Financing in 94117>Question Details

David Tran, Home Buyer in San Francisco, CA

TICs and 5yr interest only ARM

Asked by David Tran, San Francisco, CA Fri Sep 11, 2009

Planning on getting in on a 3 unit TIC. Should I be concerned that the two current units are on a 5yr interest only ARM; currently 1yr into their mortgage? I was expecting to go in and paying your traditional 30yr loan. Since, it's all under one loan am I walking into a powder keg?

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There is no right or wrong answer here; all I can do is advise you on areas of concern:

1. Try to find out of the current owners are making extra principal payments on the interest only loan -- it's advisable to do so.

2. 3 units typically can't be converted very quickly, so there is a good chance the fixed period will be over before the building is converted, and the rate could increase. After the fixed period, the rate will change annually. Also, the loan will amortize over 25 years instead of 30 years.

3. Ask to review the terms of the note so that you understand how the payments will change when the 5 years are over

4. 30 year fixed rate loans are difficult to obtain on 3 unit buildings unless there is a lot of equity -- over 30%

5. Fractional loans are another option, but the rate will definitely be higher, and they come with a 3 year prepayment penalty.
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0 votes Thank Flag Link Fri Sep 11, 2009
Jason you hit the nail on the head and I will definately have to talk to the lawyer that created the TIC agreement.

The property is definately below market value, appraisal Monday.

So far, it sounds like I should avoid this one.
1 vote Thank Flag Link Fri Sep 11, 2009
Hi Pv,

If I understand your situation correctly, you are buying into a building where the current Tenants In Common have acquired a loan together - a group loan. You could (conceivably) finance the whole building with the other Tenants In Common with a new 30-Year Fixed-Rate loan - again a group loan.

The issue with a group loan is that you share liability for the whole loan with your fellow Tenants In Common. In your situation, if the owners do not refinance, then you're also buying into a financing situation that you have concerns about. And I think your concerns are valid.

If your hope is to condo-convert, you'll have to deal with the lottery system. You'll likely have to deal with the adjustable rate before that opportunity would arise.

I have a problem with negating TIC ownership categorically. I think you have to assess the benefits versus the risks. I generally advise my own clients to be cautious about a group loan. Not only do you share liability, but you suddenly relinquish control over your own financing as those decisions inevitably become shared as well.

I also strongly suggest my TIC clients to spend the time and money discussing TIC ownership with one of SF's fantastic real estate attorney's. Once you feel like you've identified the right property, meet with an attorney. Review your prospective TIC agreement. Be sure that you have a good feeling for the associated risks.

Good luck, Jason

McGuire Urban Bay
415-420-1143
jchapin@mcguire.com
1 vote Thank Flag Link Fri Sep 11, 2009
They are asking me to put 20% down and assume the existing TIC loan at 5.7%. Which isn't bad. I had planned on paying principal + interest. Should I just pay interest at this point like everyone else and invest the prinicipal I was planning on paying each month?

I am pretty sure they have not paid any of the prinicipal down and not even sure if they even put any down payment.

Condo conversion will most likely not happen before the 5yr ARM is done. Since, the other tenants have only lived there for only a year.

There is a mortgage broker cranking the numbers on whether to refinance the entire loan or assume existing loan is better. I want to make sure I am covering all options prior to that meeting and have some ammo to renegotiate the price of the place.
1 vote Thank Flag Link Fri Sep 11, 2009
PV,

That's pretty typical with TIC's...

What's your agent say? Most agents who have experience with TIC's will tell you to put the idea of conventional 30 year financing out of your head. If you ever make it through your condo conversion, then you'll probably want to refinance into a 30 year conventional loan afterward. That can mean refinancing in 5 - 7 - 10 or 15 years... There are many other issues and this is what an experienced TIC agent brings to the table as your representative. Your agent and your mortgage broker should be able to explain it.

If you don't yet have an agent you'll find a number of quality agents online and off.

Garfield Square Homes - Mission TIC's featuring Fractional Loans...
http://www.GarfieldSquareHomes.com - Sold Out - This Week!!!

Good luck and all my best,

Mike Ackerman
Zephyr Real Estate
4040 24th Street
San Francisco, CA 94114
ABZ@ZephyrSF.com
415-695-2715
Representing TIC's for over a Decade...
0 votes Thank Flag Link Fri Sep 11, 2009
Pv,

I would want to review the TIC Agreement and disclosure docs and discuss your long term goals and comfort level with this particular TIC before advising you on whether or not this makes sense for you, but on the face of it it doesn't sound like something we would be advising a client to do unless it was a great deal or something along those lines. Interest rates are really good right now and locking in a long-term great rate makes a lot of sense.

There are also a lot of issues/questions you need to resolve before buying and you need to be very clear on what they are, and there are more issues beyond just the financing. If you have an agent, ask him/her. If not, make sure you have someone representing you who knows TICs really well.

Regards,

Lance King/Managing Broker
415.722.5549
lance@fixedrateproperties.com
0 votes Thank Flag Link Fri Sep 11, 2009
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