San francisco buyers are smart. Successful buyers are not only smart but are willing to take a financial risk to buy a home that feels outrageously expensive. Most buyers ask, “Am I crazy to pay this much for this home?” Recently when one of my clients asked me the “Am I crazy” question, I laughed and said if you aren’t asking this question you aren’t buying a home in San Francisco. All buyers are hoping for a less expensive route to success.
The next questions buyers often ask are, “What is a Tenancy in Common (TIC)? Is this a way to get a better deal?” It is true that you get more for your money with a TIC. In fact, as a rule of thumb 20–25 percent more is a number to keep in mind.
The next question is, “Why does a TIC cost less compared to a condo?” Here are the reasons:
First, 30-year fixed-rate loans are not available for TICs. The maximum length of a TIC loan is seven years.
Second, there are only a few lenders who will loan on TICs.
Third, you can get an individual loan on a TIC, but the interest rate is higher. This can be as much as a point or more, depending on the buyer’s credit and the terms of the loan.
Fourth, when there is a change of ownership or when an owner refinances his or her loan, an amendment to the TIC agreement must be signed by all owners. This can slow down the sale of a property if a co-owner is not available to sign the amendment.
Fifth, in a down market, a TIC will be more difficult to sell than a condo or a single-family home. Anything that is a bit different will make an anxious buyer more anxious and can cause the buyer to pass on the property.
And sixth, it is important to know that all TICs are not alike. Some are on the city’s list to convert to condos, some are in two-unit buildings and are eligible for fast-track condo conversion, and others will be TICs for the foreseeable future.
Because there are limited loan choices and additional risks, why buy a TIC?
Many TIC’s today are freshly remodeled and move-in ready. This is appealing to buyers who work long hours and don’t want to deal with fixing up their homes. They want to move in their furniture, unpack their suitcases, and get back to work.
Buyers get more for their money, and for some people this feels like the “deal” they have in their dreams.
If you plan on living in the TIC for less than seven years, owning a TIC is a way to get into the market and build equity. Many buyers in San Francisco are young and expect to be moving on to a better job in a few years.
In a two-unit building with a clean eviction record, it is possible to apply for a fast-track condo conversion with the city. There is a bump in value once a TIC is converted to a condo, but keep in mind that there is an increase in the sale price built into two-unit buildings. Still this is an opportunity for friends to get together, buy a building, work through the fast-track condo conversion process, and come out with two condos of greater value than two TICs. Remember “fast-track” conversions take two to three years.
Many TICs have less restrictive rental requirements than condos. As more condo associations are limiting the rental requirements to six months or more, TICs often have only the restrictions required by the city. This is appealing to buyers hoping to rent on Airbnb.
If a TIC has a special location, view, or something else that will make it less vulnerable to the ups and downs of the real estate market, it might be worth the extra risk involved in ownership of a TIC.
If you are a cash buyer, a TIC is an opportunity to get more for less money. A cash buyer does not have to worry about paying a higher interest rate or the shorter term of a TIC loan. A TIC might be especially appealing to a pied-à-terre buyer who wants to rent the apartment part-time.
THE FINAL QUESTION: IS A TIC FOR YOU?
The only way you will know is to go out and look at similar TICs and condos, talk to lenders, and evaluate your financial situation. Also, it is never too soon to ask for help from an agent who knows the market well. The more information you have, the better you will be prepared to make the best decision.