Sunday, June 24, 2007

Condo versus TIC

When I see large, historic renovation condo projects like 74 New Montgomery, with (admittedly New York tiny) studios list priced at $379,000, I have to wonder whether the TIC market has gotten a bit ahead of itself.

Prices being the same, would I opt for a condo with less square footage versus a roomier TIC? I suppose it depends upon layout and location.

Financing is a factor. Right now over a five year span buying a TIC is going to cost about $10,000-$12,000 more in mortage payments, on average $200 more per month. Longer term buyers will likely need to refinance their TIC mortages more frequently than condo owners, because no 15, or 30, or even 7 or 10 year fixed rate mortgages are available for TICs. That refi in year five means you will rack up some significant bank and title company costs down the road. Figure another 2% of the money you are borrowing, or $10,000 on a $500,000 mortgage.

But of course there is the sanity factor. Some individuals (and couples) live just fine in "ship's quarters." Others don't. $200 per month is a fair price to pay for daily sanity.

1501 20th Street

Here is an interesting Potrero TIC. First, kudos to the marketeers at Zephyr for the gorgeous photography. The artful, light-filled compositions make me imagine a leisurely life of late morning awakenings and sun-filled afternoons spent surveying the rooftops that stretch down to the Bay. And the adjectives - rare, handsome, incredible, vibrant - are most imaginative.

I am curious about why there are "three garages, one vacant." Does that mean two of the garages are rented (or owned) by individuals who are not new buyers of this TIC? Also, the ad seems to suggest the "one vacant garage" will sell only with the cottage. (Ah, the word cottage summons endearing images of charming gardens cultivated by either eccentric but friendly pensioneers or a young, fantastically good-looking young person recovering from a recent heartbreak...) But back to the subject at hand, reading between the lines, I am presuming my top floor view unit "available for $650,000" requires street parking.

Back down to the ground, is that a restaurant of some sort on the bottom floor? How might one feel about living in a sizable, comparatively well-priced unit, above a restaurant? (Assuming, of course, that the tenants scheduled to depart on October 31 do indeed vacate the place.) In this case the words "ventilation unit" and "exterminator" spring suddenly into my thoughts... not to mention "owner move-in eviction."

And then I take a look at Mapquest. Why is it in San Francisco wherever you see the label "Recreation Center" the word "projects" almost certainly closely follows in one's thoughts? Still the rec center down the street from this property gets (mostly) favorable reviews on Says one reviewer - "the center and the grounds are there to serve the housing projects to the south and east, with plenty of afternoon and evening sports programs, whilst from the north and west, the gentrified world of audi, bmw and jetta owners populate the park for the chance to exercise their prized, well-fed and groomed dogs..."

Oh, I guess that adds a well-brushed fido to my 1501 20th Street fantasy. And a bit of brave-hearted, gentrifying T-line pioneer spirit. Why do I suddenly think of the phrase "hard bargain?"

Thursday, June 14, 2007

Closing Statement Review

The bottom line is this: the buyer is the one who has the most incentive to push for reduced closing costs.

The bank or broker certainly doesn't.

And your realtor will typically not be of much assistance. At that point the deal is done and his or her commission has been secured. Also, the realtor is motivated to maintain good relationships with brokers and banks for future deals. In fact, it is probably a good idea to look at any loan and title vendors your broker might be suggesting with an especially critical eye, as the broker may be putting his or her own interests regarding financing arrangements ahead of yours once an offer has been accepted.

This is a bit of a tricky game, because the bank or broker knows you will probably not walk away from closing on a house you want to purchase (or refi) just because they sneak in $500 of extra fees. With TICs, they know your options for securing financing elsewhere are limited, and in some cases, TIC groups are under pressure to refinance because their loans are coming due.

Keep a level head throughout the process. Practice the art of detachment. The bank or broker is counting on you to be emotionally involved in the concept of "home", not acting like someone who eyes the numbers as a dealmaker. Get your good faith estimate in advance and go through it line by line. Learn what each item means. Cross out their numbers and put in numbers you feel are reasonable and fair. Becoming familiar with closing statement line items in this way gives you a strategy for challenging the costs.

Here is an outline of the items that were on my recent refi closing estimate:

Loan origination Fee (Points)
Underwriting Fee
Bank Fee
Tax Service
Flood Cert
Wire Fee
Attorney Review
Appraisal Fee
Escrow Fees
Additional Charges
Overnight Service
Notary Fees
Title Insurance
Environmental Protection Lien
Recording Fees

After receiving the first estimate I had a talk with the loan officer. He agreed to eliminate the Bank Fee (-$300) and Additional Charges (-$75) and reduced the Underwriting Fee (-$100), Appraisal Fee (-$75), Title Insurance (-$300) and Escrow Fee (-$100). So overall I saved almost $1000. Small change in the context of a home mortgage, but why pay anything that you don't have to.

Also, if at all possible, I recommend paying the closing costs out of pocket. In other words, write a check for your closing costs. The bank will want you to roll them up into the mortgage, because they hope to collect interest on those fees for a good many years. Paying a few thousand dollars now may hurt a little bit, but in the long run you will be saving a lot.

Tuesday, June 12, 2007

June 13 Plan C Rally

I will be joing Plan C on June 13 at noon on the City Hall steps. We will be protesting Chris Daly's quality of life budget cuts.

Daly, who lives in an expensive condominium, fashions himself as a hero to the downtrodden. He is no friend to TIC owners and his latest maneuver is a typical grandstanding power grab.

Here are the details from the Plan C newsletter:

"Four days after the Mayor submitted a balanced budget, Supervisor Daly introduced a motion to cut the following programs, totaling $37 Million:

$ 2,521,190 – the entire street tree budget (including the entire contract with Friends of the Urban Forest)
$ 700,000 for the Community Justice Center, modeled after best practices in other cities for enforcing quality of life laws
$ 3,000,000 for Salaries for one new Police Academy class
$ 2,100,000 for the Community Corridor street cleaning and commercial district improvement program
$ 606,000 for a Small Business Assistance Center
$ 375,000 in funding to support Community Benefit Districts (CBDs) – one of the best recent innovations to keep our neighborhoods clean and safe
$ 2,884,192 for sidewalk repairs
$ 6,353,435 for street resurfacing
$ 1,680,000 – the city's entire pothole repair budget for the coming year
$ 1,100,000 for new Park Patrol officers in Golden Gate Park to provide security and prevent quality of life infractions
$ 713,183 for the 311 Call Center
$ 500,000 in reserves for the city's massive retiree benefit liability
$7,500,000 In Financial Reserves
$5,000,000 to rebuild Public Housing

Supervisor Daly proposes to use the money cut from these programs for his housing proposal, as well as to fund other programs at the Department of Public Health including restoring funding for federal cuts to funding for AIDS programs.

Clearly, affordable housing and AIDS programs are important, and there are legitimate policy discussions the whole city should have about the tradeoffs in the budget. But Supervisor Daly's slash-and-burn approach will decimate basic city services, and do so with no analysis by the Board of Supervisors Budget Analyst, no opportunity for substantive debate and no public participation. Moreover, if Supervisor Daly's motion is allowed to proceed, it will set a terrible precedent for making major budget decisions based on short term political vendettas instead of thoughtful policy discussions."

There's No Excuse for Being Mean

Even after being in a TIC for seven years I tend to take a Pollyana view toward folks working together. During recent fractional loan debates emotions in our group sometimes ran high but in general everyone focused on issues and tried to help each other out.

Until Saturday. On Saturday we had the final powow. All six partners came to the meeting after crunching numbers and meditating on our personal finances. Five people decided to vote yay although the loan pretty much stinks. (Most of us could walk into any bank on earth and get a 30 year fixed rate of less than 6% and here we were signing up for a 5/1 ARM at 7.25%.) However, owner number 6 remained disgruntled. She began silently seething, abstained from the vote on the loan and continued simmering until halfway through our discussions about TIC agreement revisions she exploded, hurling cutting comments at another TIC member.

"It's all about you, isn't it?" was her main crescendo. "This is all about you," she repeated over and over again, snarling at the other partner, accusing the partner of orchestrating "this whole refi deal" solely for personal benefit - as if other the people in the group were incapable of doing their own math.

Over the years I have seen my TIC partners get exasperated. Once in awhile there might be a hallway encounter where someone needs to complain about Sunset Scavenger, or the water bill, or a cleaning person who doesn't really clean. But it's never personal. The individual is just having a vent about an issue. This is totally fair in my book. We do, after all live together and face challenges together trying to run a building in a City that sometimes seems to go out of its way to hobble our enterprise. If a partner needs an ear from time to time that's OK by me.

We all have demanding jobs and work long hours and making joint decisions is not always easy. But there's no excuse for being mean. People, if you want to deflate the joy in your co-owned household and derail your TIC partner relationships make cutting personal comments to your partners at TIC business meetings when you disagree with them on an issue.

Good Faith Closing Cost Estimates

After much hemming and hawing and debating and fierce negotiating with the bank my group has decided to move forward with fractional loans. When pushed the bank made some concessions. After conferring with the title company they discounted or eliminated several of the line item fees on our good faith closing cost estimate. The bank would not move at all on loan terms or points. I would advise anyone who is procuring a new loan or a refi to insist on the good faith estimate. Take the time to read it. Make sure you understand all the line items. Many of those fees are arbitrary. The bank and the title company (or the mortgage broker) will charge you whatever they can get away with. If you are asleep at the wheel that could be quite a lot.

Saturday, June 02, 2007

Fractional Loan Grrrrr

Has it really been two weeks since my last post? That's what a new job will do to a blogger. Anyway, in the midst of immersion into my new position my group has been wrangling with the bank about our fractional loan applications. The way it shakes out even the best of us - those with extraordinary 800+ credit ratings, long time employment with stable entities like the federal and local government, a low loan to value ratio on our property, and a perfect seven year payment record on our current mortgage - are being offered the following:

5/1 ARM
7.25% interest rate
30 year ammortization
1 year LIBOR index
2.25 margin
5, 2, 5 loan cap
3, 2, 1 prepay penalty

The estimated fees for a $300,000 loan are about $5,500, plus a $400 appraisal charge and legal fees for updating our TIC agreement.

When I average the $6,000 in fees over five years the loan is costing me $100 a month more than the face value of my new monthly payment. That puts me just about even with what I am paying now on an assumable group loan, interest only note. And in five years if we don't condo convert I will be forced to either pay for another round of refinancing or pay exorbitant rates attached to an ARM. (Of course with a fractional paying the loan down is another very appealing option. But for purposes of this discussion I am assuming most TIC owners do not have large cash reserves for a big paydown.)

The bottome line is there is no financial incentive to convert our building to a fractional loan. W are simply paying for the privilege of gaining some liquidity. The value of increased liquidity is such that most of the people in my group would go forward with this scenario. However, we have a person in the group who is not as stellar as the rest of us from the underwriter's perspective. And that person is being offered loan terms that are significantly worse than those we have now. So either the bank is going to have to negotiate with us or we may decide to scuttle the deal and try again in six months or a year.

This aspect of TIC ownership is emotionally very difficult for some of the people in my group. Most of us are successful, hardworking, mid-career individuals who in any other scenario would qualify for the best possible rates and terms the market has to offer. Because we own a TIC we are being offered the kind of deal that gets handed out to high risk borrowers.