Wednesday, November 29, 2006

Fractional Financing Update

My building recently researched fractional loan offerings. We are a six unit TIC that was formed in 2000. We have a group loan and over the course of nearly seven years have never missed a mortgage payment. We have about $1.5 million in outstanding debt, about 50% of what the property is worth. All our TIC members have stable jobs and excellent credit. At 7% annually, our lender would be making $105,000 per year profit on our loan. For doing, uh, nothing except sending us a bill every month. You would think that banks and brokers would be knocking down our door to offer us financing.

But we have found that it is IMPOSSIBLE to get a fractional loan at a 7% rate, which is about 1.5% higher than the average 30 year fixed. We were quoted rates of nearly 8%, with all kinds of onerous ARM reshuffles after certain amounts of time and prepay penalties up the wazoo and other unsavory, unattractive brouha and so on. And all this in addition to the 1 point refi charge and other closing costs and all the rest that goes along with a mortgage refi.

Why are banks and brokers sticking it to TICs? Because they can.

My group has decided to wait. Perhaps competition will drive rates down. Perhaps a secondary market will open up for TIC loans. Let's hope things look better for fractional loans in 2007.

Here is an update on fractional loans published in the San Francisco Apartment Association magazine.


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