Purchasing Tenancy In Common (TIC) in San Francisco: Pros and Cons
Deniz Kahramaner is the Founder & CEO of the data driven Real Estate Brokerage Atlasa. His mission is to help home buyers understand the tradeoffs of different home options using big data and analytics. Feel free to reach out to Deniz if you need help with TICs at email@example.com
You can read his second data driven article about TICs here.
So You Saw a TIC Property on Zillow or Trulia. What Now?
If you have been searching for a home in San Francisco, the chances are that you have run into a Tenancy in Common (TIC) property. At first glance, a TIC looks exactly like a condo, but it’s about 10–20% cheaper.
Are TICs too good to be true?
What’s the catch?
Let’s look into what TIC properties are, the pros and cons of buying a TIC property in San Francisco, and the crucial due diligence you need to do before purchasing a TIC unit.
What is Tenancy In Common (TIC)?
Percentage Ownership in Entire Building
When you buy a TIC dwelling, you do NOT own the unit. Instead, you have a percentage stake in the entire building along with other people who bought the other TIC dwellings in the building. For example, if you own a TIC in a 10 unit multi-family building, you will likely own close to 10% of the entire building’s title, not the unit itself.
What percentage you own is determined contractually, depending on many factors, including the floor of your unit on a multi-floor building, your unit’s square footage compared to others, and its desirability. The deed of the building will show your percentage ownership of the entire building when you buy the TIC. There is no individual deed for your unit, but the entire building itself.
In contrast, a condo ownership means that a building has been divided legally into physical parts, one of which you separately own. Each condo owner owns a particular area of the property which is delineated on a map recorded in the county records. Each condo has an individual deed recorded with the county, which identifies the area which is individually owned by the condo owner.
So I Own a Percentage Stake in the Building. What About the Dwelling I Just Bought?
As a TIC owner, your rights to use a specific dwelling in the unit comes from a legal written contract signed by all co-owners. This agreement is also called a “TIC Agreement” or “Tenancy in Common Agreement”.
This agreement has nothing to do with the deed, map or other document recorded in county records. It is a legal contract between you and the other owners in the building.
Is a TIC legal?
Yes, absolutely. However, the validity of your claim to your dwelling entirely depends on the TIC agreement, not on the deed or the county. This agreement was written by former owners’ lawyer. Treat this agreement as if you are signing an employment contract, a mortgage agreement or an angel investment document. Read it carefully!!! The devil is always in the details, and you want to find the devil before you pay a large percentage of your net worth on a property.
Time for the pros and cons.
Pros of Buying a TIC
1. You might be able to do a condo conversion and get up to 25% returns on value!
Currently, TIC properties are 10–20% cheaper than condos in San Francisco. The reasons for this are the cons listed below. Some TIC properties have the legal possibility of condo conversion. Condo conversion can happen through a lottery for 3+ unit buildings or a direct application for 2 unit buildings. If you can successfully convert your TIC to a condo, you have automatically increased your asset’s value by up to 25%, in addition to market appreciation. Now that is a fantastic investment!
However, many factors affect condo convertibility, such as:
- Past evictions
- % of units that are owner or tenant occupied
- Length of stay of each owner or tenant
- Former entries into condo conversion lottery. To learn about conversion lottery, please read this post: http://bit.ly/2roruCu
- The failed lottery entries might affect your condo conversion.
It is important to work with your realtor and a good lawyer to go through these factors and make sure the TIC unit can feasibly be converted into a condo. Once feasibility is discussed, conversion costs become important. It is always good practice to know how much the conversion will cost to determine Return on Investment (ROI) compared to buying a condo directly.
2. You are paying 10–20% less than a condo per square foot. If you plan to live in it for a while and then sell it, it can be fantastic bang for your buck.
Even if condo conversion is not possible, if you plan to live in the property you purchase and eventually sell it to move to a bigger house, TICs are a desirable option.
- Appreciation: TICs have the same percentage appreciation as condos (I analyzed MLS data to prove this — see the section below). So you get similar % returns as condo owners on your real estate investment when you sell.
- Lower Capital Expenditures: Not only are you paying 10–20% less for your property; you are also paying 10–20% less property tax. Property tax is a function of property value in California.
3. Higher ROI if you plan to rent it out — with a catch
If you buy a TIC 10–20% cheaper than a condo, and rent it out, you get the same rent as a condo would. So your monthly and annual ROI is by default 25% higher than a condo.
Is this too good to be true?
Yes, because TIC units have rent control. You will not be able to raise your rents as much as a condo owner can, which will hurt your ROI in the long term. I would advise talking to a lawyer and making sure you have a full understanding of the legal risks of TICs compared to condos. See the reading resources at the bottom of this post for more information.
4. Exposure to San Francisco Real Estate
TICs are the cheapest way to get exposure to San Francisco’s real estate. Buying a TIC can be financially rewarding decision for current renters in San Francisco, because once you own a property, you do not have to pay rent and you will own a rapidly appreciating asset, which took only 4 years to recover from the 2008 recession.
5. Ability to Buy in a Nicer Neighborhood
Because TICs are 10 — 20% cheaper, you might be able to buy in a more expensive neighborhood, which you may otherwise priced out of. More expensive neighborhoods (e.g. Pacific Heights, Presidio Heights, Cow Hollow) are more recession proof: more owners in those neighborhoods can afford to hold their properties during recessions. As a result, prices do not drop as much due to shortage of supply.
What Are the Cons of Buying a TIC?
1. TICs have legal complexities — many of them.
We have established that when you buy a TIC, you are buying a percentage stake in an entire building, where your unit is defined by a unique contract written by a fallible lawyer, who is capable of making errors. You have to read this contract carefully and make sure you are legally covered. I advise getting legal counsel to review everything before you put in the offer.
2. Rent control
If you are buying a TIC in hopes of eventually renting it out, know that TICs are covered under San Francisco rent control, and condos aren’t. The amount you are allowed to increase annual rent as a landlord starting March 1, 2018 is 1.6%. There is no such limitation on condos. More information here.
It is also extremely hard to remove an problematic tenant in a TIC. Understanding eviction law and rent control law is important before making your buying decision.
3. Fractional Mortgage
If you want to secure financing for a TIC, you will most likely get a fractional loan. There are only a few lenders and few loan options in fractional financing.
The cons of fractional loans are:
- Higher interest rate
- Higher down payment
- Higher monthly payment
- Fewer choices of lenders and loan types
Note: Group TIC loans is an alternative form of financing, where a group of people buying a multifamily building apply for a loan together. If you are buying an individual TIC, this is usually not an option.
4. Condo conversion might not be possible
As mentioned in the prior section, condo convertibility might or might not be possible depending on several factors. Make sure you talk to a real estate lawyer to make sure you can convert to a condo before you put in an offer. Condo convertibility not only matters for long-term potential but also affect the market value of the TIC.
5. Sells Harder in Market Downturns
During recessions, it is harder to sell a TIC than a condo. TICs sit longer in the market before they sell, when condo prices have dropped significantly. When prices are lower, the TIC vs condo dilemma becomes more pronounced.
If I Buy a TIC, How Does It Appreciate Compared to a Condo?
As a former big data guy, I obviously had to build a database and run some SQL queries to find out with my colleague Jeremie Young. Rule #1 of data science: Never rely on dirty data from other sources. Make sure your data is clean yourself.
Below is how the appreciation of TIC units compared to condos in the San Francisco Bay area between 2010 and 2018. This data is pulled from the official San Francisco Multiple Listing Service.
Median prices of TICs compared to condos from 2007 and 2017
As we can see from this graph, TIC prices appreciated slightly faster than condos between 2008 and 2017. Overall, TIC prices appreciate as much as, if not more than, condos. If you want your investment to appreciate, TICs clearly check the box.
How Cheap (in Percentage) were TICs Compared to Condos Between 2007 and 2017?
Over the last 10 years, TIC prices have slowly approached condo prices. While on average, TICs were almost 25% cheaper than condos in 2007, now they are only about 15% cheaper. Because of their relative affordability, they are gradually becoming more desirable among San Francisco buyers.
How Hard Will It Be To Sell My TIC Once I Buy It?
Days on market, the number of days a property takes to sell after it is listed publicly, is the best indicator of how hard it was to sell that property. If a property sold within a week, it means it was in high demand. If it took weeks to sell, it means it wasn’t as desirable.
During the recessionary environment between 2008 and 2010, TICs were harder to sell . As the economy recovered in 2010–2011, it became much easier to sell TICs. This is demonstrated by the graph below:
Number of Days Condos and TICs were on Market Between 2007-2017
Takeaway: If you are buying a TIC, you should plan to hold it during a future downturn and organize your financial strategy accordingly.
What Are Important Questions To Ask When Buying a TIC?
There is an already very-well flushed out article on this by Andy Sirkin’s Law Office. You can read it here:
Takeaway 1: There is no free lunch!
While you are getting that nice 10–20% discount, you should make sure you are OK with the tradeoffs of owning a TIC unit.
Takeaway 2: Every TIC unit is unique with its own challenges and legal intricacies. Every building has its own legal history and owner/tenant makeup that affects whether you can rent comfortably or condo convert. Make sure to work with a good realtor (such as myself) and a good lawyer to do all the due diligence you can to make sure you are buying a TIC that won’t give you any bad surprises!
Takeaway 3: If you do the right due diligence, a TIC can be a great way to get exposure to San Francisco’s real estate and to benefit from the its rapidly rising real estate prices.
Extra Resources to Read In Your Home Hunting Adventure
Below are more reads that I personally found useful:
- Read my second TIC article on condo conversion and its upside.
- Andy Sirkin’s TIC related blog posts that all listed on this page: https://andysirkin.com/tenancy-in-common-tic. SirkinLaw APC, among many other services, specializes in TICs and condo conversions.
- G3MH’s Guide to TICs: http://g3mh.com/wp-content/uploads/2017/11/2017-TIC-FAQs.pdf. G3MH is a legal firm which also specializes in TICs.
Deniz Kahramaner is the Founder and CEO of Data Bay Area and a Realtor. He was formerly the Head of Data at Accompany Inc. He holds a BS in Electrical Engineering and an MS in Computer Science at Stanford University.
Jeremie Young is a Real Estate Marketing Professional at Pacific Union. He is a marketer by day and a big data analyst who seeks to uncover useful insights in real estate by night. He previously held positions at Redfin and ZeroCater.
Note: This article is not intended to be legal advice. Before you buy a TIC, I would highly advise you to get legal counsel. I would be happy to recommend a list of lawyers who specialize in TICs if you reach out to me at firstname.lastname@example.org