Was Buying a TIC the worst decision of my life?
I have a client who purchased a TIC a few years back. Like any buyer foraying into the world of San Francisco TIC’s, there were a lot of questions & concerns. Here’s her story:
A fews years ago, my husband and I were ready to buy our first home in San Francisco. We had dipped our toes in real estate a few times before, but in regions where the price point for what we wanted was a fraction of the price we needed for the city.
Coming from Texas and living for a while in the East Bay, our experience with home buying was that our price range afforded us pretty reasonable options in terms of what was available. We could be picky; only new or newly renovated properties with good layouts, parking and in neighborhoods we actually wanted to live in was what we were looking for (who wasn’t?). So naturally we thought if we bumped up our budget a bit we’d be able to find exactly what we wanted in San Francisco.
Boy...were we wrong. Between the outdated homes, inefficient layouts and less than ideal locations we had nearly lost hope, until Matt (our friend & realtor) wanted to show us a TIC (Tenancy-In-Common).
At first, we were VEHEMENTLY against it. Yes, TIC’s run a lower price/sq ft, yes this was MUCH nicer than any other home we saw in our price range up to that point, but a TIC? We flat out told Matt, “I don’t think so.”
But then, we saw pictures. What started with liking the look of the place, led to us seeing it person, led us to putting in an offer, led to 4 years later...it was the best decision we’ve ever made.
While it was definitely a good buy, there were a few things we had to keep in mind.
What You Need to Know About buying a TIC
Priced lower, but harder to get a loan
At the time we purchased, only two banks were offering a TIC home loan : Bank of Marin and Sterling Bank, which means your options are limited. They put you through the ringer a little more but only people with solid financial backgrounds are given loans (sometimes they will ask for more $$ down, for assurances).
This is important for two reasons. 1.) Because only 2 banks offer this type of loan, the loan cannot be resold which means that if we ever experience another mortgage crisis, TIC loans might not be affected as badly. 2.) These banks are so rigid in their approach, at the time we purchased no one had ever defaulted on a TIC loan.
TIC vs. Fractional TIC
In the traditional TIC model, all buyers share one mortgage & one property tax payment. What does this mean? Well, if a TIC has 2, 3 or 4 units with individual buyers all buyers have a single mortgage. This can be tricky because if your TIC neighbor defaults on their payment, the other owners (you) will be responsible for covering the shortage.
In a Fractional TIC model, each unit owner has his/her own mortgage payment and is not responsible for their TIC neighbors mortgage payment. In fact, in my situation I have 3 neighbors : 1 paid all cash, 1 has a mortgage with Sterling Bank, and 1 has a mortgage with Bank of Marin. However, we still share a single property tax payment divided up based on % ownership.
Outside of mortgages/property taxes, it basically operates like a condo
Just like a condo, we have a shared TIC account (similar to an HOA) for common expenses and a buffer just in case something major comes up. We keep it pretty tight since there are only 4 units and it still works very well.
If You Decide to Buy a TIC
Speak with a TIC lawyer
There are a few TIC lawyers in the city, but speaking with them will help you ease your fears. The biggest thing you want to do, though, is make sure they read through your properties TIC Terms & Conditions /T’s & C’s (which should already be documented buy either the seller or the existing TIC group within the property you are buying from). They will give you insight into what you need to know, the gotchas, etc. Also they might recommend changes the the T’s & C’s that would work in yours and your neighbors’ favor.
Know that you can eventually condo convert
There is a lottery system that was closed a few years ago in which SF TIC’s could apply for condo conversion. This is expected to return in 2024. While you may not feel the need to convert when you move into your TIC know that (while expensive) a conversion means no shared mortgage/property tax bills & likely in increase in price/sqft if you decide to sell.
That’s basically it, but I’ll leave you with some parting thoughts : know thy neighbor, especially if you’re in a traditional model.