We are often asked how TICs are different from condos. What are the financing options? Are they risky? Why do they exist? We decided to put all the answers to the most frequently asked questions here as a resource for San Francisco homebuyers.
Ruth:
Yesenia, why don’t you kick it off. Tell us about the lending products on TICs and what’s available in the loan space?
Yesenia:
With a TIC you do have to work with a TIC lender. You can’t go to your conventional Wells Fargo or Chase to get a loan. Historically with TIC loans you were only offered adjustable rate mortgages up to seven years. Generally the interest rates were a pretty large delta between your conventional loan and a TIC loan.
Now (this is new news!) you can get a 30 year fixed mortgage on a TIC loan, which is great news and offers a bit more flexibility with lending.
Ruth:
What about the group loan thing that people talk about? What’s the deal with that?
Yesenia:
Group loans are not a thing anymore. They are a thing of the past. Previously when TICs first came about you had to get a group loan. You bought the building and you got one loan for everyone in the building.
That can be really scary for a lot of reasons. What if somebody defaults, then their falls on the group.
Ruth:
I have to show you all my finances and see all your finances. It was much more involved.
Yesenia:
TICs are now fractional loans so you can get your own loan. And every individual in a four unit building usually has their own loan. I don’t think we’ve run into a group loan in a long time.
Ruth:
I see them occasionally on buildings that were purchased a long, long time ago. I do think that a lot of people hear TICs are scary because of group loans. When in fact, nobody buys a building that way anymore.
In terms of everyday living, you feel like it’s a condo. Your finances are protected just as much as they would be on a condo, in a way. I want to touch on that a little bit.
There are some downsides to a TIC. I was on a call with a buyer the other day and they said, “I’m looking at this TIC and I heard that I’m going to get a 20% discount for buying a TIC versus a condo.”
It used to be that way. I think even three or four years ago there was a discount of about 20%. When there was that 20% variation, there was also about a 2% difference on the interest rate between a TIC loan and a conventional loan. So for every interest rate percentage point, it’s 10% difference in the purchase price. That made it kind of even.
I don’t know if you’ve looked at a TIC loan lately, but do you have any idea what the percentage difference is between a conventional and a TIC loan?
Yesenia:
About 3.5%, which is not too different.
Ruth:
Right, versus maybe 3%. So about a half a percentage point. What I see from the last time I pulled the data is that there was about a 5% difference in sales price between a TIC and a condo. That means net net you’re probably paying the same.
Yesenia:
So with that I mean, why would you buy a TIC?
Ruth:
Because you like it? Yes! I think that’s right. Yeah a lot of times when buyers reach out to us they say they just saw this great home.
One buyer reached out to me recently and said, “Oh my god, these views, this place is beautiful. I really want it. I’m not seeing another home.”
The product is pulling them in. I don’t think anybody says, “I’m a TIC buyer! I am specifically looking to buy a TIC.” They a stumble into a property that they really like. And then they’re left figuring out what is a TIC? Is it risky?
I think that there are some risks to owning a TIC. What happens when the market goes down?
Yesenia:
What we’ve seen is that when the market goes down TICs take a bigger hit compared to a single family home. Then you’ve got condos and then you’ve got TICs. They generally don’t do very well when the market goes down.
Aside from them taking a bigger hit, there’s another big risk to a TIC. Rent control. Which we all know in San Francisco is a big deal.
Ruth:
That’s the elephant in the room. The way that San Francisco rent control laws work is that TICs have the most stringent form of rent control.
Usually if somebody wants to remove a tenant, they will raise the rent and then the tenant will oftentimes put in notice. You’re not really supposed to give a tenant notice, per se. But oftentimes if you raise the rent they’ll decide to relocate. On a TIC you cannot raise the rent. You cannot get them out unless they want to leave.
If the market goes down then the rental market also probably goes down. Now I want to move to Palo Alto to be near my parents and have a bigger house. And I have this TIC and the market is down. It’s a great time for me to buy in Palo Alto because the market is down in Palo Alto (seems like it’s never down in Palo Alto). Then what do I do? I don’t want to rent it because rents are low and I have to be locked in at that rent. I don’t want to sell it because the sales price is also low.
That’s the risk.
Yesenia:
Getting locked into low rent with the tenant in a TIC. You do have rent restrictions and how much you could raise the rent. Is it 1% or 2% a year?
Ruth:
I think it’s usually around 1.5%. If suddenly the market went up 10%, 15%, 20% you better believe that those tenants don’t want to leave. They’re probably going to stay. I’d say that’s probably the biggest risk.
I’m trying to think about anything else with a TIC… you have one property tax bill. That’s a little bit of a minor inconvenience because you’re dividing it amongst all of your cotenants.
What about the HOA? Is it run any differently in terms of your relationships with your neighbors?
Yesenia:
No. The TIC really runs and acts like a condo. The HOA runs the same way. You have common areas in the building that share expenses with the other owners in the building. Title is held a little bit different. You have one title for the entire building, so you own a percentage of interest in the entire building versus in a condo you own the four walls in your unit and the percentage of interest in the common areas. But in terms of the way they run, they run pretty much the same. I don’t think you would notice the difference in that.
Ruth:
Great question. We’re in a city that doesn’t have enough housing. There were a lot of multi-unit buildings and historically they were rentals. Some people thought if we could allow pieces of those buildings to be sold then we’d have more housing. In order for that negotiation to be reached it was decided that if the city was going to allow these units to be sold then they would want to have additional rent controls on those units in order to protect tenants.
I want to say they’ve been around for maybe 20 years or so. At this point the contracts have been worked out. I’m not seeing a lot of lawsuits or anything like that come up over these agreements.
I think they’re very common in San Francisco, New York and Chicago. Cities where there’s just more housing density. And probably more multi-units.
Yesenia:
I think we’ve covered the most the most frequently asked questions.
Ruth:
If you have any questions about TICs or about buying or selling your San Francisco home Yesenia and I are here. Reach out to us anytime.
