TIC Mortgage Financing Expert Gordon Friedman Talks Shop
Buying a home in San Francisco is arguably one of the biggest –if not the biggest financial decision- most people make in their lives. With the high cost of property and the complexity and variety of ownership options, mortgage financing can be a daunting and intimidating experience for even savvy real estate investors. Gordon Friedman of Guarantee Mortgage specializes in TIC financing. He recently sat down with “the Brain” to share his thoughts. Thanks Gordon!
What are the key differentiating factors between TIC Financing and traditional home financing?
First, it's important to know that both group and separate loans are currently available for TIC's.
With group loans, lenders aggregate the income, assets, and credit scores of all the borrowers for qualification and one lien is taken out against the building. Group TIC loans are generally larger than loans taken against a condominium or single-family home. In addition, they are secured by properties with two or more units. Lenders view larger loans, and loans secured by properties with more than one unit, as more risky. To compensate for this risk they usually charge a slightly higher rate and may require a larger down payment. Slightly higher rates, larger down payments, and shared qualification are the key differences between group TIC loans and traditional home financing.
With separate TIC loans, borrowers qualify individually and each will have their own loan secured against their TIC unit in the building. Separate TIC loans are secured against a partial interest which relates to an individual TIC unit in a building. The ability to secure a loan against a partial interest in a building is a relatively new innovation. From a borrower's perspective these loans will appear similar to traditional financing but the rates and required down payments will be higher.
What risk factors do lenders consider in TIC financing that may not be evident in traditional mortgage lending?
As mentioned above, group TIC loans are generally larger and are secured by multiunit buildings. For these reasons, lenders view them as more risky. Separate TIC loans are perceived to be significantly riskier than traditional home financing or group TIC financing. These loans are so new that lenders don't have a history of performance to rely upon when evaluating their risk. In the absence of historical data lenders have set rates higher than those for traditional home loans. Generally, the premium is about 1%-1.5%.
What should prospective borrowers plan for when seeking pre-approval for TIC financing?
Group TIC financing can work well for groups with varying financial qualifications. What one buyer lacks another can make up for and vice versa. Credit scores are an exception to this rule: each buyer's credit rating is examined separately. The lender will use the lowest score among the group to set the interest rate. If one person's scores are low it can impact everyone's interest rate and terms on the loan.
For separate TIC loans each borrower qualifies on his or her own merits. If one member of the TIC group can't qualify for a separate loan the remaining members may have to find a new partner to buy the unit. It is not possible to mix group and separate TIC loans on the same property.
Do you find that TIC owners with common group loans tend to get better, equal, or worse loan terms than in traditional financing?
The interest rate is usually slightly higher than for traditional home financing. It's important to remember that when buying a condominium or house buyers can often make as little as a 5% down payment (or even no down payment). While it's possible to do this with a TIC loan, the interest rate on the loan will be significantly higher. In general, a 10% down payment is required for group TIC loan.
Why would someone choose wrap-around financing?
Wrap-around financing is generally provided by a seller. The seller offers the TIC buyers a group loan, or possibly separate loans, at an interest rate which is at a premium over the rate on the underlying loan. The TIC owners make their mortgage payments to the seller and the seller uses the money to pay the interest on the underlying loan. Seller-provided financing can be the best financing available, especially for buildings with five or more units.
What are the most common mistakes you see home buyers make when seeking TIC Financing?
Not thinking about what will happen when they sell! Often buyers are focused on getting the best interest rate but don't think through what will happen when one of the co-owners needs to sell their unit. For example, partially assumable group loans work very well for TIC groups because the departing owner can offer his or her portion of the group loan to the buyer to assume. The rest of the co-owners don't need to refinance to admit the new buyer. The problem is rates for these loans are slightly higher than for traditional group loans. If buyers are just looking for the best rates they may miss the opportunity to get the best loan.
TIC ownership is increasingly more common in San Francisco. How has the local government -the board of supervisors, the housing board, the Mayor's office- reacted to the increase in TIC's?
There's no short answer to this question! In general, the majority of the current Board of Supervisors is against the conversion of the city's rental stock into owner-occupied tenancy in common units. The Board of Supervisors has repeatedly put forward legislation and ballot initiatives which make it more difficult for first-time buyers to purchase a TIC unit in the city. The Mayor, on the other hand, has supported TIC ownership opportunities.
One complaint often voiced in opposition of TIC ownership is that financing can be challenging. In what ways are the local lenders evolving to meet the increased demand for TIC financing?
There are now five lenders offering separate TIC loans. As more competition develops in this specialized area of lending we may see interest rates become more competitive and terms more attractive than they are now. The creation of separate TIC loans has been an excellent first step towards making TIC ownership more like a condominium or single-family home.
What advice do you have for those who need to refinance their loan on a TIC?
If a group has owned their building for some time it's likely they have a fair amount of equity. Depending upon how much equity is in the building, refinancing can be a great opportunity to lower the group's payments and also take some cash out of the building for improvements or whatever else the group agrees the money can be used for. In addition, if the group has a second loan it may be possible to refinance both its first and second loans into one, new first loan for a lower overall monthly payment.
What are the pro's and con's of individual, or fractional, TIC loans?
Pros: TIC partners are not "financially married" to one another. They are each responsible for the repayment of their own loan without depending upon their partners.
Cons: higher interest rates, prepayment penalties, and larger required down payments.
Getting a common group loan for a piece of San Francisco real estate is -on the surface at least- a significant risk. TIC co-owners are mutually responsible for the entire loan. What questions should TIC co-owners ask of each other before they financially commit to each other on a group loan?
Prospective TIC co-owners should evaluate each other's finances to make sure each owner can carry their share of the debt and other expenses associated with the building. They should also discuss their ideas about possible improvements or repairs to the building so that everyone is in agreement about spending whatever money is required. Most importantly, everyone should get along well! It's good to be flexible and able to compromise when one owns property as tenants in common.
Fill in the blank: The ideal partner in a TIC group loan is ____________ someone who you like, has similar goals for the property, and who can afford to pay their share of the mortgage.
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