Save 20% off your SF home with a TIC

Just do this: Buying a home in SF is expensive. If you want to make things easier on yourself, shave ~20% off the price of your next home by purchasing a property that is owned as a Tenancy-in-Common (TIC). TICs are unique to the Bay Area, function just like a condominium ownership model, but sell for ~15-20% less than single family homes or condos. For a place you intend to live in and own, it’s a great option in what is an otherwise crazy market!

When I purchased my San Francisco home back in 2014, I went through the effort of ‘getting smart’ on the market. I had been following real estate prices for years and knew what any given property would likely sell for. That’s why when I discovered Tenancy-in-Common (TIC) properties, I was amazed that they were available for 20% less than a comparable home or condo. I was wary at first, but after a little research realized there was nothing to fear. I took the plunge and it was one of the better financial decisions I’ve ever made.

If you’re considering buying property in SF, consider a TIC. They are a uniquely San Francisco phenomenon that is an outgrowth of the decades long battle over rent-control in the city. They sell at a discount for a few reasons outlined below, but those reasons shouldn’t affect you much as a primary home owner – particularly someone who might consider paying down their mortgage early. Given that, there’s no reason why you shouldn’t take advantage of this opportunity and save yourself upwards of $200K.

So… What is a TIC?

TIC (Tenancy in Common) is a legal form of property ownership. In most cases, it is used by real estate investors when they partner on the purchase of an investment property. It is not commonly used to divide up ownership of a residential building – typically that is done using a condominium ownership structure. But, the TIC ownership structure can be used for dividing the use of a multi-unit residential buildings. This requires a TIC agreement to stipulate which owners have exclusive use access to which parts of the building.

Why are there TICs in SF?

In San Francisco, people use TICs as an interim ownership structure for multi-unit buildings in the hope of eventually converting to a condominium. But many buildings have been ‘stuck’ in the TIC ownership structure due to the decades long battle between real estate investors, home owners and renters. It’s a complicated, convoluted story, but the shortest explanation is that:

  • 1978 – Property tax freeze: In 1978 the state passed Prop 13 which froze residential property tax in California at 1% and limited the annual tax growth to some fraction of stated inflations – this was a response to the high inflation of the time that was increasing property values and the corresponding property taxes – it was basically a tax revolt by the homeowners of California
  • 1979 – Rent control rollout: In theory, landlords were supposed to pass these ‘tax savings’ on to renters, but it didn’t work that way. As inflation continued to rise in the late 70’s, landlords jacked rents. Renters in SF (and other Bay Area towns) fought back by passing the San Francisco Rent Ordinance, which imposed rent control on any building that was occupied before June 13, 1979
  • 1995 – Costa Hawkins Rental Housing Act: By the 90’s the rent control craze and tenant coordination had waned, at which time Jim Costa was able to push forward his 1995 bill at the state level that effectively limited local jurisdiction over rent control by exempting single family dwellings and new construction from coming under rent control. Condominiums were included under the definition of single family dwellings
  • Buildings converted to condos to escape rent control: With the passing of the Costa Hawkins, there was now a path to remove rent control on a building by removing tenants, selling the building as a TIC, and then converting it to a condominium. Developers saw this opportunity and took advantage of it
  • Cities implement restrictions on the conversion to condos: To combat this erosion of rent control through condo conversion, local governments (like San Francisco) imposed restrictions – which meant owners could remove tenants from a building and re-sell it as a TIC, but wouldn’t be able to easily convert that building to a condo. The latest set of changes were rolled out in 2013, which effectively blocked conversion for buildings with 5+ units, or a history of Ellis Act / No Fault evictions

The result is that in San Francisco, any apartment or TIC building with 5+ units, or a history of an Ellis Act / No Fault eviction will not be eligible to convert to a condominium. This means they are stuck in the TIC ownership structure indefinitely.

What’s so bad about a TIC?

There are two drawbacks to the TIC ownership structure:

  1. Those properties will remain under rent control – by not converting to a condo, they will not get the benefit of the Costa Hawkins Act that removes rent control on the unit
  2. Loans for these properties are more expensive / less available – conventional mortgage loans for single family homes and condos can be sold into securitized investment pools that are then sold to investors from around the world. This is why 30 year mortgages are so readily available at such attractive rates in the United States. Unfortunately, TIC mortgages designed for splitting up a multi-unit building are considered unconventional and not eligible to be sold into those large securitized pools of mortgages. This means the only source of financing comes from banks and investors willing to hold the loan in their portfolio directly (as opposed to selling that loan off their books). Given this, lenders will often charge slightly higher interest rates, and offer shorter fixed rate loans – to my knowledge you can’t even get a 30 year fixed rate mortgage on an individual TIC. The banks usually offer 3, 5 and 7 year fixed rate loans

For these two reasons, people discount the price of a unit sold as a TIC. This typically results in a 15-20% discount from an identical property sold as a condo.

So why go with a TIC?

As discussed above, for the right buyer, a TIC can be a great deal given the significant price discount. The ideal TIC buyer is someone who plans to live in the TIC unit, and pay off their mortgage as soon as they can. This is because as an owner, you are your own tenant and the ‘rent control’ issue doesn’t affect you while you live there. Second, if you’re planning to pay off your mortgage, then the higher financing cost is only a minor inconvenience. Ideally, you can get a 5 or 7 year fixed rate mortgage and pay off the loan before that fixed rate even goes variable.

If you’ve read any of my other writing on home ownership, this is exactly the approach I recommend for reaching Ramen Retirement – purchase your primary residence and pay down the mortgage as soon as possible. It’s the perfect low risk part of your investment portfolio. Therefore, TICs become an excellent way to go about doing this.

Tactical items for future TIC owners

If you think a TIC is right for you keep a few things in mind:

  1. Legal: Make sure you have the right lawyer drafting the TIC agreement (I think Sirkin Law is probably the leader in the city on this), then it functions pretty much identically to a condominium – while legally speaking you own a % of the entire building, practically speaking you own your specific unit, as you will have exclusive use rights for the areas described in the contract. Again, as long as you have the right provisions in the contract, you will be protected from being dragged into any issues that might arise from the co-ownership structure – i.e. mortgage defaults from other owners, lawsuits against other unit owners, taxes owed etc. So in short, it should feel pretty much like you own and live in a condominium building
  2. Loans: Shop around to the banks who offer individual TIC loans – they include Bank of Marin, Sterling Bank and the Bank of San Francisco

I would recommend TICs for anyone looking to buy and pay off their mortgage. You will save up to 20% on the price of a home which could equate to many years of savings for someone working and living in SF. Look into this for yourself, and see if it makes sense for your situation.

Good luck, and enjoy the journey!

Other relevant articles & notes:

Median Sales Price in San Francisco – Condo vs. TIC

TIC Prices

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