Here is a complete guide to the TIC agreement’s importance, risks, and how it shapes ownership of your property.
When you think of buying a property, either a house or a condo, complete ownership is always guaranteed. You are the sole owner of your property, with no one to share. And once the transaction is complete, the transfer of title will follow to acknowledge you as the new owner.
However, this is not the case for properties listed in Tenancy-In-Common. When you buy a TIC, you have shared ownership of your property with a group of people.
Which means you own only a part of the property but not all of it. Moreover, the property’s title will not be transferred solely to you—instead, the title is under the ownership of the entire TIC group.
Because Tenancy-In-Common is unique only to San Francisco real estate market, it is easy to get lost in the legal complexities concerning your property. And with several people involved, disputes and conflicts may arise.
That is why TIC agreements are critical. It functions as a contract among co-owners establishing their respective obligations and regulations. Remember, the TIC agreement is your only legal document to support your claim to the property.
What is a Tenancy-In-Common Agreement?
A TIC agreement is a written and legally binding agreement between two or more co-owners, also known as tenants in common, who share ownership over a particular property.
It is similar to a contract where necessary details, such as percentage of ownership, maintenance, repair, loan payments, and property taxes, among other things, are stipulated and agreed to by all parties involved.
Essentially, the TIC agreement governs the rights and obligations of the owners with respect to the property.
As TIC properties gained popularity through the years, group loans became a thing of the past. Nowadays, there are already banks who would lend to individual TIC owners for their assigned TIC units only. So the loans are no longer combined with the TIC group. This kind of loan is called fractional-financing TIC loan.
Although there is shared ownership among tenants-in-common, controls and percentages of shares are not necessarily equally divided. Each independent owner may have an equal or different share of the property.
Thus, everybody is encouraged to allocate time, seek legal counsel and facilitate a healthy and thorough discussion when creating the TIC agreement. Everything concerning the property, even the most minor things, no matter how trivial, should be discussed among the group.
What should be included in a TIC Agreement?
As with every agreement, all parties must understand what they want to include in the TIC agreement and how they want it to be observed and enforced.
There are TIC agreements available for the group to review and compare when drafting. But keep in mind that every TIC agreement is unique and varies in details and functions based on what works best among the group.
Although there is no universal template, each TIC agreement should include at least the following:
- Description of which portion of the property is for individuals and groups in terms of usage rights and maintenance responsibilities
- Mortgage, property tax, property maintenance, utilities, and other shared financial obligations
- Rules for condominium conversion (even if the property is currently ineligible for conversion), including obligations to obtain individual mortgage loans
- Consequences and remedies when a default has occurred, including a default reserve fund
- Rules governing the use of the property by the owners, including limits on the number of occupants, pets, quiet hours, and enforcement of the said rules
- Policies addressing the death or bankruptcy of a member
- Rules governing the sale of individual interests, including approval of buyers and rights of first refusal
- Dispute resolution via mediation and arbitration
- Meeting and decision-making procedures
A good TIC agreement should be comprehensive and well-organized rather than short and simple. It should reflect the group’s intentions, empower co-owners to uphold each other’s duties and responsibilities, and create contingency plans for responding to future conflicts.
Please note that the points of discussion recommended above are some of the most common contents in a TIC agreement. You can always add other concerns that you deem necessary for the benefit of the group.
How are TIC Agreements Prepared?
Several factors can influence the formation of a TIC agreement, such as the condition of the property, the personal preferences and relationship of the parties involved, and more.
Using another group’s agreement does not help new TIC members to engage in group discussion of what is appropriate for their own group. Instead, it encourages complacency and increases the odds of conflicts within the group.
When creating a TIC agreement, a highly-qualified attorney represents the entire TIC group. The legal procedures of owning TIC properties matched with the self-serving interests of co-owners is already a feat on its own.
There is a high chance that they will end up sabotaging their property if left alone. So before anything else, interested buyers of TIC properties are advised to reach out to a real estate lawyer who can mediate and develop a comprehensive and organized TIC contract.
Once a real estate lawyer is onboard, the process usually starts with a face-to-face conference among potential TIC members where they can meet and test their abilities to make group decisions and get along with each other.
Everyone is encouraged to participate and speak up about everything that comes to mind. Doing so will allow the group to find common ground that is fair and reasonable for everyone.
Meanwhile, the attorney is responsible for suggesting alternatives, discussing the advantages and disadvantages of various approaches to resolving potential future disputes, and preparing a comprehensive written agreement tailored to the group’s personality and needs. And suppose you are not comfortable with the initial draft; in that case, you can seek independent reviews with other accountants and attorneys and incorporate their comments into the final discussion of the TIC agreement.
Common mistakes when creating the TIC Agreement
One of the common mistakes that usually occurs when creating the TIC agreement is postponing resolutions of complex issues to avoid unnecessary tensions. People think that somehow when the problem occurs in the future, they can work it out. But delaying what has already been identified as a problem is often the cause of conflict. Preparing for the worst-case scenario, or even a simple “what if” scenario is a better action plan.
Another mistake is assuming everything will work out just fine, exactly as planned. Housing plans are closely related to employment, health, and domestic situations, which regularly change in unforeseen ways. Therefore, a good TIC agreement must be durable enough to adapt to dramatic changes in occupancy and ownership plans without having to renegotiate along the way. It should never cause one owner to sell their home due to another owner’s life changes.
A good TIC agreement is your protection against expensive, tedious, and relationship-destroying disputes. Even if your co-owners are long-time friends, family, or relatives that you have always gotten along well with, the risk of needing to fall back on the TIC contract should not be taken for granted.
With all the facets of a TIC Agreement, it is reasonable to conclude that it is the single most crucial document you will ever have when buying a TIC Property. You must thoroughly review the draft, participate in the discussion and ask questions when confused.
It is easy to say that we trust our group members, but it won’t hurt to be safe and legally ready. After all, you are investing in this property, and surely, you want to ensure that your investment counts, right?
And because this is an investment, it is only appropriate that you also understand the pros and cons of owning a TIC! Learn the top 5 risks and benefits of acquiring a Tenancy-In-Common property in our next article! Then find out whether or not a TIC property is suited for you.
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.
