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.

As the San Francisco rental market softens, so too is the market for condos and TICs (Tenancy in Common). This bodes well for buyers — as long as they can be patient. In general, we do not forsee a stabilization in the lower end of the condo/TIC market in San Francisco in the near term, so until that changes buyers very much have the upper hand, as they can demand price reductions, parking and other amenities to be included in the sales price.

This week’s Deal or No Deal is a newly remodeled TIC in
Nob Hill, close to the bars and restaurants of Hyde Street.
2 units in the building are up for sale, this being the middle
(and therefore lower priced) unit. Updates throughout, access to the back yard and a list price drop of $70,000. Parking, however, is listed as an extra $45,000 or $75,000 (depending on size of the spot).

In addition, HOA dues of $394 makes the monthly maintenance on this spot a bit on the pricey side.
The spot looks great, but do the numbers add up?
That’s what will determine whether this is a DEAL OR NO DEAL.

Address: 1446 Sacramento St., San Francisco, CA 94109 (MLS Listing)
Status: ACTIVE
Bedrooms: 2; Bathrooms: 2
Living Space: 1,025 sq ft
Lot Size: N/A
List Date: 5/26/2009
Original List Price: $669,000
Current List Price: $599,000
MLS no.:357053

Real Estate Agent Comment: Spectacular studs-out contemporary remodel of vintage Edwardian. 2BR/2BA flat with custom finishes throughout. Modern open floor kitchen/great room w/professional Viking appliances & Ceasarstone breakfast bar has french doors that open to rear deck w/access to lush landscaped rear yard. Master bath w/glass mosaic tile & walk-in closet. White oak floors, custom lighting & fixtures & new windows throughout.
In-unit W/D, garage pkg available.

DEAL or NO DEAL?
Comment below and tell us what you think!

Cirios Verdict: DEAL

San Francisco isn’t for everyone, but with the rental market still expensive relative to just about everywhere but New York, buying a condo or TIC (Tenant in Common) is a pretty viable option. It didn’t used to be, but low-end condo and TIC prices are falling, as overbuilding, lower rents and the general economic malaise is hitting developers where it hurts. No, not there. Their pockets.

As a result, some of the smaller units in older, renovated buildings are being offered at reasonable prices. To be sure, its likely they’ll keep getting cheaper, but some are starting to get interesting.

In particular, S1 listed on the CLEAR below is a lower unit in the same building, which sold for $440,000 after being listed at $410,000. And while we believe TIC and condo prices will keep sliding in the near term, prices will be supported as they come more in line with rents in the area.

Address: 3322 16th Street #6, San Francisco, CA 94114
Status: ACTIVE
List Date: 3/31/09
List Price: $469,000
Cirios Value: $485,000
List Price vs. Cirios Value: 3.4% under-listed.
For a complete Cirios Valuation, click here for our CLEAR report, or on the image to the right.

Have a home you’d like Cirios to use for our next House of the Week?
Make a comment below or email us!