From a Tenancy In Common (TIC) to a Condo — 6 Reasons to do a Condo Conversion
Prelude
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 deniz@atlasa.com
TLDR: What is a TIC?
Tenancy in common (TIC) is a form of ownership where an entire building is divided into percentage stakes between multiple owners.
Each owner receives the exclusive right to occupy a particular space that is delineated in a TIC agreement. The percentage ownership (e.g. John Doe owns 7.8% of the building) is shown on the title (grant deed) of the property.
To learn more about TICs, you can read my extensive post about purchasing Tenancy in Common (Pros and Cons)
The most fascinating topic related to TICs is that some of them can be converted into condos.
In this article, we will dig into the reasons for condo conversion while giving an overview of the San Francisco’s condo conversion market over the last 4 years.
Pulling data from the official San Francisco Multiple Listing Service, we analyzed how many TICs were sold in San Francisco per each condo sold. The results are astonishing.
TICs, a small niche
Condos were sold 10 times than TICs.
TICs are not a very common type of ownership due to the legal complexities associated with TIC ownership, and the fact that most national banks (Bank of America, Wells Fargo etc) do not lend to TICs.
Even so, TIC owners have some privileges.
Privileges of a TIC Owner
As listed in my previous article about TICs, owning a tenancy in common comes with advantages:
· They cost less than 10–20% the cost of a similar condo.
· You might have a higher rental ROI compared to your purchase price if you plan to rent it out — although you are beholden to stricter rent control rules.
· You get exposure to San Francisco real estate for less- you own a rapidly appreciating asset, at an entry-level price.
· Because TICs are cheaper, you might be able to buy a property in a more expensive neighborhood. For example, buying a good condo in Pacific Heights can be a nightmare where you compete against 10+ offers. A TIC can treat you better.
But today we will analyze the most important perk of TIC ownership:
· You might be able to convert it to a condo and increase your asset value up to 8% on top of appreciation (updated as of December 2020).
Reasons for Condo Conversion
1. You will be the sole owner on the title of your condo
This means that the city officially recognizes your own unit within the building. As a TIC owner, you are only recognized as a fractional owner in a building.
For example, on San Francisco title records, a TIC owner will be shown as a 50% owner of the two-unit building 2055–2057 Filbert St. A condo owner will be shown as the 100% owner of 2055 Filbert St.
Being the sole title owner of a unit within a building gives you greater privileges than being a fractional owner of the building, such as
a) You get to pay your own property tax. TIC buildings have a home owner’s association (HOA) that typically collect property tax from individual TIC owners and pays it to the city as a whole.
b) If you rent out your unit, you have full agency to do an owner-move in eviction or an Ellis Act on your unit if you want to start to live in it again. If you own a TIC, you will typically need to get the other owners’ consent to do any sort of owner move-in, because any type of eviction can stain the building as a whole in the eyes of the rent board.
c) TIC buildings tend to have more involved, overbearing HOAs than condos, due to the fractional nature of ownership.
2. Condos have much better lending options
Only select local banks lend mortgages to TICs, such as Sterling Bank, Pinnacle Lending, Patelco Credit Union, Bank of San Francisco, Bank of Marin and Redwood Credit Union. None of the large national lenders (Wells Fargo, Citibank, Chase, First Republic etc) lend to TICs. Why? Because TIC is a very niche product that exists in a few cities in the US. Supporting mortgages and foreclosures to a very limited number of TIC units doesn’t make financial sense for large banks, but makes a lot of sense for small banks.
Furthermore, even local lenders can’t lend
TIC mortgages tend to have less favorable terms and rates than condo mortgages. Interest rates on TIC can be a lot more, sometimes up to 0.7–0.8% more than those for condos. Also, TIC loans tend to require a bigger down payment, such as 25% or 30%. If you reach out to me at deniz@atlasa.com, I am more than happy to connect you to a TIC lender so you can learn more about TIC mortgages.
As soon as your condo converts a TIC, you can refinance your property at a lower interest rate with a lower downpayment. Also, when you sell your condo, you will be able to get a larger pool of buyers from more banks, and hence illicit more competition.
3. Condos' average price has historically been higher.
If you plan to convert your TIC into a condo and then sell it, the gain could be high. Although both condos and TICs were initially sold for an average price of $1,26M at the beginning of 2017, the percentage difference between their sold price has increased over time. In the last quarter of 2020 TICs were sold for an average price of $1.10M while condos average $1.30M.
4. Same home, higher value
The percentage discount of TIC prices over condo prices has changed over time but in the last year, TICs were sold at almost 8% less than condos. Owners who were able to convert their TIC into a condo in 2020 appreciated it up to almost 8%.
5. It’s easier to sell a condo than a TIC
We also analyzed the average number of days it takes owners to sell both TICs and condos.
As you can see from the graph below, not only have TICs been historically more complex to sell, but the number of days it takes to sell a TIC over a condo has historically been higher.
In the last year, it took, an average of, 10 days more for owners to sell a TIC than a condo.
This trend is expected to continue over time so we will see how this difference in days increases.
Moreover, the COVID-19 pandemic has slowed down the economy globally. Generally, it is harder to sell a TIC than a condo.
If you manage to convert your TIC into a condo, you will be able to sell it faster to a wider audience.
6. Condos in San Francisco don’t have rent control.
While TIC units have rent control, condos in San Francisco are exempt from San Francisco-specific rent limitations. While the condo will still be subject to California rent control rules, California’s rent control is much more relaxed than San Francisco’s. As of Q4 2020, California doesn’t allow rent increases of more than 5% year-over-year, while San Francisco limits the increase to 1–2% annually.
In short, when you own a TIC, you will not be able to raise your rents as much as a condo owner can.
Please note that your unit will continue to be San Francisco rent controlled after your condo conversion. Only after you sell your condo does the condo stop being rent controlled by San Francisco.
What Others Did — TIC to Condo Conversions in SF
From all the condos listed in the past 4 years, 132 were previously a TIC at some point in the past 15 years. This means that,
1.37% of total condos listed in the last 4 years were previously a TIC
We identified that only a very small number of TICs owners were able to do a condo conversion. Let’s take a look at the ones who achieved it.
Where were they located?
The majority of the condo conversion took place in the Castro neighborhood (23 of them). The ranking below shows the top ten neighborhoods where past condo conversions happened and the property was sold afterward.
What do condo convertible TICs look like?
2 units
2 Bedroom
1 Bathroom
Most of the condo-converted TICs were in 2-unit buildings, where the TIC had 2 bedrooms and 1 bathroom. This makes a lot of sense because SF has postponed the condo conversion lottery until 2024, and nowadays, the only TICs eligible for fast track condo conversion are those in 2 unit buildings with no eviction history.
So, I own a TIC and want to convert it into a Condo. What now?
As of this writing (Mar. 2021), you are only eligible to convert your TIC into a condo if it has two units. Any multifamily building with more units will need to wait until the condo lottery returns.
Note: This article is not intended to be legal advice. Before you start the conversion process, we highly advise you to get legal counsel. We would be happy to recommend a list of lawyers who specialize in a condo conversion.
Conclusions
- Currently, not all TIC properties have the legal possibility of condo conversion.
- Until 2024, condo conversions can only happen if the TIC is in a 2 unit building where no prior evictions of protected tenants took place.
- If you can successfully convert your TIC to a condo, you can automatically increase your asset value up to 8% in addition to market appreciation.
Additional Considerations
Every TIC unit is unique with its own challenges and legal intricacies. Make sure to work with a good realtor and expert lawyer during the entire process of condo conversion.
Make sure you do an analysis on the Return of Investment (ROI) before purchasing a condo conversion-eligible TIC. Taking into account all the possible conversion costs might help to determine if it’s worth it to start the conversion process instead of directly buying a condo.
If you work with a good broker or Realtor (like our team at Atlasa!), you can quantify:
- Your TIC loan costs until the condo conversion take place
- The condo conversion costs (both application fees and the costs associated with bringing a TIC “up to code”)
- The condo eligibility of a specific TIC that you are considering buying
- Comparison to similar cases in own your neighborhood and areas nearby
Author
Deniz Kahramaner is the Founder and CEO of Atlasa and a Realtor. He holds a BS in Electrical Engineering and an MS in Computer Science at Stanford University. You can reach Deniz by emailing him at deniz@atlasa.com
