Tenancies-in-common, a type of shared homeownership that is widespread in San Francisco, were once considered an affordable option for first-time home buyers in an expensive city.
Now some homeowners, unable to sell, are calling them traps.
Since the recession, sales and property values of TICs have dropped more than the market as a whole. At the same time, mortgages for these properties have become scarce, which has diminished the pool of potential buyers. Some units have been on the market, unsold, for more than a year.
And it could get worse, according to about a dozen experts familiar with the situation. City ordinances are clashing with real estate realities, and many TIC owners might lose their homes unless city leaders intervene.
That, however, would take a majority of the Board of Supervisors, which appears unlikely.
Instead, on Wednesday the city once again toyed with the fates of these besieged homeowners with its annual condo conversion lottery. The process transforms selected TICs into condominiums, which are more easily financed and sold.
Clutching their application forms like Willie Wonka chocolate bars in the hope of finding a rare golden ticket, 2,309 property owners applied for the lottery; only 200 were picked.
Rachel Pechter had her hopes up for the seventh straight year. Pechter, a stay-at-home mom and a San Francisco native who grew up in a rental, and her husband, an electrician, used their savings to buy a small two-bedroom TIC in the Castro in 2004.
“We were just excited at the time to buy a house,” she said.
Now they have two children and need more space, but there are no buyers. “We’re stuck,” Pechter said.
Unlike condominium units deeded to their owners, TIC apartments share one deed for an entire building, creating co-ownership of the whole property.
Having one’s financial fate so tied to others — sometimes strangers — makes these properties less desirable and less expensive to buy, hence their relative affordability.
The number of TICs has grown since limits were put on condominium conversions nearly 30 years ago as a way to protect tenants’ rights, a popular cause in a city where two-thirds of the residents are renters. The idea was to thwart speculators from converting buildings to condos to raise rents, since condos are not covered by rent control.
Instead, some homebuyers transformed buildings into TICs, which are subject to more tenant protections, if rented. The assessor-recorder’s office estimates that at least 5,000 buildings are now TICs, home to tens of thousands of residents.
To secure financing, many TIC buyers obtained “fractional mortgages,” a nontraditional loan that allowed them to finance their part of the building. Few banks ever wrote those exotic loans, and many that did have stopped since the recession. Those that write the loans charge higher rates, can require 25 percent or more down, and do not offer 30-year fixed terms — only adjustable-rate five- or seven-year loans.
Julian Hebron, San Francisco branch manager for RPM Mortgage and editor of thebasispoint.com, a website that reports on loan rates, said fractional loans were “just too much risk for most lenders.”
“It’s non-standard,” Hebron said.
Those unusual loan terms have consequences. Many of those short-term mortgages are expiring now or in the next year or two. At the same time, TIC prices have dropped at least 20 percent since 2008 (down 38 percent in some cases), according to an analysis by Paragon Real Estate Group.
“When those loans reset, people could be in a world of hurt,” said Britton Jackson, a veteran agent with Zephyr Real Estate. Without equity to refinance, Jackson said, many could lose their homes.
To prevent this from happening, Scott Wiener, a city supervisor for District 8, which contains more TICs than any other, wants a one-time expansion of condo conversions. Only owner-occupied units in good standing would qualify — no real estate speculators — and a hefty fee would be charged that would go toward financing lower-cost housing.
But the Board of Supervisors rejected a similar proposal last year, and the new board does not appear to have the votes to pass such a plan.
The San Francisco Tenants Union is “absolutely opposed” to any increase in condo conversions, said Ted Gullicksen, the group’s executive director.
Gullicksen called most TIC owners “elite,” noting that properties sold for an average of $700,000 before the recession. Any tinkering with the current system could undermine rent control, he warned.
Pachter is not rich, but she is lucky. This week she beat the odds and won the condo conversion lottery. “There’s a light at the end of the tunnel,” she said.
This article also appears in the Bay Area edition of The New York Times.