Defining TIC traps
A reader asks:I have heard of a TIC Trap. What is this and how can I avoid it?
Our reply:
One form of a TIC trap would be the inability to get out of a property when you need to sell. Unless you are able to provide financing it is very difficult to take advantage of any appreciation that might have occurred during your ownership.
Take an example where there is one master loan on the property and interest rates have gone up. This may make it too expensive to refinance in order to accommodate the new buyer. Most TIC agreements provide that you, the seller who needs to do the refinance, must pay for all of the costs of that refinance. At the same time you must also ensure that the monthly payments of the other TIC owners will not go up.
If interest rates are higher than they were at the time the original loan was made, it may not be financially feaseable to refinance. In that case you are stuck with a lower loan to value ratio and needs to find a buyer with more cash. Another option might be to carry the financing, however, in this case you would not be able to get your money out of the property.
Another trap is to depend on your ability to convert to condominiums in a reasonable amount of time. In today's market it takes 10+ years to qualify and be selected for the condo lottery (as an average) in San Francisco. Unless you are exceedingly lucky and are selected in the first few years, it takes 3 years of owner occupancy, then getting into the lottery where it takes 5+ years to be guaranteed selection, then another year to go through the conversion process.
I think these are going to be major problems with TIC's as the financial markets change.
- Janis Stone
posted by SFResidence.com @ 7:11 AM
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