Condo Lottery Goes Digital

In 2007 the City of San Francisco will, for the first time, use a computer to generate winning condo lottery numbers. This digital lottery supplants the previous system of pulling paper tickets. I'm surprised there has not been more reporting in the media about this change.

Computer logic tends to be anything but random. Generating a random number is something that has to be simulated in a computer. It all depends on how well the simulation is programmed.

Call me old-fashioned. I'd rather have a paper ticket that gets picked out of a well-mixed bowl of other paper tickets. At least that is a process that can be witnessed and is easily understood by all participants. It's hard to hack a glass bowl.

2 Unit Building, Delivered Vacant

When you are in the market for a TIC, the benefits of purchasing a move-in ready, fully renovated unit must be offset by considerations like higher interest rates for fractional loans, the uncertainty of winning the condo lottery, and the lack of liquidity you might face if you sign up for a group loan.

One way around these hurdles is to purchase a tenant-free 2 unit building. Two unit buildings typically can go straight to condo conversion, which means ideally you will only be burdened with the TIC status for about the three years it takes to meet the residency requirements and go through the legal process of the conversion.

According to the information on andysirkin.com:

Two-unit buildings by-pass the conversion lottery if both units are occupied for one year by separate (unmarrried) individuals who each own at least a 25% interest in the property during the entire occupancy period. Occupancy is proven by electric and telephone service. No other building types can by-pass the lottery. Vacant apartments do not count as owner-occupied. A two-unit building cannot by-pass the lottery if an elderly (over 60 who has resided in the building for 10 years), disabled or catastrohically ill person was evicted from the building after November 16, 2004.

Last spring, when the market was hot, these types of properties were highly sought after. Competitive bidding made the buying process overly stressful, and prices on substandard flats could end up costing nearly as much as a condo. Now that the activity curve on real estate in the City has flattened, perhaps we will be seeing more 2 unit opportunities.

If I were looking to buy, I'd prefer a flat in a 2 unit building that needed some work over and above a perfect multi-unit dwelling that had a snowball's chance of winning the lottery. And before I finalized the deal I'd make sure my TIC partner also wanted to move quickly on conversion and I'd have a local lawyer who specialized in TICs affirm that there would be no barriers in moving straight to condo.

The Two Weeks of Magical Thinking

According to Wikipedia, in psychology and cognitive science, magical thinking is non-scientific causal reasoning (e.g. superstition). One scholar writes that magical thinking is evident in the idea that the manipulation of effigies or similar symbols or tokens can cause changes to occur in the thing the symbol represents.

You should see the shrine in our hall. We have a Guadeloupe candle, rocks, flowers and various other lucky charms surrounding the condo lottery numbers we were given by the kindly clerk at the office of Street Use and Land Mapping last Thursday. The lottery winners will be announced by the City on February 14.

Sexy Chic TIC

I love the location on sweet little Clinton Park, the bright, open plan that combines kitchen, dining and living space, and the Dwell modern fixtures throughout. However, I would suggest that a 1 bedroom in a "newly forming" 4-unit TIC priced at $479,000 should include parking, not price that little amenity as a 30K add on.

Pulling the Sled

Inevitably in a TIC group there are some owners who pull more of the weight of maintaining a building than others. They are the ones who spend hours dealing with contractors, make sure the bills are paid on time and deal with the bank during a refi. Sometimes partners are less active because they have busier jobs, or perhaps the TIC is the first home a partner has purchased and they still have a "call the landlord" mentality. Whatever the cause when there is a significant disparity in the labor load among partners it will inevitably breed some resentment.

We have reconciled this by articulating all the building duties and assigning a reasonable amount of compensation to the chores. (Our basic chore categories are: paying bills and keeping books, cleaning and beautification, insurance, condo lottery, security and safety, routine maintenance, like changing lightbulbs, and emergency maintenance - for example, a suddenly leaky roof.) Larger capital projects are discussed on a case-by-case basis.

In our building an owner can either choose to take on chores or choose to pay for the privilege of avoiding building duties. People can change their status bi-annually, as their preferences and life situations vary. This flexibility ensures that the group maintains good relations while the building remains well tended to.

The Liquidity Trap

KB and I had dinner on Saturday with two other couples. All are TIC owners. Inevitably the conversation turned to the tribulations of TIC ownership.

One duo lives in a two unit building, and recently bought out their upstairs partners They would like to convert the property, a lovely stick Victorian, back into a single family dwelling. But of course lawyers have advised them not to tangle with the City when it comes to "taking a unit off the market." So even if they do the renovation they will need to complete it on the sly without permits, and leave a side door entrance to the upstairs, leaving the illusion of a separate residence and street number. And when and if they want to sell they will likely have to reconvert the property back to separate units. They are not planning to move anytime soon, but nonetheless any equity they gain in the property is going to be dinged by the expense of renovating and unrenovating. And heaven help them if the City finds out.

The other duo live, like I do, in a six-unit building. They recently needed to refinance their mortgage, like my building will need to do before 2010. This group opted for an assumable group loan instead of fractional finanacing, because fractional financing rates and terms are so onerous. This, of course, puts all the owners in a position where they will be hindered from paying down their notes. If you have a group loan and pay off your portion of the mortgage and then decide to sell you are hogtied when it comes to getting your cash out. Either the entire group has to refinance again - with all the costs that go along with a refi - or you must offer a private mortgage to the new owner.

When you first buy a TIC paying down the mortgage may seem like some far off impossibility. But of course sometimes financial situations do change for the better. There are two owners in my building who have the means to pay off their loans, and only with great trepidation would they do so. Meanwhile, they continue paying an inordinately high financing rate in order to preserver some liquidity in their property. Not the best situation to be in. This liquidity trap is, in my view, the biggest downside of TIC ownership. Until fractional loan rates become more favorable, many TIC owners will remain in the clutches of this liquidity trap.

Price Reduced!

"Price reduced" is a phrase we are seeing more frequently. This 1364 square foot top floor 2 bedroom TIC with Twin Peaks views is now listed for $519,00. Lovely remodel - no parking. And just one block from busy Ceasar Chavez. In this buyer's market if a property doesn't have it all - good fractional financing rate, no protected tenant evictions, great location, sound structure, appealing interior and, of course, parking for at least one car expect it to languish. Which means if you find some negatives that you can live with - you can lowball an offer. Who's to say this seller wouldn't take $450,000? Unfortunately when it comes to TICs tools like Zillow do not reveal what the seller paid for his or her particular unit, which is helpful when calculating how low you might go. For that info you will need the help of an agent.

Down the Drain

Yesterday's recitation of contractor rules must have been inspired by the bathroom renovation that is currently taking place in my unit.

The soaker tub is in (yay!). But our efforts to install new tile seem to be accursed. The six boxes of tile for the shower walls arrived in the hue of green, not the blue we ordered. And the tile for the pony wall around the tub arrived in two boxes, which do not match each other in either size or finish.

Unfortunately the tile installer began, with great care, gluing on the pony wall tile from the first box and did not catch the incongruity of the second box until 2/3 of the pony wall had been completed. The tile vendor emailed me this morning to let me know that box one cannot be matched because it was cast from an older mould that is apparently no longer extant. The tile came from this "eco-friendly, women-owned" place, which, unfortunately, I cannot recommend.

This problem is not my fault, but I will have to pay for the hours of labor that were wasted installing the no longer extant tile as well as the hours it will take to rip it down.

In situations like these a contractor appreciates a client who can do a little bit of hand-holding, just as a client appreciates a contractor who can do the same. And since I want my tile to be lovingly (and quickly) re-installed once all this madness is sorted out, so that my home and bath sanctuary can emanate with good chi, I am happy to call the contractor and we can both rant against the fates (but not each other). Then I will drink a glass of Weingut Binz 2003er Nackenheimer Chardonnay and flip through some old issues of Metropolitan Home, to rejuvenate my hopeful visions of residential glamour.

Care and Feeding of Contractors

If there is one thing I have learned since becoming a TIC homeowner, it is that you must treat a good contractor lovingly. As the guy who is painstakingly re-tiling my bath area put it, "I like to think I'm an artist, not a laborer."

If you are a new TIC homeowner, you will inevitably be hiring contractors and tradespeople. Over the past several years my building partners and I have faced a myriad of maintenance problems, from exploding hot water heaters to falling pieces of plaster facade. Because we made the decision to manage our building ourselves, we alone have been responsible for handling all the various dilemmas that come up while living in a circa 1910 building. Here are a few things we have learned.

1. Approach any project as a collaboration. If problems arise or mistakes are made during the project, don't assume an adversarial attitude. If your water is shut off on Christmas day, but your contractor is making a good faith effort to remedy the situation, make sure he or she knows that you are on the same team and working together with him or her to find an effective solution.

2. Divide responsibilities among your building partners, based on their skills, talents and what they can bring to the project. In my group some individuals are good at managing the human side of the contractor/building relationship. Because they have the best public relations and communication skills, they handle meetings with the contractor, fielding his phone updates and communicating back to him regarding decisions that are being made. We also have an individual who, thanks to her training in civil engineering, is great at inspecting work and making a checklist of all the details that need to be resolved before the final payment is issued. We rely upon her to sign off on the project, but if there is bad news to be delivered regarding quality issues that need to be resolved, we leave it to the diplomats to deliver that information in a tactful and supportive manner. Contractors will quietly charge you as much as ten or twenty percent more based on a "pain in the ass" factor if they find themselves in a hostile or antagonistic situation.

3. Estimate up. In older buildings, there are often strange bedevilments lurking behind the walls. If a contractor needs to readjust the estimate after the job begins, it is likely that he or she is justified and not simply taking you for a sucker. (Unless of course you have been a yelling, accusatory pain in the ass client, in which case he feels justified socking it to you.) To be on the safe side, whe you get the first number, double it.

4. Be human, be kind, set boundaries. I once had a housepainter call to ask me if I had any work for her. As it happened, I did, and because she gave me a sob story about her life situation I accelerated the schedule of my project. This put me under undue stress, making decisions I was not ready to make in order to help her pay her rent. And then I had to deal with her incessant phone calls after I mailed the final check, because she had suddenly moved and it took the post office a week or two to forward the payment. In retrospect I wish I would have planned the job when it was convenient for me to do so, and not given her the impression that I was interested in involving myself in any other aspect of her existence other than our professional relationship. Then I might have kept her on my list of contractors I like to work with, and she wouldn't have lost a client for future jobs.

5. Batch jobs. If you are putting in a new tub and your downstairs neighbor needs a new faucet and the common area has a leaky pipe take advantage of having a plumber on site and get it all done at the same time.

5. Maintain your sense of humor. One afternoon several years back I received a phone call at my office from one of my building partners. He smelled gas in our hall and was convinced it was emanating from my unit. I raced home and sure enough, PGE confirmed his suspicions. There was a live gas pipe hidden behind one of my ceiling lighting fixtures, a remnant from the time when our building was lit by gas lamps. At some point in the building's history, some owner or contractor or tenant or landlord had decided to stuff the end of this deadly gas pipe with a wine cork. Sure, it could have killed me had I fallen asleep the previous night and not been alerted to the leak. But I had to laugh at the absurdity and crazy ingenuity of the corked pipe. How many years had it been up there before it finally gave way?