short sells or REOs and re-sells the upside down unit, but the whole building is not on the hook for that unit’s liability – that’s the whole reason you are paying a premium for individual TIC loans.
“Well, maybe there will be more TICs that are never intended to convert to condos, but that’s definitely not the case now.”
Hard to say. The odds on winning the condo lottery are already pretty steep and getting steeper by the year. It may well be that most TIC buyers hope to eventually condo convert, but for most that’s likely to be many, many years down the road–assuming, of course, the Supes don’t tighten the conversion rules still further. As a practical matter, no TIC buyer can reasonably expect to condo convert anywhere in the forseeable future. That fact didn’t prevent a record number of TIC sales last year (~600, according to a recent study by Plan C). My point is that TIC’s are a market driven phenomenon that have a life of their own, independent of the possibility of future condo conversion.
I asked this once a year ago and never got a good answer so I’ll ask it again.
If one of the partners walks away what happens? In the single loan case do the other partners have to cover the loan or get foreclosed. If it’s one of these new multiple loans can one of the individual lien holders foreclose on the entire property? Just the part that the loan covers?
I’ve always thought that TICs were one of those “innovations” that would work great when times were good but would blow up in everyone’s face as soon as the downturn hit. What IS the legal situation where a TIC partner defaults?
Not that hard to say actually – look at the TIC section of the condominiums that are available throughout the city at http://sfarmls.com/ and count how many are in 3-6 unit buildings (can convert to condos) and how many are in buildings of 7 units or more (can’t convert to condos). As of now – it is mostly 3-6 unit buildings which are selling and these are eligible to convert to condos. Developers are not doing Ellis act evictions or evicting protected tenants at will anymore which either penalizes a building with a 10-year delay to enter the lottery or disallows the building from converting to condos entirely – again a sign that everyone knows there is value to convert a building to condos. The 600 TIC sales that Plan C cites are mostly existing TIC units as there have been only about 300 new TIC applicants to the condo lottery each year for a net gain of about 100 units per year recently. From that same PlanCSF.com article, there were 1,756 units applying for the 2006 condo lottery which is up from 1,652 units applying in 2005. So yeah – you’re probably going to have to wait 5-10 years to convert, but that is definitely the end game with 3-6 unit buildings, not only to get cheaper financing but also to get a pop in value. Permanent TICs may find a place in the market if the financing is there for them, but that’s not a typical TIC unit right now and I think there will be a price differential to reflect the fact that they can”t convert to condos ever.
To answer your question – it depends on the financing. If it is a shared loan and one unit defaults – then every partner in the building is on the hook – including probably personal assets other than just the TIC real estate interest until the debt is satisfied. If it is a individual TIC loan – then the bank is on the hook for that unit. They will foreclose on that owner only and re-sell that unit.
they are making pretty good margins above standard home loans that I think there’s going to be enough profit for lenders to stay in it
That’s what they said about sub prime lenders. How did that work out for them?
PS. NYT says the same problems that we saw a few months ago in sub primes are starting in alt-A. High default rates are not in themselves a concern. But when the investors can’t accurately forecast the risk, they stop lending. That’s what happened to sub prime and it’s near the tipping point in Alt-A. Another couple of months and that segment will be history.
Would I buy a TIC and be totally beholden to the whims of a handful of small banks to enable me to resell? Not on your life. If those loans dry up, you’d have to convince all of your neighbors to refinance into a group loan, just to let you sell. Good luck with that! No Thanks!
Individual TIC loans are the same as subprime loans? Kinda comparing apples and oranges there – you can write a bad loan to a TIC, a condo, or a multi million dollar house – if the borrower is unqualified to pay it back and has little equity invested, well it’s going to default regardless of the property type and how lucrative the loan was to write. And I agree the loan mess is going to spread across the rest of the mortgage spectrum – but really that’s a more general issue to the whole real estate market, not just TICs. Right now more banks are entering the individual TIC market, not abandoning it, so the idea that individual TIC loans will dry up is a worst case scenario guess at this point. But overall you are right, these things definitely have more risk than a condo or a house – tougher to finance with more expensive loan terms for both the group or the individual TIC loan option, possible shared liability, and there’s the hassle of the lottery and eventual condo conversion – so they are definitely not for everyone. For some people, it allows entry into the market that is otherwise impossible, while other people would rather skip the risk and hassle and pay 20-30% more for an existing older condo, and then some others would rather pay a premium above that for brand new construction. To each his own.
In my experience as a TIC purchaser who has since condo converted, the TIC agreement drawn up by a lawyer is the key document regarding protections in case of another co-tenant defaulting. Most good TIC agreements will require additional reserve account deposits, in the event of non-payment (mortgage, prop tax, insurance & joint utilities) worth a couple of months. This will provide the co-tenants 60-90 days time to review their options to either sell, refinance or whatever. Of course, the agreement attempts to mitigate risk and is only as good as the co-tenants comply with it. As far as condo conversion goes, it’s definitely not cheap nor a cakewalk once you are able to submit an application.
To my knowledge, there hasn’t been any rash of TIC foreclosures–exactly what would be expected in light of the strict TIC lending requirements. If TIC’s are able to ride out the current down market, or at least not suffer disproportionate declines in value and/or loan delinquencies, I think they’ll be perceived as an even more viable homeownership option by both buyers and lenders when the market fully recovers.
200-204 Funston seems like a nice place to buy. Dealing with the owner is somewhat difficult. He wants you to use his finance person and advises no real estate interaction due to the commission. I really think there is something wrong with the place, structurally or otherwise…
I’m going to look at it Saturday. I spoke with the owner too and he seemed okay to me but very much in a rush.