Category: Condominiums

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TICs, San Francisco’s Involuntary Reflex: Part 1

Inconvenient and Ugly

A tic is an involuntary and habitual muscle spasm, frequently in the face.  If you live in San Francisco, a TIC is also what many people end up with when they buy a flat in one of San Francisco’s classic 2-4 unit buildings.  Like the medical condition, TICs are inconvenient at best and can be downright ugly at worst.

TIC stands for “Tenancy-In-Common,” a form of legal title by which multiple owners take title to a single property.  In San Francisco, this form of taking title has come to be used as an end-run around the City’s restrictions against converting multi-tenant buildings into condominiums.

When you buy a condominium, you’re basically buying your particular unit and that’s all. But when you buy a TIC interest, you’re buying an interest in the building as a whole, along with your other TIC owners.

Lawyering Has Its Limits

Why does it matter?  Because buying a roof over your head is expensive.  Most of us need to borrow money to do it.  And the major disadvantages of TICs over condominium ownership relate to financing issues.

  • When you buy a condo, you get a loan on your unit and that’s all.  If you don’t pay your loan and the bank forecloses, they have the right to sell your condo to get repaid, but they don’t have the right to sell the building the condo is in.
  • But when you buy a TIC, in the vast majority of cases you and your co-owners become co-signers on a loan for the entire building.  You qualify for the loan together and you are “on the hook” together for repaying it.  If one of the co-owners stops paying his share of the loan and the others don’t feel inclined to make up the difference, the bank has the right to sell the entire property at a foreclosure sale.  That itself would be enough to give many prospective buyers a twitch or two.
  • There are a few banks that will finance separate TIC interests.  This pretty much puts the TIC on a par with a condo.  But interest rates are higher than on a regular condominium loan; and the building itself needs to “qualify” for the program.  Also, although these kinds of loans have been around for a while and seem to have survived the credit crunch, there’s no guarantee that they’ll continue to be around.
  • Selling a TIC interest can also be more difficult than selling a condo. If the lender doesn’t permit the buyer to take the seller’s place as a co-signer on the loan, the owners may be forced to take out a new loan to accommodate the new buyer.  If the lending environment isn’t good, that can kill the sale.  Or the bank can use the sale to try to extract better terms for itself.

It’s true that clever lawyers – and I say that without any irony – have developed legal structures to mitigate these risks.  Andy Sirkin and Andrew Zacks are two prominent attorneys who specialize in this stuff.  (See their websites for excellent in-depth material on TICs.) But TICs remain inherently riskier and more complicated than condominiums, and no amount of legal engineering can fix that.

Tomorrow we look at the market data for TICS and condos.

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Homes vs. Condominiums: How much extra do you pay?

Recently, I blogged about the fact that condominiums seemed to be holding up better than single family homes in terms of their decline from their all-time highs.

At the same time, I noted that there was only about $100,000 difference in median value between condos and homes.  That seemed like a small delta and I was interested to see whether it was, historically speaking.  Turns out that it is.

Since, until recently (ahem!), home prices along with everything else have tended to go up, I decided not to look simply at the difference in price between condos and homes.  Instead, I converted the price difference to a percentage of the median value of condos sales for the given period.  This represents the “premium” for owning a home rather than a condo.  Here’s the result.

Average Premium for Home vs Condo

Sure enough, you’d normally expect to pay around 20% more for a home than for a condo.  But starting in 2008, the home “premium” started dropping significantly.  I believe that drop was a direct reflection of the housing market decline that began with homes and only subsequently spread to condos.  As I postulated in my blog, condo values possibly held up for longer as people got squeezed out of the single family home market by tightening credit standards.

But what about 2009?  The chart above shows the premium based on all sales for the year to date.  The picture looks a little different if you look at values on a monthly basis.

Average Premium for Home vs Condo 2009

Again this is consistent with my previous blog.  It suggests while that condo values may have held up longer, they too have fallen so that the premium paid for a home is now heading back to its historic norm.  Of course, the other possibility is that home prices are beginning to recover.  It may well be that both explanations are true.

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Surprise! Condos are Holding Up Better Than Homes

For the quarter century (gulp!) that I’ve been involved in real estate, the conventional wisdom has always been that condo values generally do worse in down markets than homes.  Why?  To be honest, I’m not sure, but I think it’s because it’s easier to overbuild the condo market than the single family home market.  It goes back to that famous quote:  “Buy land – they aren’t making any more of it.”  Just take a look at Miami, Chicago – or downtown San Francisco.  One new high-rise can hold hundreds of condos in the sky.  Try building just one new home in SF, let alone hundreds – it aint happening.Of course, more supply  + less demand in a down market means prices fall.  Has that been the case in San Francisco?

I looked at percentage change from all time highs for condos and single family homes (sfd’s) since January 2003 and here are the results for the city as a whole.

Condos vs. SFDs All Districts Chart

Until June 2008, condo and home prices were in lock-step in terms of price appreciation and decline.   Thereafter, homes fell first and further. (Do I hear a lithp?) In March 2009, the delta between condos and home prices was a whopping 13%.  Since then, however, home prices have recovered smartly:  as of June, homes are about 4.5% further off their all-time highs than condos.

What does this all mean?  First of all, I wouldn’t take too much consolation just yet in the upward spike in both condo and home prices since the beginning of the year.  If you take a look at the chart, this happens every Jan/Feb when people start buying out of the winter doldrums.  I wouldn’t predict a bottom until we see what happens this winter.

Secondly, given the woeful condition of the economy and the credit markets, together with the fact that San Francisco is not a badly overbuilt housing market, it sort of makes sense that condos are holding their value relatively well as people are finding themselves priced out of more expensive single family homes.

Still, the current delta of only $100,000 between median condo and median home prices seems rather small.  If people are just begging to know what the historical average is, let me know and I’ll find out.