TIC Financing "Do's" and "Don'ts"
Many of my clients are first-time homebuyers. When we start the pre-approval process they usually tell me they're interested in looking at condominiums and single-family homes. However, it's often the case that our discussion ends up including TIC's as well. Many of them are initially wary of the shared ownership structure inherent in TIC's but they also realize prices for TIC units can be significantly less than comparable condominiums and single-family homes. Once they've made the decision to consider TIC's I help them understand how TIC loans work and advise them of what I consider to be the “do's" and "don'ts" of TIC financing. A partial list is shown below.
TIC Financing "Do's"
Do get pre-approved before you buy! This is a must regardless of the type of property you're looking for and it's especially important with TIC's. You'll need to show the seller that you can support your share of the group financing. If separate TIC financing is being offered you'll need to qualify for your loan on your own. Separate TIC loans carry higher rates than loans for condominiums or homes and also require larger down payments. You'll need to make sure you can qualify for one.
Do clean up your credit before making an offer. It's always smart to run your credit report early to catch any problems. Within a TIC group, the lowest score among the co-owners determines the rate the lender offers the whole group. You don't want your score to adversely affect your new TIC partners! If you're considering separate TIC financing you'll need to have a minimum middle credit score of 680.
Do expect to make a down payment of at least 10% towards your purchase. Group TIC loans are secured against multiunit properties. Lenders require larger down payments for loans secured by multiunit properties versus loans secured by a single-family home or condominium. For separate TIC loans lenders require at least a 20%-25% down payment, although it is possible to put down as little as 10%.
Do allow time to assess the financial strength of your potential co-owners before committing to your purchase of a TIC. When you make an offer be sure to include a contingency that allows time for meeting your TIC partners and reviewing their paperwork. Their financial strength is important because all of you will share responsibility for the same loan. If you're getting a separate TIC loan you'll still want to assess the financial strength of your partners. All of you will share responsibility for taxes and insurance on the building.
Do expect rates and terms for separate TIC loans to improve. There are more lenders entering the market every month and it's likely that the increased competition will lead to lower rates and, possibly, lower required down payments.
TIC Financing "Don'ts"
Don't use interest rates as your sole criteria when searching for a TIC loan. A low rate is important but it's also important to consider what happens when one of your TIC partners needs to sell. For example, a group loan with a partial assumption feature may carry a higher interest rate, but will make it possible for a buyer to assume a selling partner's portion of your group loan. This means the remaining partners don't need to refinance when someone sells. With separate TIC loans, rates can be 1% or more above traditional group loans but the upside is that if one of your co-owners defaults on his or her loan you won't be affected.
Don't assume all TIC loans work well with all TIC units. In San Francisco a two unit building can begin the conversion process after one year if it is 100% owner-occupied. Given this, a short-term adjustable rate mortgage may work well. Three to six unit buildings must win the condominium conversion lottery before converting. Because it could take several years to win, a longer-term loan with an assumption feature, or separate TIC loans, might work better.
Don't put yourself in a situation where you need to close quickly. If you're getting a group loan to finance your purchase you'll want to have time to meet and approve of your new co-owners. You'll also need time to draw up your TIC agreement. For this reason, it often takes 60 days for a TIC purchase to close instead of 30 days, which is customary in San Francisco.
Don't base your purchase decision on the expectation of converting your TIC unit to a condominium. Two unit buildings notwithstanding, it can often take several years to win the condominium conversion lottery in San Francisco. I always tell my clients to be happy with their TIC unit and their co-owners. If you get the chance to convert your home to a condominium, great! But don't count on it. Get financing which works if your unit remains a TIC over the long term. In cities outside San Francisco local rules often require bringing a building up to current building codes and adding parking. Code work could be costly and it might not even be possible to add parking.
Don't limit your TIC search to San Francisco. I receive calls on a daily basis from developers and agents selling TIC units in Marin County, the East Bay, and the Peninsula. Any place where property values are high and the ability to convert buildings to condominiums is restricted will likely have a market for TIC's.
Gordon Friedman is a TIC Mortage Expert based in San Francisco and a regular contributor to "the Brain". To contact Gordon Friedman: