I’m going to hope the Stammtisch comes through with a quick response to this reader’s question, as I am totally swamped right now. If they don’t I’ll get to your answer this weekend. Thanks for writing in.
In Andy Sirkin’s famous online article on condo conversion in SF, the graph seems to suggest that vacant 2 unit TICs are fetching the same price as condos (Condominium Conversion in San Francisco), implying there is not much upside in condo conversion price-wise. However, I have also heard from some Realtors that condo conversion of duplexes can increase the building value by 10%. What’s your thoughts on this?
Thank you for your sagacious response.
And yes, I had to look up the word sagacious. Keeping me on my toes. I like it.
It would seem that because 2-unit TICs are administratively exempted from the condo conversion lottery, the premium for condo ownership would be built into the price from the beginning. Since (at the moment at least… you never know with the supes) there’s no risk of not converting, there shouldn’t be any reward, either. If you’re buying, don’t pay a premium.
(follow-on)
All that being said, if other buyers are willing to pay a premium… whether based on a rational expectation of return or not… then they set the higher price.
It’s not black and white on the 2-unit tics. They have to be owner-occupied for 12 months prior to applying for the conversion; and the units themselves often have to have major renovation to conform to condo standards: separate utilities, fire plans, etc..). So maybe the gap is closing, but it could be part of a broader economic impact (i.e., condos decreasing in value with TICs holding steady). In the long run there should always be a gap in prices.
Not being a Realtor, I am speaking from a purely investment point of view. Because the laws are changing all the time. SF Supervisors are trying to close the loopholes to keep people from converting 2 & 3 unit apartment buildings into condos to avoid rent control. But the market finds a way. And TICs have now become that way.
Essentially people are buying “shares” of building and, depending on the TIC agreements, specific space can be designated as “owned” by one party or another. It is a more open arrangement than a condominium and works well for people who want to buy something, not rent, especially those who are buying for the first time. Also, there is not the same expense in setting up an HOA and all the bureaucracy and reporting requirements that are associated with condominiums.
But back to the original question. Yes, TICs seem to be selling for almost the same price as condos, though there are some deals to be had in different areas. I think that is mostly due to the fact that people are overcoming their fear based on a better knowledge of the product.
The challenge to date has been financing. Fractional loans have a higher interest rate (in general) than traditional loans. But lenders are quickly working to fill this need so new loan products are being introduced all the time. Once again, free market enterprise comes to the rescue.
Based upon what I see, condos are at least 10% more expensive. TICs are getting more common all the time, and the difference will likely continue to shrink. But condos cost at least 10% more.
Condos are still 15-20% more expensive than TICs on a price/sqft basis.