One of the strategies SF brokers and bankers devised to make TICs more palletable was the fractional loan. Such a loan has the allure of allowing you to enter into a TIC relationship with partners without having to assume the risk of the entire loan amount. Without a fractional loan, if one of your partners defaulted on his/her share of the mortgage, you would have to pay that share or you would lose your home, because though you may have agreed to split the mortgage, if your partner can’t pay, the bank goes after whomever is left.
Fractional loans let you be responsible only for your portion of the loan. This way, whatever may happen with your partner is not your problem. The bank can repossess the defaulted-upon unit, but not the whole building. Also with fractional loans, you have no need to condo convert. Since the units are individually owned, owners can rent or sell their homes at will, just as they can with condos. This scenario then saves you the hassle and expense of condo conversion.
Fractional loans, however, have their disadvantages. For one, many banks won’t offer them. They’re considered, to draw from two recent sfgate.com articles, dangerous, untried, and unpopular with consumers. Sfreblog sums up the negatives as follows:
There are a couple of negatives in the fractional loan scenario. First of all, and most important: they are not as affordable as traditional TIC financing tools. Fractional loans are more risky for banks, since the bank now only has pieces of notes on a building, rather than a note for an entire building. This means that the bank cannot foreclose on the entire building if one individual owner is defaulting on his or her loan. So banks require a) higher down payments (usually not less than 20%), b) higher credit scores from borrowers, c) and more points on the loans to eliminate risk. Additionally, the bank financing the loans may have restrictions on assumability on this type of loan, or higher pre-payment penalties than traditional financing tools.
Ironically, these restrictive measures have made fractional loans some of the safest in the market. While interest-only mortgages go into meltdown, fractional loans have had no problems at all:
We’ve not had any problem – and to my knowledge no lender has had a problem with defaults,” said Pat McCarty, senior vice president for Circle Bank in Novato. Sherry Hendrickson, of Bank of Marin, agrees that the TIC program has made her and her colleagues happy campers.
“Not only have we not seen any defaults,” she said, “We haven’t seen a single late payment or late fee.”
Maybe because fractional loans, unlike their interest only counterparts, require proof of income, full disclosure of assets, higher credit, and at least 10% down. In other words, the loans could only be extended to people who were in fact qualified, as opposed to convinced they were qualified by optimistic (or unethical, depending on how you look at it) realtors and brokers.
What’s this mean to you? Well, it makes TIC ownership that much more inviting: but you can’t do it if you can’t really afford it. There’s no wiggle room with fractional loans. Here are some reasonable TIC’s on the market now, if you’re in the market. (Note: They are all in SF as Daly City is not big on TIC’s.)