what has to be done to convert a 2 unit residential property in sf to condos
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 sympathise 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 unabridged edifice is divided into percentage stakes between multiple owners.
Each owner receives the exclusive correct to occupy a item space that is delineated in a TIC agreement. The percentage ownership (e.thousand. John Doe owns vii.eight% of the edifice) is shown on the title (grant human activity) of the property.
To learn more about TICs, y'all tin can read my all-encompassing post nigh 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 amazing.
TICs, a minor niche
Condos were sold 10 times than TICs.
TICs are non a very common type of buying due to the legal complexities associated with TIC ownership, and the fact that most national banks (Banking concern of America, Wells Fargo etc) do not lend to TICs.
Nonetheless, TIC owners have some privileges.
Privileges of a TIC Owner
Every bit listed in my previous article nigh TICs, owning a tenancy in common comes with advantages:
· They price less than 10–20% the price of a similar condo.
· You might have a higher rental ROI compared to your purchase price if you plan to hire it out — although you are beholden to stricter rent control rules.
· You lot get exposure to San Francisco real manor for less- y'all ain a rapidly affectionate nugget, at an entry-level price.
· Considering TICs are cheaper, you might be able to purchase a property in a more expensive neighborhood. For case, buying a good condo in Pacific Heights tin can be a nightmare where you lot compete against 10+ offers. A TIC tin can treat you ameliorate.
But today nosotros volition clarify the most of import perk of TIC ownership:
· Y'all might be able to catechumen it to a condo and increase your asset value up to 8% on acme of appreciation (updated as of December 2020).
Reasons for Condo Conversion
one. You volition be the sole possessor on the title of your condo
This ways that the city officially recognizes your own unit within the building. As a TIC owner, you are merely recognized every bit a fractional owner in a building.
For example, on San Francisco title records, a TIC owner will be shown every bit a 50% owner of the 2-unit edifice 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 y'all 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 revenue enhancement from individual TIC owners and pays it to the metropolis equally a whole.
b) If you rent out your unit, you have full bureau to exercise an possessor-motion in eviction or an Ellis Act on your unit of measurement if you want to start to live in it again. If you ain a TIC, you lot will typically need to go the other owners' consent to do any sort of owner move-in, considering any type of eviction tin can stain the building as a whole in the eyes of the hire lath.
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
But select local banks lend mortgages to TICs, such as Sterling Depository financial institution, Meridian Lending, Patelco Credit Union, Bank of San Francisco, Banking concern of Marin and Redwood Credit Union. None of the large national lenders (Wells Fargo, Citibank, Chase, Showtime Democracy etc) lend to TICs. Why? Because TIC is a very niche product that exists in a few cities in the U.s.. Supporting mortgages and foreclosures to a very limited number of TIC units doesn't make fiscal sense for large banks, but makes a lot of sense for small banks.
Furthermore, even local lenders tin can't lend
TIC mortgages tend to have less favorable terms and rates than condo mortgages. Interest rates on TIC can exist a lot more, sometimes up to 0.seven–0.viii% more than those for condos. Also, TIC loans tend to crave a bigger downwardly payment, such every bit 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 then you tin can acquire more virtually TIC mortgages.
As soon as your condo converts a TIC, y'all tin refinance your belongings at a lower interest rate with a lower downpayment. Also, when you lot sell your condo, you will be able to go a larger pool of buyers from more than banks, and hence illicit more competition.
3. Condos' average cost has historically been higher.
If y'all plan to convert your TIC into a condo and and then sell it, the proceeds could exist high. Although both condos and TICs were initially sold for an average price of $i,26M at the kickoff of 2017, the percent divergence betwixt their sold price has increased over time. In the final quarter of 2020 TICs were sold for an average toll of $i.10M while condos boilerplate $i.30M.
four. Same dwelling, higher value
The percentage discount of TIC prices over condo prices has inverse over fourth dimension but in the terminal yr, TICs were sold at about 8% less than condos. Owners who were able to convert their TIC into a condo in 2020 appreciated it upwardly to about viii%.
5. Information technology'southward easier to sell a condo than a TIC
We besides analyzed the average number of days it takes owners to sell both TICs and condos.
As y'all can run into from the graph below, not merely have TICs been historically more than circuitous to sell, only the number of days information technology takes to sell a TIC over a condo has historically been higher.
In the last yr, 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 downward the economy globally. More often than not, information technology is harder to sell a TIC than a condo.
If you manage to convert your TIC into a condo, yous will be able to sell it faster to a wider audience.
vi. Condos in San Francisco don't have rent control.
While TIC units have rent command, 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'due south hire control is much more relaxed than San Francisco's. As of Q4 2020, California doesn't allow hire increases of more than 5% year-over-year, while San Francisco limits the increase to 1–two% annually.
In brusque, when you ain a TIC, you will not be able to enhance your rents as much equally a condo possessor can.
Please annotation that your unit will continue to be San Francisco hire controlled after your condo conversion. Only after you sell your condo does the condo stop being rent controlled past San Francisco.
What Others Did — TIC to Condo Conversions in SF
From all the condos listed in the past iv years, 132 were previously a TIC at some bespeak in the past 15 years. This ways that,
one.37% of full condos listed in the terminal iv years were previously a TIC
Nosotros identified that just a very small-scale number of TICs owners were able to do a condo conversion. Permit'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 holding was sold afterward.
What do condo convertible TICs wait similar?
2 units
2 Bedroom
one Bathroom
Most of the condo-converted TICs were in two-unit of measurement 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 present, the only TICs eligible for fast track condo conversion are those in 2 unit buildings with no eviction history.
So, I ain a TIC and want to convert it into a Condo. What at present?
As of this writing (Mar. 2021), you are only eligible to convert your TIC into a condo if information technology has two units. Any multifamily edifice with more units will need to wait until the condo lottery returns.
Note: This article is not intended to be legal communication. Before you start the conversion process, we highly advise you lot to become 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 edifice where no prior evictions of protected tenants took identify.
- If y'all tin 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 piece of work with a adept realtor and expert lawyer during the entire procedure of condo conversion.
Brand certain 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 information technology's worth information technology to start the conversion process instead of direct buying a condo.
If y'all work with a good broker or Realtor (like our squad at Atlasa!), yous tin quantify:
- Your TIC loan costs until the condo conversion take identify
- The condo conversion costs (both application fees and the costs associated with bringing a TIC "upward 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
Writer
Deniz Kahramaner is the Founder and CEO of Atlasa and a Realtor. He holds a BS in Electrical Engineering and an MS in Information science at Stanford University. You can reach Deniz by emailing him at deniz@atlasa.com
Source: https://denizkahramaner.medium.com/san-francisco-tenancy-in-common-tic-condo-conversion-2abc8dc8ac69
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