TICs are a fantastic option for buyers in an inventory strapped market like San Francisco and should not be overlooked. Yet more often than not, the first response I get when talking to buyers is “I was told TICs are really risky and should stay away from them….” While that would have been good advice 20 years ago, the fact is, nothing could be farther from the truth today!
Risky History…
TIC stands for Tenancy In Common and were introduced in the 1980s as a way for buyers to purchase a property in neighborhoods they may not otherwise be able to afford. Unlike a condominium, TICs are not subdivided. In the simplest terms, it is a form of co-ownership in which each property owner owns a percentage of the property rather than a specific unit.
Prior to 2002, when purchasing a TIC, buyers were required to be under one group loan, creating financial risk. Should one TIC owner miss his/her share of mortgage payment, the other owners of the property would be in jeopardy of defaulting. These riskier bulk loans existed because early TICs did not have specific space assignments or “usage rights” as part of their co-ownership agreements.
TICs Today…
In today’s world, the majority of TIC properties in San Francisco are actually “space-assignment co-ownerships” or SACO TICs “…which are intended to have the look and feel of condominiums or other legal subdivisions, and assign particular houses, apartments, rooms, offices, stores, or storage spaces to each owner…” (Andy Sirkin). SACO TICs are created with TIC Agreements that specify these space assignments and spell out the rules and regulations for use.
More importantly, these SACO TICs opened the door for “fractional financing” where each TIC owner obtains his/her own financing on their percentage of the property, eliminating the earlier risk of becoming responsible for another owners inability to pay their loan. “These fractional mortgages are secured only by one co-owner’s TIC share in the property, meaning that one owner’s mortgage default does not imperil the other owners.” (Andy Sirkin)
Bottom line…
While loan options for TICs are usually limited to 5, 7 or 10/1 ARMs and often require a min of 25% down, when compared to a condo in the same neighborhood, today’s TICs are a fantastic value without any additional risk.