April 14, 2011
First! (Individual TIC Unit In San Francisco To Return Bank-Owned)
It’s a three-bedroom and two-bath Alamo Square Tenancy In Common (TIC) unit which was purchased for $710,000 in June 2006. Back on the market and listed for $598,000, and assuming the listing is correct, as far as we know 1390 McAllister is the first individual TIC unit in San Francisco to return to the market bank-owned.
And yes, that would make it an eventuality that some thought to be inconceivable on account of stricter lending and down payment standards for TIC loans.
∙ Listing: 1390 McAllister (3/2) - $589,000 [MLS]
First Published: April 14, 2011 9:30 AM
Comments from "Plugged In" Readers
Gee; 1 REO for SF TICs, how many hundred for SF conventional's?
Slow news day.
[Editor's Note: Funny, that's exactly the kind of comment we'd get a few years ago when we were the first to note an uptick in conventional foreclosure activity in San Francisco. And if you're sincerely interested versus simply heckling: San Francisco Bucks CA Foreclosure Trends, But Not In A Good Way.]
Posted by: jimmy at April 14, 2011 9:57 AM
An agent told me that one TIC cannot be foreclosed upon, not unless the entire building is foreclosed too. What gives in this case?
Posted by: Samuel at April 14, 2011 10:27 AM
I believe Samuel is correct. I almost bought a TIC years ago but was scared away by the fact that it's one loan shared by all and if one defaults, either the others pick up the slack or you all go down. On another matter, vintage bathrooms scare me, particularly when it looks like the toilet is creeping across the room.
Posted by: Larry at April 14, 2011 10:32 AM
One unit in a TIC can be foreclosed on if the units each have fractionalized TIC loans. The whole building can be foreclosed on if there is one TIC loan for the building and no other owners pick up the defaulting owners share of the debt service.
A few TIC REOs are to be expected. Let us know in year what the ratio of defaults are for TICs vs. condos. Until then this is not an indictment of stricter underwriting practices and larger down payments.
Posted by: Mike at April 14, 2011 10:36 AM
When a TIC has fractional financing, the lender can foreclose just on the deed of trust securing the defaulting borrower's allocated space in the building. That's why the advent of fractional financing gave many people more comfort to buy a TIC with fractional financing rather than one loan covering the entire building. If there is just one loan covering the entire building and all owners sign up to the sole loan, then yes the lender has to foreclose on the whole building.
Posted by: Dolores Guerrero at April 14, 2011 10:36 AM
Yeah, fractional TICs are safer. I ran away from a 2007-mint TIC where all co-tenants were under-water on a group loan.
1 - The group mortgage would have been almost impossible to set up because the assessment would have been awful overall.
2 - The risk of default from UW co-tenants was too high for my finances.
3 - The UW seller didn't want to bring cash at the selling and kept an unrealistic asking
As far as I know, the place is rented and the "owner" spits out his 1.5K/month of deficit after the rent is factored in. I hope time will be on his side.
Posted by: lol at April 14, 2011 10:50 AM
I would say that the lesson here is that IF you have to do a TIC, then make 100% sure that there is either no loan or if a loan is necessary it is a fractionalized loan!
(I think that's been obvious to most people for some time but this case is a reminder)
Imagine the nightmare if this wasn't!
I still empathize with the other owners in that TIC... hopefully they don't have to sell anytime soon. (would any lender give out a TIC loan on a unit in a building with a foreclosure?)
as for the unit itself: it has a ton of charm and character, and seems pretty well cared for. I really like it. Beautiful floors and coved ceiling and chandelier medallion.
There are some things that will challenge some buyers of course, like a parlor bedroom right off the living room, cut up floor plan (common in that era), clawfoot tub which is both a selling point and also a problem (am I the only fatty that hates taking showers with the 360 degree shower curtain sticking to 280 degrees of my fat rolls!?)
but overall a great place.
Posted by: ex SF-er at April 14, 2011 10:56 AM
Somebody who's a mortgage broker could answer this authoritatively, but my understanding is that fractional financing for TICs is fairly new, hence the the option of easier foreclosure wasn't available to lenders, so raising the fact that there's 1 REO for SF TICs vs. how many hundred(s) for SF conventionals doesn't say a whole lot.
Posted by: Brahma (incensed renter) at April 14, 2011 10:59 AM
This is really a lovely unit.
Having experience with a fractional TIC loan (Sterling)......I would not be scared in the least to pursue this unit if I were interested.
Posted by: runnz at April 14, 2011 11:01 AM
"fractional financing for TICs is fairly new, hence the the option of easier foreclosure wasn't available to lenders, so raising the fact that there's 1 REO for SF TICs vs. how many hundred(s) for SF conventionals doesn't say a whole lot."
Fractional's have been in place since '04. Regardless if its a group loan or fractional's, why is foreclosure not available to lenders? If borrower(s) don't pay (group or fractional), at some point the lender takes it back.
Posted by: jimmy at April 14, 2011 11:09 AM
people end up in foreclosure because of job loss, divorce etc.
not just hinky underwriting.
Posted by: meep at April 14, 2011 11:10 AM
Doesn't the foreclosing bank have the right, as a cotenant, to force a partition sale? If so, the dynamics of the situation would seem similar to foreclosing on the whole building in a group loan
Since the TIC agreement is a basically a contract between the original cotennants rather then a deed restriction, is the forclosing bank bound by the original TIC agreement?
@Brama -- "fractional financing for TICs is fairly new, hence the the option of easier foreclosure wasn't available to lenders, "
My understanding is that forclosing on a group loan was just as easy for the lender, but that since the entire building would be at risk it can [induce] other cotennants not in default to attempt to cure the defualt.
Posted by: tc_sf at April 14, 2011 11:11 AM
I would think that traditional TIC financing would be safer for banks, but riskier for the TIC partners.
If one person in a TIC defaults the oter partners have a vested intrest in pitching in together to protect themselves.
With a fractional loan the bank if screwed if that one person defaults.
Posted by: HappyRenter at April 14, 2011 11:14 AM
Never been tested in court. If the defaulting owner doesn't leave, good luck.
Posted by: tipster at April 14, 2011 11:45 AM
Hard to believe it is the first, then again, those new fangled fractionalized loans are fairly recent innovations. With an old school, all-for-one-and-one-for-all loan, you just got booted out and the co-tenants pick up the slack.
I admit, I'm wondering if the MLS is marked incorrectly. I can't find the foreclosure on the SF Recorders site, and it appears one of the owners of this unit filed for the RESIDENTIAL ENERGY INSPECTION on 3/2/11, which usually is a precursor to selling. Perhaps they meant to mark short sale (?) (from PS, one of the Sterling loans from July 2008 is for $616,000). These things are pretty hard to track as everyone is on the same APN, so take what I say with a grain of salt. It is an interesting owners group. It appears that the owners of 1390 joined the 'investors' in 2006 (group mortgage) after having having been part of a successful condo conversion elsewhere in the City in 2005. The co-tenant in 1388 bought into the TIC in 2005. The folks in 1392 bought into their unit in July 2008 (when the loan was fractionalized by Sterling). They also own a duplex elsewhere in the City which makes we wonder if this is an 'investment'. Good luck with the lottery everyone. The tax basis for the whole building shows up as $2.3 million.
Posted by: EBGuy at April 14, 2011 12:19 PM
"clawfoot tub which is both a selling point and also a problem"
I don't understand the appeal of clawfoot tubs either. As a practical matter, I don't understand the purpose of having a bathtub where water, dirt/dust, and other crap may have to be cleaned out from under it. I guess if you have your maid do it, it's not a big deal. Is it that people think they had "charm"?
Posted by: sfrenegade at April 14, 2011 12:28 PM
I believe another reason that there are no TIC defaults is that there were no $0 down loans. I've looked at fractional loans a bit, and I believe there lender requires minimum 20% down, and will allow another 10% in seller financing. Many of the group loans are assumable, so a lot of buyers had to bring a huge wad of cash to purchase.
Basically TIC buyers tend to have a lot more equity in the property, as well as co-owners having a good incentive to make up for missed payments in a group loan situation.
Posted by: lyqwyd at April 14, 2011 1:26 PM
sfrenegage: they are a simple, large tub. i think you're overdramatizing the difficulty of cleaning a bathroom.
Posted by: EH at April 14, 2011 2:25 PM
Is it that people think they had "charm"?
the reasons I've heard are:
1) they are very comfortable to lie in, especially if you are a female (I'm not sure I've ever heard a guy say clawfoot tubs are more comfy, but it's probably because women take more baths than men and because women are usually slighter of frame so likely fit better).
2) they are often made of cast iron. Cast iron holds heat better than some of the newer materials. thus, longer bath!
3) they tend to be deeper than regular baths.
4) they are beautiful.
I'm sure there are many more reasons to love them
I personally would never put in a clawfoot without a secondary shower, but I'd also never rip one out!!
then again I cannot remember the last time I took a bath. it may have been DECADES ago.
Posted by: ex SF-er at April 14, 2011 3:03 PM
our TIC had a group loan for the first 18 months we existed. the loan required 25% down. our TIC group agreed to go fractional and we got in just in time (before the financial collapse) - it was a good move! my unit was assessed much, much lower and the lender would only finance 66% LTV. the fractional rate was a full point higher than rates for a condo so for the bank it is a good deal. Our lender has since failed and the loans were passed along to a new bank by the FDIC.
Posted by: readySteadyGO! at April 14, 2011 3:26 PM
"i think you're overdramatizing the difficulty of cleaning a bathroom."
It's possible. However, with all the moisture that is natural in a bathroom, it's annoying to clean crevasses and reach under things. Someone mentioned this with respect to a tiny space between a tub and a tempered glass wall recently -- was it the same thread where people were discussing steam showers?
It seems like you could accomplish many of the factors ex SF-er mentioned with a regular tub designed properly. Also, not all clawfoot tubs are cast iron. Many are acrylic, which actually keeps the water warmer than iron, if I remember correctly. With cast iron, you also often have to reinforce the floor joists because it's so heavy.
Posted by: sfrenegade at April 14, 2011 3:54 PM
@ readySteadyGO -- Does your TIC agreement contain any provision waiving or modifying your right of partition? Anything that subordinates all or part of the agreement to the loan contract?
Posted by: tc_sf at April 14, 2011 3:58 PM
Having recently shopped for a tub I agree with sfrenegade. You can find just about any tub configuration though the price could be shocking. Take for example this $20K stainless steel soaking tub which is reminiscent of the institutional sized soup kettle that we used at a deli where I once worked.
More out of control bathtub porn in the name link.
Posted by: The Milkshake of Despair at April 14, 2011 4:02 PM
Assuming the bank has the right of partition, it is very unlikely that it would use it.
Under a fractional loan, the only thing the bank would recover following a partition sale is the foreclosed-upon owner's pro-rata share of the proceeds. So unless the value of the whole building as a set of rental units (subject to SF's zany rent control ordinances) eclipses the sum of the values of the units owner-occupied TICs with fractional financing, the bank is going to do better reselling the foreclosed-upon unit rather than exercising the right of partition.
Posted by: cse at April 14, 2011 4:20 PM
@cse -- My thinking here is opposite to yours. I was thinking that there would be a control premium that would make the whole building more valuable then its TIC parts.
Imagine four identical buildings. If offered at the same price would you pick complete ownership of one building or a 25% TIC share of each of the four buildings?
Market demand and loan terms for individual units vs whole buildings will probably factor in on a case by case basis though.
Posted by: tc_sf at April 14, 2011 4:44 PM
@tc_sf & csc
Under the terms of my loan agreement, the lender does not have the right to force a sale of the entire building in a foreclosure. (which I believe is what you mean by 'partition sale', though I a not an expert). Upon gaining control of the unit, they become a voter in the TIC, however, and can participate as part of a voting majority to compell the minority to do things.
Most TIC agreements have stipulations about mandatory and immediate remedy of potential structural defects in a building. Essentially, they have to be fixed so if one unit insists, the rest must cough up their pro-rata share of the costs. In our case, we do not insist on the immediate part, instead opting for 'very soon' and allowing for a several-month accumulation of funds. But, were a bank to take over, they could compel all sorts of building improvements or hold us in 'default' (default in terms of the TIC, not in terms of the loan). Defaulted members do not have voting rights. A nasty bank could warp things enough to take control from a practical standpoint.
The one major power the lender does hold upon taking over that a regular occupant does not is unilateral ability to OMI or Ellis a building, which is a very negative thing from a condo conversion perspective. All of our fractional loan agreements prevent renting a unit (they are all owner-occupying loans) anyway. If my neighbor wanted to rent out his/her unit, I'd refuse and alert her to the terms of the loan agreement, because, although it is wishing misfortune on others, I'd rather the unit foreclose than get rented, later foreclosed, and then Ellis acted. (Additionally, as part owner of non-partitioned building I am legally liable for unlawful evictions, even if I am not the nominal landlord for the unit in question)
Summarized briefly: fractional TICs are complex and not for those who wish to have easy peace of mind. It's the reason condos typically demand a premium at sale.
Posted by: rr at April 14, 2011 5:21 PM
@rr -- "which I believe is what you mean by 'partition sale', though I a not an expert)."
I'm no expert on TIC law either but my understanding is that by law generally any cotennant has the right to request a court for partition. Typically a sale of the whole property with proceeds divided proportionally to the TIC interests.
This right of partition can be waived or modified by the TIC agreement (i.e. giving other co-tennants right of first refusal to purchase the share in question before seeking partition). It is not clear to me to what extent the lender is bound by the TIC agreement. Were I a lender I would require the TIC agreement to be explicitly subordinated to my interests to prevent any unfavorable changes to the agreement being made just prior to my assuming control of the unit. But I don't know if this is done in practice.
Posted by: tc_sf at April 14, 2011 6:11 PM
Sterling today took back an interest in a building on Arguello. It may have been listed as a short sale in MLS. In any event, Sterling had an opening bid for less than the full debt, but still found no takers. Originally sold as TICs in 2007.
Circle Bank also has taken back several interests in a building on Portola. Don't know the story here but it's my understanding that they're putting money into the building (remodeling). Also originally sold as TICs in 2007 and some were advertised as getting in with as little as 10% down.
Posted by: formerly%whatever at April 14, 2011 6:33 PM
The reason the sum of the values of the TIC units shoud be more than the value of the whole building as an investment-rental property is (1) the tax code favors owner-occupiers, (2) SF's rent control laws depress the value of rental buildings, and (3) by hypothesis, the building has already been spruced up to a level that's atypical for the rental market.
Historically, owner-occupied units have sold for about 15x annual rent, give or take. I don't know of equivalent data on rentals but I've heard investors use 8x rent as a rule of thumb. It'd require a huge "TIC discount" (relative to condos) before the value of the building as TIC units falls below the value of the building as rentals.
Posted by: cse at April 14, 2011 11:06 PM
@cse -- That seems sensible. Thanks!
Posted by: tc_sf at April 15, 2011 9:57 AM
Went to the open house on Sunday. Bizarre layout. The bath with the tub has *three* entrances. The second bath is awkward and located at the rear of the unit. "Take the hall all the way back. Go through the kitchen. Go through the laundry room. Just when you're about to leave the unit, turn right." And, the second bath has windows into the unit. The "optional" bedroom has two three entrances: one to the hall, pocket doors to the sitting room, and one to the bath. While I'd hate to get rid of pocket doors, I think I'd need to for privacy. Again, strange.
There's some deferred maintenance, including a number of broken/chipped tiles and plexi windows in the front bedroom. Are plexi windows even safe? You can't break them in case of fire.
The showing agent said that the building was recently seismically retrofitted, but the TIC reserves are at $0. That's a red flag for me.
That said, the price is good for a 3/2 in the area. We've been looking for a 2+/2 in that area for a long time, and this is the cheapest.
Posted by: Q at April 26, 2011 12:10 PM
On the listing, REO is now marked NO (which jibes with my observations above). Anyone with evidence to the contrary?
Posted by: EBGuy at April 26, 2011 1:42 PM
The sale of 1390 McAllister closed escrow on 6/10/11 with a reported contract price of $595,000: No Longer "Distressed," 1390 McAllister Closes Down 16% Under '06.
Posted by: SocketSite at June 13, 2011 2:22 PM