The idea of owning a property in San Francisco is exciting. But with million dollar plus price points, ownership may be out of reach for many. Tenancy-in-Common (TIC) provides an excellent opportunity to enter the market and experience the process of acquiring and owning a property at a lower price point.
But like any other property, Tenancy-in-Common units also have benefits and risks. So no matter how incredible or how good of a deal it seems, it is imperative that you first evaluate both the advantages and disadvantages of owning one. After all, this is more than just a property; this is your future home.
What are the benefits of owning a Tenancy-In-Common?
- Affordable price point in San Francisco Real Estate
Over the years, prices of single-family homes and condo units have significantly increased, driving home buyers to look for cost-effective alternatives. As a result, TIC units have become a popular option as it provides a lower price point for first-time home buyers. With TIC units, you pay 10–20% less per square foot than a condo. Moreover, property tax is also reduced by 10–20%. So not only did you save on the cost of your unit, but you also saved a significant amount in your annual property tax.
- Possibility of Condo Conversion
Aside from cost savings, another great advantage of acquiring a TIC is the possibility of converting to a condo. Condo conversion allows co-owners of TIC to eliminate many risks of shared ownership.
The most profound change would be replacing the TIC agreement with a certificate of title. As a TIC owner, you only have fractional ownership of the property. But once it converts to a condo, you will become the sole owner of the title of your condo unit. Additionally, if you can successfully convert your TIC, you have automatically increased your asset’s value by up to 10-20%, in addition to market appreciation.
However, be advised that in order to do condo conversion, buyers need to also be aware of the building eligibility. San Francisco condo conversion rules are complicated, be sure to seek expert’s opinion before making your decision.
- Opportunity to own a property in Affluent Neighborhood
Who doesn’t love to occupy a pleasant and comfortable residential space in an affluent neighborhood, right? It’s the dream of many! Yet everything in San Francisco’s real estate market comes with a price. The good news is that, with Tenancy-In-Common, your dream of living in a cozy neighborhood can become a reality.
Most of the TIC units are within older buildings in the more popular parts of the city, such as Noe Valley, Pacific Heights, the Mission, and more. Instead of demolishing or rebuilding historic buildings, creative designers and developers turned old-facade buildings into modern homes on the inside. These redesigned buildings will then enter the real estate market as TIC units.
- Beat monthly rent expenses and an opportunity to rent it out!
Whether you are buying the unit as your primary home or planning to have it rented out, nothing beats having your own property in San Francisco! As your primary home, you no longer have to pay monthly rent for a property that will never be yours.
It is true that you still have to pay your financing loans but it is more rewarding knowing that you are paying for your own property, not others. And just like any other property, you can also choose to have your TIC rented out and even charge the same rent a condo would! Additionally, because you are able to acquire your unit for 10–20% less per square foot than a condo, you’ll enjoy a higher ROI on your property!
But there’s a catch. TIC property is exposed to San Francisco’s rent control law. Tenants also have additional eviction protections which you also have to consider. Make sure to consult with your real estate attorney before renting out your unit.
Risks involved when owning a Tenancy-In-Common
- TICs have several legal complexities
By now, you know how important it is to understand all the legal considerations involved when buying a TIC property, but if you’re not fully up to speed, check out our blog post “What is a Tenancy-In-Common Agreement”.
The truth is that your investment and ownership over your property are within a unique contract ( a TIC Agreement) written by a real estate lawyer. Unfortunately, no matter how experienced the lawyer is, they can still commit errors. Thus, you must read the contract carefully and make sure you are legally covered. You can also seek legal counsel and have another real estate lawyer review the agreement.
The second truth concerning TICs is the challenges of imposing the TIC agreement and ensuring everyone follows it. As with any group, conflicts and disputes can quickly occur. Hence, the TIC agreement must be thorough enough to identify different aspects, such as violations and penalties, to keep the group in place.
- TICs are exposed to San Francisco’s Rent Control
There are only two (2) possible reasons why people acquire Tenancy-In-Common. The first reason is that they are buying a TIC as their primary residence. The second reason is that they are buying TIC as an investment in hopes of eventually renting it out. Unfortunately, TICs are covered under San Francisco rent control and are subject to state restrictions and limitations.
For instance, the amount you are allowed to increase annual rent as a landlord effective until February 2023 is 2.3%. It is also challenging for a TIC owner to remove problematic tenants unless there is a just cause. Thus, anyone interested in acquiring TIC properties is encouraged to study and understand eviction and rent control laws.
- TICs offer limited financing options to interested buyers
Unlike single-family homes or condo units, wherein financing options are flexible and accessible, TIC properties only have a handful of lenders. If you want to secure financing, you will likely get a fractional loan.
This financing option allows TIC owners to have separate loans from each other. Each loan includes a note signed only by the owner, secured by a deed of trust. With the help of a fractional loan, the TIC group is no longer at risk if one of the owners defaults on the loan. Thus, the lender can only foreclose on that owner’s particular share, not the entire property.
As there are only a few lenders and few loan options in fractional financing, loans are subject to the following:
- Higher interest rates compared to other properties
- Higher down payment which is approximately 20-25% of the sales price
- Higher monthly payment
- Condo conversion might not be possible.
With its low entry price point and condo conversion possibility, Tenancy-In-Common is a good investment opportunity to get into the San Francisco real estate market. But as previously mentioned, not all TIC properties can successfully convert into a condo. Several factors can influence the conversion process, such as:
- % of units that are owner or tenant occupied
- Eviction history
- Former entries into the condo conversion lottery
- Length of stay of each owner or tenant
- Number of failed lottery entries
- Number of units in the building
As an owner or investor, due diligence is necessary to understand whether you can convert your TIC to a condo before you put in an offer. Remember, once your unit is no longer eligible for condo conversion, its actual market value will be affected. Another downside is that your property is permanently subject to rent control and eviction laws. So how do you ensure that your unit has a high chance of being converted to a condo unit? Learn more about TIC considerations in our next article!
Disclaimer: If you’re looking to buy or sell a TIC property, we recommend contacting an experienced real estate attorney who can guide you through the process. The information provided above reflects real estate broker insights and should be considered a resource for home buyers and sellers and educational purposes. In addition, the information provided is deemed reliable only at the time of publication and is subject to change without any prior notice. Thus, San Francisco home buyers should always seek the counsel of qualified professionals, including attorneys, wealth managers, and municipal authorities, before deciding to purchase or lease real property.
References:
https://medium.com/atlasa/tics-in-san-francisco-9af423c6f842
https://denizkahramaner.medium.com/san-francisco-tenancy-in-common-tic-condo-conversion-2abc8dc8ac69
