Feature: To Condo or TIC, That is the Question
This post first appeared in the October edition of Cirios Trends: Getting to the Bottom of the Housing Market
First-time homebuyers shopping in San Francisco almost inevitably encounter units that look like condos, but are listed as “Tenancy in Common” or “TIC.”
While physically a TIC unit may look no different than a condo, financially TICs generally sell for less than condos and thus often pique would-be buyers’ interest.
Why does this price discrepancy exist between TIC units and condos? The answer is due in large part to the differences between the legal structures of TICs and condos, and consequently, how those legal differences impact a buyer’s ability to obtain and maintain financing. These different legal structures, in turn, create different risks for buyers and lenders alike, which play into the market value of the unit.
For condos, each owner separately owns their own unit, while simply co-owning structural elements and common areas of their building. In TICs, however, the owners (or “TIC group”) collectively own the entire building, and each TIC member owns a percentage share of the entire building. This share is generally determined by the size and condition of the unit that each owner will occupy. Each TIC owner is thus responsible for each and every obligation of owning the entire building.
Traditionally, many TIC groups share a common mortgage and each individual TIC member owes a predetermined percentage of that mortgage. With condos, an individual owner has their own mortgage that only ties to the individual condo unit. This difference between TIC and condo financing means that an individual TIC member must be concerned with whether their neighbors will be able to pay their share of the mortgage. If one TIC member fails to pay their percentage share of the mortgage and defaults, a lender could foreclose on the entire building rather than just the individual unit occupied by
the defaulting neighbor.
In less extreme instances, the non-defaulting TIC owners could have their credit negatively impacted by another defaulting member. In the uncertain economic world of today, with unemployment nearing 10%, this scenario is important to consider before purchasing a TIC unit. Furthermore, when one TIC member wishes to sell their share of the building to a new member, complications can arise with restructuring the group mortgage.
Because of the unique sharing structure in TICs, obtaining individual mortgages based on only a percentage of a TIC building is less common, but possible. Known as “fractional” or individual TIC mortgages, some lenders allow individual TIC owners to obtain separate mortgages based on only a percentage of a TIC building. With a fractional mortgage, the default of a fellow TIC member does not damage the other TIC members’ credit nor does it create the risk of foreclosure against non-defaulting TIC members. While these advantages are significant, they are usually coupled with higher interest rates and less favorable mortgage terms. Moreover, the number of mortgage lenders offering this type of mortgage appears to be on the decline.
What does this all mean for home buyers debating between a secure condo and a cheaper TIC unit? It all depends upon each individual buyers’ situation.
The difference in potential financing related issues between condos and TICs and the implications to each individual home shopper is unique and should be discussed in full with a real estate professional or real estate attorney.
Tags: Cirios real estate, condo, san francisco, tic