A TIC Asks Why Rent?

As I drove to an appointment this morning, I passed a banner (pictured below) that asks ‘Why Rent?’ with the implied solution being the purchase of a San Francisco TIC (tenancy-in-common) unit. As a Realtor in San Francisco, you might think I’d be all over TICs as a great opportunity. You’d be wrong, and I’d like to explain why. But before I do so, a few caveats and disclaimers.

First of all, I’m not trying to single out the property that this sign is attached to. My comments apply generally to TICs in 3 – 6 unit San Francisco buildings, and particularly to any TIC interest that has fractional financing. The current rules that apply to TIC interests in 2 unit buildings (100% owner occupied, clean eviction history) can make them a more sensible purchase. I have personally purchased a TIC interest in a two unit building and converted it to a condominium, so I’ve been down that road and can talk about it at length. TICs also exist in buildings with more than 6 units, but the city at this time has an absolute prohibition on their conversion to a condominium, which makes them (IMHO) an even less sensible purchase than in a 3 – 6 unit building.

Why Rent? Here’s Why…

The Basic Concept of a Tenancy in Common (TIC)
The idea behind a tenancy in common is to take a multi unit building in San Francisco that has historically been rented and carve it up into units that can be individually owned. A condominium is the “traditional” way that homes in multi-unit buildings are legally separated so that ownership can be independently transferred, and mortgages can be secured against a particular residence. The city of San Francisco has strict rules (subject to change at the whim of the San Francisco¬†board of supervisors) about converting a building into a condominium, so if you own a multi-unit building you just can’t go down to the planning department and say you want to become a condominium, which would be the straightforward way to subdivide a multi-unit building and sell of each of the residences.

Instead, the tenancy-in-common share was created, which gives a particular owner a percentage interest of ownership in a building, along with the exclusive right to occupy a specified unit. But because the building is still legally a multi-unit building, financing can’t be obtained in the same way as it can a condominium. The first solution was the ‘Group Loan’.

The Group Loan
In the group loan, all of the TIC owners in a building are on one combined/shared/joint/we’re-all-in-this-together mortgage. Which means that each individual on the mortgage is liable for 100% of the mortgage payment (not just their share) should someone else fail to make their payment. This is why prospective TIC owners would sniff through the finances of prospective members, since they wanted to feel good about their fellow TIC members ability to pay their share of the mortgage and property taxes. This shared risk was the primary deterrent for many people considering a TIC.

However, in addition to shared risk, a group loan has some other major flaws, particularly when it comes to transferring an interest in a TIC. In the sale of a TIC interest secured by a group loan, the transaction is considered a refinance by a bank because some – but not all – members of the loan are leaving and being replaced by others. The equity requirements in a refinance (particularly a cash-out refinance, which is what would be required to walk away with any equity) are dramatically stricter. And that’s before we even take into account an increase in interest rates caused by the refinance which is triggered by the transfer of a TIC share. Both of these issues were only theoretical when loans were easily obtained and interest rates were decreasing. But one day underwriting standards got realistic and interest rates started increasing, and these two issues quickly become major hurdles that caused massive heartaches and heartbreak, not to mention plenty of lawsuits and cancelled escrows. And at about this time, the fractional loan came along to solve all these problems, but…

Fractional Financing
To solve the problems of the group loan in a tenancy in common, some local attorneys and banks got together and started offer what is referred to as fractional financing. In fractional financing, the bank offers individual loans to each of the TIC owners, in theory making it easier to transfer a TIC share and avoiding the refinance, equity, and shared default risk of a traditional TIC group loan. I say ‘in theory’ because while that was the goal, fractional financing introduces its own set of challenges. What are those challenges?

In a nutshell, I think it is fair to call fractional financing “experimental financing” – when it first rolled out – roughly 2006, we did one of the first deals in the city that was a conversion of a group loan to fractional loans in a 6 unit TIC – there were about a dozen banks that were willing to offer fractional loans. At the end of 2011, depending on who you ask, there are between one and three banks that are still willing to offer fractional financing. While banks never suffered major losses on their TIC loan portfolio, they were all portfolio loans that weren’t resold on the secondary market. As banks have sought to diversify their portfolio holdings and preserve capital they’ve become less interested in offering TIC fractional loans.

So far, we’ve continued to see banks offer financing on TIC projects where they originally offered a fractional loan. But what if the one to three banks left in the fractional financing market change their mind and decide they want out of the business? If no buyer could get a loan from a lender, you could only sell to an all cash buyer or with seller financing, which obviously places severe limits on the number of eligible buyers, and the smaller the buyer pool, the lower the price will have to go.

Even if banks continue offering the financing, the rates and down payment requirements have also been harsh in comparison to condominium financing. In my experience, rates on fractional loans are usually a minimum of 1.5 to 2% higher than condo rates, and usually come with several pre-paid points, strict pre-payment penalties, and with rates that are never fixed for more than 15 years (but usually 5 – 7 years). In addition to the higher rates, banks are usually not willing to finance more than 75% of the purchase price, which means you need a 25% down payment.

TICs are generally of most interest to first time home buyers, and very few first time home buyers have 25% for a down payment. And yes, a seller can buy down both the rate and carry a portion of the financing which reduces the monthly rate and down payment required by the buyer. And that might be great if you are a buyer coming into a TIC and get the seller to buy down the monthly interest rate and carry a portion of the financing, but…

But someday you will likely be the seller, and will you want to buy down the rate for the next buyer? Will you want to lock up some of your equity in the form of a loan to the incoming buyer that doesn’t have the required down payment?

Property Taxes
And, oh yeah, even with fractional loans the property taxes are still a shared risk (the property, regardless of the number of TIC shares, has one lot and block number against which the city will assess taxes). So while your potential exposure is much less, you still are jointly liable for the entire property tax bill.

So Why Rent?
That’s a lot of background to what seems like a simple question. But in the end, unless your circumstances are such that the disadvantages of a TIC in a 3 to 6 unit building outweigh the advantages, here’s my answer to why you should rent: Because TIC shares are less liquid and appeal to a smaller segment of buyers, the costs of entry and exit as well as the shared risks during ownership and around future financing possibilities usually means it makes better financial sense to continue renting and save your money towards a condo or single family home purchase instead of investing in a TIC share.

Or, as a mortgage broker I once worked with said, “If you’re going to buy a TIC [in a 3+ unit building], why don’t you just set your money on fire?”

Laguna Honda Reservoir

I was jogging past the Laguna Honda Reservoir this morning when I thought to myself – what is that, why does it have so many fences, and isn’t that pretty… in no particular order of importance.

So I snapped a few pictures and got on with my morning run. When I arrived back at my desk and dug into my work for the day, what I thought would be a quick blog post has evolved into something much more.

Above are a few pictures that I took this morning, as well as one historical photo (credit: San Francisco history center, SF Public Library).

It turns out that the Laguna Honda Reservoir has been around since the beginning of San Francisco. It was once owned by the Spring Valley Water Works, and in addition to being fed by natural creeks it was also supplied with water via a redwood pipeline from Pilarcitos Canyon in San Mateo until the pipeline was destroyed in the 1906 earthquake (according to Wikipedia).

These days it is owned by the San Francisco Public Utilities Commission (SFPUC), which is the entity responsible for delivering water to homes and taking sewage away from homes.

It appears there are currently some plans by the SFPUC to develop parts of the site, and the Friends of Laguna Honda Reservoir have a website and facebook page with information of interest to neighborhood residents and/or concerned citizens.

I haven’t been able to verify it, but I believe the reservoir still provides drinking water to San Franisco homes (the copious quantity of No Trespassing signs on the property certainly reinforce that belief).

It’s a tranquil spot to run, bike, or drive by, but the fencing and limited access don’t really make it much of a destination site. Either way, it is a wonderful hidden gem and an interesting part of San Francisco’s history.

That’s A Lot of Compost

I hope everyone had a great Thanksgiving day feast, whether you were here in the city or far away in a house full of friends and family. Since my refrigerator is now filled with Thanksgiving leftovers, I thought an article about leftovers would make the perfect weekend post.

For those of you that don’t know, San Francisco offers (er, mandates) curbside composting, recycling, and garbage pickup. Compost goes in the green bin, recycling goes in the blue bin, and garbage headed for the landfill goes in the sad black bin. The composting program in San Francisco recently celebrated an awesome milestone, having diverted one million tons of organic material:

San Francisco’s recycling company today celebrated a milestone in its composting program, having now collected one million tons of organic materials in the city.

Representatives from the company, Recology, joined city officials at Scoma’s Restaurant in Fisherman’s Wharf today to mark the achievement and discuss the benefits of composting.

Since Recology started its composting program in San Francisco in 1996, the city has increased the amount of food scraps and plant cuttings it composts to more than 600 tons per day, more than any other city in North America, company officials said.

San Francisco has a stated policy goal of reducing our waste to zero by 2020. While I doubt that will happen by 2020, I think the fact that we have moved so aggressively to reduce our environmental footprint is pretty awesome. In fact, the current issue of National Geographic has a great article about how cities may offer some of the solution to the environmental challenges we face.

Collectively, the residents of San Francisco are currently composting 600 tons of food scraps and plant cuttings every day. To put that number in perspective, the largest cruise ship in the world weighs in at… 600 tons! So if you think your refrigerator is filled with too much food… just imagine the largest cruise ship you can think of overflowing with leftovers and charting a course for the nearest composting farm.


It’s Tuesday… which means that I am normally out and about on broker’s tour, looking at newly listed San Francisco homes. And nothing makes me quite as thankful on a Tuesday as an easily accessibly parking spot. Which got me thinking about parking… and it turns out that San Francisco, as part of it’s smartpark program, actually conducted a census on how many parking spots are in the city of San Francisco. From the SF Chronicle, here’s the scoop on parking spots in San Francisco:

These days, you hear the word census and you think people. But San Francisco has always been a bit different and has spent the past 18 months conducting a census of parking spaces. And nowit’s the first city in the country to know exactly how many spaces it has: 441,541.

“I guess we didn’t have anything better to do,†joked Mayor Gavin Newsom.

That number includes free and metered spaces on streets, as well as all spaces in garages open to the public. Specifically, there are 280,000 spaces on streets, 25,000 of which are metered.

Newsom said the San Francisco Municipal Transportation Agency, which spent 18 months tallying spaces, had a very good reason for the parking census. It’s background work toward implementing S.F. Park later this year.

The program, now in a pilot phase at the Port, will implement congestion pricing for parking spaces, meaning that it will cost more to park in an area coveted by drivers or during a time of day that’s especially popular.

“It’s a revolutionary effort,†Newsom said, noting it should create more parking turnover and eliminate the need to circle blocks for parking multiple times. He added that people will be able to use their smart phones to track where among those 441,541 slots there’s actually an open parking space.

Hope everyone else has a wonderful Tuesday, and that your parking spots are bountiful!

The San Francisco Market Takes a Nap

You know the feeling. You’ve gorged on turkey, cranberries, sweet potatoes, mashed potatoes, green beans, and every other culinary delight on your Thanksgiving table. Filled with tryptophan and generally exhausted by your eating exertions, you take your post-feast nap, hoping to wake up recharged and ready to take on the pumpkin and pecan pies.

Even though Thanksgiving isn’t until Thursday, the San Francisco real estate market has already decided it’s time to take its annual holiday nap.

In the olden days (2010), the thickness of the printed broker’s tour was a good guide to inventory. The higher the inventory, the thicker the broker’s tour report. Environmentally friendly? Not really. Fortunately, I have the privilege to be testing out a product currently in a closed beta that brings the broker’s tour report to my phone. It’s pretty slick, and definitely a much more modern way of touring homes on Tuesday. I’m going to save you my rant about the MLS and third party vendors, but as much as I love this product I’m equally frustrated by the fact that it isn’t just a standard offering from our MLS vendor…

Anyway, awesome-but-unreleased product that I probably shouldn’t be blogging about (don’t tell) has a very handy stats page that manages to convey the same information I used to get about the market from printing the tour, but it saves trees!

San Francisco Inventory

As you can see from the screenshot of inventory, the holiday slump has begun. Buyers and sellers often travel over the holidays, and if you are a seller keeping your home in showing condition is particularly challenging if you are cooking a meal for 20 or hosting the in-laws for a few days. Tomorrow there are only 112 new properties on the market, down significantly from the beginning of the month, and even more substantially from the beginning of September, when we traditionally see a spike in new inventory to take advantage of our summer weather between Labor Day and Thanksgiving.

So what does it mean for you? If you are a seller, the good news is you have less new inventory to compete against. If you are a buyer, there may or may not be deals to be had. I’ve seen buyer interest remain strong this fall (a property I wrote an offer for received over 15 offers just last week), but if you stick with it through the holidays you just might catch your competition napping and snag yourself an excellent San Francisco home.

MLS blooper reel, the sequel

I posted a few funnies on Monday about random goofs I’ve come across in the San Francisco Multiple Listing Service. And now it’s like shooting fish in a barrel when I’ve been looking through listings — the hits just keep coming.

First up, there’s a property that can be sold with the whole houseful of furniture for an additional $3,500. I’m no furniture snob, mind you, but $3,500 for a whole houseful doesn’t seem like a whole lot of money. Then again…

Sanford and his son called, and they want their couches back.

…if it looks like this, I might just pay $3,500 extra to make sure the house is empty when I buy it.

And then there’s this marketing text, which makes it sound like the house needs to visit the self-help aisle at the local bookstore:

Poor house with its poor self-image. I hope it works through its (poorly spelled) dysfunctional layout, gets the Love that it needs and finds some approval somewhere — from the lender or somewhere else.

On the flip side is this self-confident home:

Or this home that IS San Francisco:

Now, sometimes pictures make me wonder just who lives in a particular home. Like this photo, with what appears to be a suicidal teddy bear looming over the head of the bed…and the other stuffed animals scattered about the room, including the ones perched on top of the curtain rods.

Next up: could you please move that “e” from “plane” to the end of the word “suit,” so this makes some sense? Or is there a formal dress code for the master bedroom?

I’m not entirely sure what we’re going for here. Does it need a big slobbery dog to do a little panting?

I know what will always sell a house: a photo that shows potential buyers what the place will look like if they’re total slobs like the current owners.

Buyers in San Francisco are often concerned about earthquake safety. So let’s go ahead and show them what their new house will look like after the Big One.

Yes, I’m serious. No, I’m not kidding. Someone apparently didn’t know how to rotate a photo, so this turned-90-degrees-counterclockwise photo is the primary shot in a listing.

And the one that had me laughing out loud (not just LOL, but seriously laughing out loud).

If you peel up some of that parquet flooring, will it say “butter!”?

A post in which I mock MLS text and photos

I spend all kinds of time in the San Francisco Multiple Listing Service (MLS), keeping my listings current and scoping out new properties for my buyer clients. And as a former English teacher and lover of language, I sometimes cringe a bit when I see marketing remarks that are only vaguely related to real-life words. I also occasionally stumble across photos that make me wonder what in the world is going through someone’s mind as he or she posts them in the MLS.

I won’t name names or give addresses, in order to protect the innocent. But in a kind of MLS blooper reel, I’ll share some of my recent finds. Sure, there are lots of dinning rooms, eating kitchens, and walking closets — I’ve gotten used to finding those rooms instead of dining rooms, eat-in kitchens and walk-in closets.

How ’bout some “old world granger,” which I’m pretty sure is standing in for old world grandeur? Or the agent who sent a mailing to offer potential sellers a “customized market tragedy” for their homes? I’m pretty sure the first tragedy is that she didn’t realize that tragedy is quite a different word from “strategy.”

And then there’s this one for a home with two units, with two bedrooms and one bat each. Send this one to your clients who dig baseball.

Calling all baseball fans...

Up next: do the ghosts at the card table come with the house? (Hint: maybe you should ask your clients to leave the room when photos are being taken so you don’t have to use your mad Photoshop skills to blur them out. Then again, when the room looks this cluttered, maybe it’s not a big deal.)

This next one made me scratch my head for two reasons: it doesn’t tell much of a story about the kitchen, and it was taken in 2007. This is for a current listing, on the market right now. Now I’m curious…what does the kitchen look like now if this four-year-old photo is the best they’ve got?

For those of you who run home-based shipping businesses:

And last, just in time for the holidays:

Is the Market Up or the Market Down?

Last week we hosted a San Francisco first time home buyer webinar where we talked with first time home buyers about the latest San Francisco market data and financing information. We spent a little time chatting about whether the market is up or down, and like so many things the answer is relative to your starting point.

Below are two of the slides from the webinar, both are looking at single family homes in San Francisco MLS districts 1- 10. The first chart looks at the past 3 years, starting with Q3 of 2008 (just about the market peak) and ending with Q3 of 2011. For single family homes, the high median price was in Q3 of 2008 with a value of $820,000. The low was this past quarter with a value of $700,000. From Q3 of 2008, the overall market for single family homes in San Francisco is down about 15%.

3 year San Francisco single family home price graph


The next chart below looks at values for single family homes in all of San Francisco since the beginning of 2011. As you can see, since January of 2011 the median price for a San Francisco single family has increased by about 20%, when you take into consideration all price points and all neighborhoods.

San Francisco housing prices, January – October 2011

So which is it? Is the market in San Francisco up or down?

Obviously, we are still down from the peak of the market in 2008. That said, the trend at this point seems to be moving in a positive direction, with buyers feeling more confident about their job prospects (especially those in the technology industry) and motivated by historically low interest rates.

One important caveat: While data sets that look at all of San Francisco can be useful for discerning city-wide trends, it is important to remember that San Francisco has numerous micro-markets based on property type and neighborhood. What is true of single family homes in Pacific Heights may or may not be true for condos in the Bayview or tenancies-in-common in Noe Valley.

We are more than happy to run the stats for you if you are interested in a particular neighborhood or property type.


Real Estate Resources for Veterans

Today is Veteran’s day, and I’m not quite sure what the appropriate greeting is. Saying “Happy Veteran’s Day” seems a bit flip, since the entire point of today is to take a moment to honor and remember the lives and sacrifices made by the members of our armed forces. Regardless of your political affiliation, I’d like to think you’d agree that there is nothing happy about the loss of life or injuries sustained by our soliders, both past and present. So while I might be befuddled by the appropriate salutation, I’m certain that we’d all agree on the value of their service. Heck, the only surviving founder of Zephyr Real Estate is himself a Veteran – I won’t mention which war, but let’s just say it’s not recent…

Veteran's Day 2011

In that vein, I’m going to mention two programs that are designed for Veterans thinking of buying a home. One program is the national VA home loan program that offers the following benefits to Veterans:

VA guaranteed loans are made by private lenders, such as banks, savings & loans, or mortgage companies to eligible veterans for the purchase of a home which must be for their own personal occupancy. To get a loan, a veteran must apply to a lender. If the loan is approved, VA will guarantee a portion of it to the lender. This guaranty protects the lender against loss up to the amount guaranteed and allows a veteran to obtain favorable financing terms. There is no maximum VA loan but lenders will generally limit VA loans to $417,000 This is because lenders sell VA loans in the secondary market, which currently places a $417,000 limit on the loans. For loans up to this amount, it is usually possible for qualified veterans to obtain no down payment financing. A veteran’s basic entitlement is $36,000 (or up to $104,250 for certain loans over $144,000). Lenders will generally loan up to 4 times a veteran’s available entitlement without a down payment, provided the veteran is income and credit qualified and the property appraises for the asking price. Note: For properties in Hawaii, Guam, Alaska and the U.S. Virgin Islands loan limits can be up to $625,000.

VA Loans Offer the Following Important Features:

  • Equal opportunity for all qualified veterans to obtain a VA loan.
  • No down payment (unless required by the lender or the purchase price is more than the reasonable value of the property).
  • Negotiable interest rate.
  • Ability to finance the VA funding fee (plus reduced funding fees with a down payment of at least 5% and exemption for veterans receiving VA compensation).
  • Closing costs are comparable with other financing types (and may be lower).
  • No mortgage insurance premiums (PMI).
  • An assumable mortgage.
  • Right to prepay without penalty.
  • VA assistance to veteran borrowers in default due to temporary financial difficulty.


For Veterans in California, the California Department of Veteran’s Affairs has the CalVet loan program, which features the following:

  • Low interest rate
  • Even lower rate for qualified first time home buyers
  • Low or no Down Payment
  • Loans up to $521,250
  • Subsequent eligibility – Use the loan again
  • Home and loan protection plans
  • Home Improvement Loans