Real Estate: TICs – Opportunity Knocks?

By Jennifer Rosdail

In the year ended August 28, 2008, there were 267 TICs (tenancy-in-common) sold in SF districts 5 and 6 versus 489 condos. TICs represented 35 percent of all sales and had a value 71 percent of that of Condos. In the year ended August 28, 2009, there were 173 TICs sold in SF districts 5 and 6 versus 391 condos. TICs represented only about 30% of all sales and had a value of 69% of that of condos.

True, overall volume declined 25 percent year over year, and prices declined over 10 percent. However, the difference between a 20-percent decline in condo sales volume and a 35-percent decline in TIC sales volume and a 9-percent price decline for condos and a 13-percent price decline for TICs has a story behind it.

Most of the buyers I work with are faced with deciding if they are willing to “take the risk” of buying a TIC. They provide more value for the same sale price in terms of location and size. However, as the old saying goes, “there IS no free lunch,” and buyers find that TICs come with higher interest rates and down payment requirements and more complex rules and relationships with which to grapple.

When people talk about “the risk” of buying a TIC, what exactly do they mean? Most buyers are gambling that the TIC they buy will eventually convert to condominium, resulting in an increased value. This can happen, but it can also fail to happen due to TIC partners moving before completion, lack of motivation, or the inability of a TIC partner to afford the costs of conversion. In buildings with a “group” loan, it is also at least theoretically possible that a TIC owner will end up paying the mortgage of their co-tenant and that if they can’t do so, they could lose their own home to foreclosure as a result of their co-tenant’s default.

Fractional loans were designed to protect against the risk of “group” financing for TICs. What is interesting is that these loans and their popularity have led to the disproportionate decline in TIC values rather directly. Fractional loans are offered by a handful of local banks. These local banks hold these mortgages until they are paid. They are not sold off on a secondary market, so it is a long-term investment for the lender and a commensurately high interest rate is necessary. Condo loans below the $729,000 conforming loan limit can be sold, and the lender can then loan out the same funds over and over, making a profit on each transaction. The federal government has done its very best to reduce the rates on conforming loans, so the rates on a 30-year fixed mortgage have been extremely low for the last nine months or so.

To sum it up, right now, there’s a huge difference in the financing available for condos versus TICs. Buyers using an FHA loan program can buy a condo with as little as 3.5 percent down and will get an interest rate under 6 percent fixed for 30 years, while buyers using a fractional TIC loan must have at least 20 percent or even 30 percent down and will pay an interest rate in excess of 7.25 percent for just a five year fixed fractional mortgage. This spread widened last fall. In the year prior to that, a condo loan was much more similar in pricing to that of a TIC. The extreme drop in interest rates for condos has resulted in TICs losing ground.

The TICs I have sold in the last 12 months all had private, assumable financing at competitive rates. All others were not able to compete against condo inventory for my clients. If you have a TIC to sell, my number one suggestion is the work out the financing before hand and make sure your agent is able to explain it to the market cogently and transparently. Feature it on the marketing materials and make it easy to understand and your TIC might just defy market expectations.

If you’re buying right now, take a critical look at TICs. Because their relative decline has been steeper, they are a comparatively better value than condos. Consider group loans to get a lower interest rate. And remember a low mortgage rate is only so important: paying a lower number of dollars for the same space and location can end up being a profitable choice in the long run, especially if you have a significant down payment.

Jennifer Rosdail is a Realtor with Paragon Real Estate Group. She can be reached at 415-269-4663 or Jennifer@Rosdail.com. To hear more from Jennifer, read ClientsInTheKnow.com.

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