Home Buying in San Francisco>Question Details

Erin Romig, Home Buyer in San Francisco, CA

What are the disadvantages of owning an apartment that's part of a TIC as opposed to a condo?

Asked by Erin Romig, San Francisco, CA Thu Jan 24, 2013

I'm a first time home buyer in San Francisco and am having trouble figuring out whether the lower price of a TIC is worth it.

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8
Steve West’s answer
Erin,

Just to add to everyone's great advice. Not only do very few lenders in town lend for TIC's, but the interest rates are much higher for TIC's (even with fantastic income, downpayment and credit).

If you buy a TIC that has less than 6 units (the smaller the better), and the building is mostly owner occupied, you can apply with the city to convert to condo. They have rules and regulations to convert, and building improvements might be among these requirements.

This would be the ideal situation for a homebuyer, because of the price difference between TIC's and condos. If you can find the right fit, you may be able to get an convert that means nice shot of equity for the buyer!

Good luck and your search, and call if you need any advice!

Steve@thegowestgroup.com

TheGoWestGroup.com
0 votes Thank Flag Link Fri Feb 1, 2013
There is too much to explain here on this forum. To fully understand the differences and to choose the best option, I recommend sitting down with your agent and thoroughly discussing this subject. If you do not yet have an agent, then interview 2 or 3 and go from there.
Web Reference: http://www.oggikashi.com
1 vote Thank Flag Link Thu Jan 24, 2013
Do you play the lotto? You'll see why many folks in SF who own TICs do.

These perceived 'issues' apply for buildings first built before 1979. New homes (apartments) built after don't have this distinction and are simply a condo.

The 1979 date matters because it all boils down to this: Is there rent control and eviction control over the apartment? Stated differently: Is the landlord's ability to raise rent as they please and/or to take back the apartment limited?

Understanding the answers should show you why condos and TICs that are two owner-occupied units are worth a great deal more than many other seemingly 'better' TIC units with better remodels and finishes.

FOR TICs: In a TIC the landlord should be happy with whatever rent they set when they first rent it out as that number will be the basic rent until the tenant moves out or is otherwise evicted; rent can be raised only according to the minuscule increases allowed by the Rent Board each year. If tenant leaves voluntarily and a new tenant signs a new lease a new rent can be set. But tenant has to be evicted there are two types: If the tenant is at fault, then a landlord can go through for-cause eviction proceedings. On the other hand, if the tenant is at no fault there are 16 allowable causes (just cause) that will allow a landlord to evict most tenants. (Some tenants cannot be evicted due to illness, age, disability while some tenants with school-age kids in the house can only be asked to leave during summer break). Just cause evicted tenants are entitled to relocation monies starting at $5300+ per person.

FOR Condos: For those with original occupancy permits issued before June 13, 1979 (which is about 80% of the city) there is no rent control per se, just when a landlord can do it and how much notice must be given. There are eviction controls and relocation cost obligations however. This seems to be self-conflicting, right? Essentially, a landlord can raise monthly rent to such a high (albeit market) rate they effectively make it too expensive for a tenant to remain, which would entitle the landlord a 'just cause' to evict should the tenant hold over — failure to pay rent.

OVERALL: The main distinguishing factor between a TIC and condo (as they look alike in all other respects) is legal — i.e., does each unit have its own title. Condos do — when your sale closes you get legal title (one piece of paper) showing what and where you own. Most lenders in the world will recognize that. For a TIC, you only get a percentage of the title document for the entire building. Exactly what you own is defined within a TIC contract agreement the other owners have signed too. So instead of the other folks who live next to you simply being your neighbors in a condo building, in a TIC building your neighbors are more akin to your business partners. A TIC will retain its legal status unless and until a certain number of otherwise eligible owner-occupiers apply to the city convert the TIC building into a condo building, which would take the rent-control units off of the market. This removal is why the powers that be in SF have limited the conversion process to no more than 200 buildings a year by lottery and only allow ones with 6 units or less with 'clean' eviction records to enter that lottery.

See how not-simple that was? This is the short hand version too as the details are even more nuanced.

But all of thus, as my other colleagues state, is why only 2 banks will lend on TICs (but there are rumors a third will come in) one is local (Sterling) and other other national, but only accessible by a mortgage broker (National Cooperative Bank). TIC rates are .25% higher and mortgage rates are fixed to a maximum of 7 years and down payments must be at least 20% if not 40% in some cases.

Leaving all that hassle behind and being able to go to more than 2 lenders is why condos are priced higher (10-20% on average) and why buildings with fewer units or ones that have bene in the lottery for a long time fetch a higher price. Units that are ineligible on the other hand will be priced accordingly, i.e., cheaper.

I know a few good lawyers who can walk you through this process and also can identify opportunities that are close or can otherwise bypass the condo conversion lottery. Contact me to learn more.
Web Reference: http://www.andysirkin.com
1 vote Thank Flag Link Thu Jan 24, 2013
Tenancy in Common in San Francisco -
FAQ from lead TIC lawfirm, Goldstein, Gellman, Melbostad, Harris & McSparran, LLP

http://www.g3mh.com/wp-content/uploads/G3MH_TIC-Brochure.pdf

Proceed with utmost caution, strict due diligence and work with a Realtor who's highly experienced in TIC's and condo conversion.
0 votes Thank Flag Link Fri Feb 1, 2013
One of the reasons TIC's are priced lower than comparable condos is because interest rates are higher (at least on fractional TIC loans). So your carrying costs often end up being the same as a condo even though you may have paid 20% less for the TIC. The huge advantage of owning a TIC is if you're around for the condo conversion because your apartment will see a huge appreciate in value. The trick is learning to evaluate one TIC vs. another in its liklihood to convert and when it might convert. Some TIC's, like those in buildings with 7 or more units currently can never convert to condos. You can read up at andysirkin.com and G3MH.com or if you're not already working with an agent give me a call and I'll help you understand some of the tricks of the trade for doing a quick evaluation of one TIC unit vs another.
Thanks,
Rob Regan
0 votes Thank Flag Link Thu Jan 24, 2013
Erin,

We deal a lot with TICs, and you really need to understand them before buying. You also need to know that all TICs are not created equal, but the main equation is this - A TIC has to be considerably below what a comparable condo costs to be worthwhile.

If you would like an expert no-strings consult to help understand this, contact info is below.

Best Regards,

Lance King/Owner-Managing Broker
lance@fixedrateproperties.com
415.722.5549
DRE# 01384425
0 votes Thank Flag Link Thu Jan 24, 2013
Hi Erin,

TIC ownership is complicated and can be very confusing, especially to first time home buyers. I owned and converted a TIC personally and work with TIC buyers and sellers frequently, so I consider myself extremely well versed.

The cons of TIC ownership are as follows:
1) higher interest rates
2) you own a percentage of the building, rather than the unit itself
3) refinancing can be difficult because most loans are fractional these days and there are currently 2 lenders who offer this financing

However, there may be light at the end of the tunnel because San Francisco Supevisors Mark Farrell and Scott Wiener introduced legislation that would provide an opportunity for certain TIC owners to bypass the condo lottery and go straight to conversion.

For more information, you can go to http://www.plancsf.org for a fee schedule, FAQ's and many other details. The condo bypass legislation is scheduled to be heard by the Land Use Committee on January 28th at 1pm.

I hope this helps and if you have additional questions, please get in touch. Good luck!
0 votes Thank Flag Link Thu Jan 24, 2013
Hi Erin

TIC's can be tricky. You want to first make sure that the loan is fractionalized- and also just as important- or maybe more so- that you are VERY compatable with the other owners. Make sure you have a lawyer (I Recommend Andy Sirkin) look at the TIC agreement too. If all that works out then it's a good deal. Otherwise- walk away- to the nearest condo.

Katie Wigington
Bradley Real Estate
415.827.3626
0 votes Thank Flag Link Thu Jan 24, 2013
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