Monday, August 08, 2011

Was It Worth It?

Was it worth buying a TIC versus a condo, from a financial perspective? Over ten years ago, when I was a single woman trying to buy my first home in San Francisco, the real estate boom was just starting to heat up. I was relatively conservative and did not believe the cheerleading of the mortgage brokers who claimed I could afford a $500,000 loan. Based on my take home pay, I felt I was in a $250,000 price range. I had about $50,000 for a down payment. In other words, I was, even ten years ago, priced out of the market.

In 2010 not many buyers would touch a 6-unit TIC. The whole concept of a TIC was viewed as incredibly risky. Most realtors advised strongly against them. I just happened to be walking down the street in my neighborhood, and strolled into this building for a looky loo. At that point I was no longer trying to buy and was more or less happily resigned to being a renter. Back in 2000, a one bedroom TIC unit, in this 1910 Edwardian building, with good bones and great historic details, was listed for $250,000. It has also been a rental building for over a decade, and had not been very well maintained - by either the owner or the tenants. So it needed a huge amount of work. You had to have a good amount of imagination to see the charm in this building when it was put up for sale with its crumbling plaster, multi-layers of linoleum, decrepit, unusable fireplaces and so on. But I fell in love with this old building, and plunged naively, blissfully forward.

Looking back, all things being equal, wouldn't it have been smarter, easier and even less expensive to buy a $300,000 condo? For the condo I could have put the $50K down, and taken out a $250K loan at 6% for $1,500 a month. Instead I borrowed $200,000 at 8% interest and paid... yes, more or less the same $1,500 serving the loan. Plus I would not have incurred the thousands it cost to renovate an old house, as well as the cash I am dishing out right now to condo convert.

I think it is all about the particular property. In this case, our neighborhood went through an amazing renaissance in the past ten years, boosting property values, and keeping them high, even through a volatile economy. And while there are plenty of condos being built, there are not any more historic Edwardians, framed in old growth redwood, with all the charm of old San Francisco. So I like to think I've done all right by this old place, and it's done pretty well for me also.

The List

Some of you may think I am exaggerating about the list of things that we must do. We are a six-unit building so we do have a bunch of paperwork that needs to go to the state, as well as the City. If you have less than six units you don't need the state documentation, so your list won't be as long. Lucky us!

Title company's check-list for the state application:

A) Estimated completion dates of City inspections and necessary repair work:
1. Entire project
2. All common areas
3. Residential units

B) Legal documents from your lawyer (approved, final version for submittal to the DRE):
1. Declaration of Covenants, Conditions and Restrictions ("CC&R's")
2. Bylaws
3. Articles of Incorporation (will the Homeowners' Association be incorporated?)
4. Articles of Association (will these articles be used?)
5. Sample Contract of Sale/Purchase Agreement
6. Existing Subdivision Interest Disclosure Form (if applicable to the project)
7. Form RE 648 Check Sheet

C) All documents from engineer/surveyor:
1. Tentative Subdivision Map
2. Tentative Map Approval
3. Conditions of Approval
4. Condominium Plan (if applicable)

D) DRE submittal:
1. 3-R: Report of Residential Building Record- Please provide a copy of the most current 3-R report, Report of Residential Building Record. If not available, please obtain one from the San Francisco Department of Building Inspection.
2. Form RE 639, Supplemental Questionnaire:
Attached is a copy of the completed, executed RE Form 639. Please provide (via e-mail) the following items:
a. Items 2A1 and 2A2, Page 1 - Copies of paid invoices and cancelled checks for the work completed in June 2010 (exterior and trim painting) and March 2011 (hot water heaters) for DRE's verification purposes.
b. Item 2B, Page 1 - As the roof is 6 years old (see item 2B), please provide a roof certification completed by a licensed roofing contractor. The certification should be on the contractor's letterhead and should indicate the useful and estimated remain ing life of the roof, its present conditions and the cost to replace.
c. Item J, Page 2 - Copy of complete/entire 3-R Report - Report of Physical Inspection issued by the Department of Building Inspection, City and County of San Francisco. This report should include: electrical inspection report, plumbing inspection report, structure inspection report, etc.
d. Item L, Page 2 - Copy of Certificate of Final Completion and Occupancy issued by the Department of Building Inspection, City and County of San Francisco.
e. Item 4A, Page 4 - Copy of written notice of intention to convert and notice of tenant's first refusal.
f. Item 5, Operating Statements, Page 4 - Please provide copies of the income and expense statements for the last 3 years.

E) Complete budget package (approved, final version for submittal to the DRE, not a draft):
1. RE Form 623 HOA Budget
2. RE Form 624A HOA Common Facilities List
3. Reserve Study
4. Utility bills for the last year

Breakup Time

They say that the stress of a big home renovation can break up a marriage, and I will say that the process of a condo conversion, especially with a 6=unit building, does put a strain on the partners in a building. There are a lot of things to do, and inevitably one or two partners end up doing most of the work. Or maybe it is that even if everyone is doing some part of it, each individual starts to feel like he or she has taken on the lion's share. Someone must be home to let in the various inspectors and contractors. Someone has to make sure all the various contractors are paid in a timely fashion. Someone must organize getting the various papers notarized and walked around to different City departments. Someone must deal with documenting the building's finances, in preparation for forming a condo association. There is the title company stuff, the legal stuff... it seems like the list goes on and on.

Meanwhile, half the partners are starting to think about selling, once the conversion is done. After ten years, is it time to cash out?

Nerves start to fray. Disagreements start to happen. And yet the condo conversion deadlines keep rolling, and everyone struggles to stay polite enough to get through it all.

City Inspections: Building Department Records Search

We are in the last stages of going through the City electrical and plumbing inspections. It has taken us longer than we anticipated for two reasons. First, one of the inspectors misplaced some paperwork from his initial visit, so we had to wait for the paperwork to be completed a second time. Second, it was unclear whether one of our units had pulled appropriate permits for a kitchen and bath remodel, back in 2000. The city's online database did not show the necessary permits, so the inspector could not sign off on that unit for the condo conversion.

Luckily, the City's Building Department allows anyone to submit a form for a records search. You can download the form from the building department website, specify exactly what records you are searching for, and they will review all the microfiche, paper and electronic archives. I have to say the process was made very easy for us. After we mailed in the records search form, a clerk from the Building Department left us a voicemail message confirming they had received the request. She also stated the date when copies of any found records would be available for pickup. They charge a reasonable per page fee for making paper copies.

By great luck, the search turned up the records we needed. Without documentation of those permits and inspections, the owner of this unit would have had to open walls for the inspectors to see the plumbing and electrical work. The inspectors' job is ensuring the work is done safely, and without the documentation of the inspections, there would be no other way for them to certify the safety of the work. This work was done over ten years ago, and the unit had been sold twice over those years. So the current owner did not have any of the paperwork, and had no way of contacting the original owner.

So this leads to two pieces of advice. First, if you are part of a TIC that is able to enter the condo lottery, make sure everyone in your building is getting appropriate permits and inspections. Don't just take people at their word - get copies of the inspection sign-offs for plumbing, electrical as well as the certificate of completion. Keep these with your building records, so they are easy to find when it's time for you to go through the conversion.

Second, if the work was done years ago, and you don't have the records, take advantage of this City records search service. It could save you a lot of time and money.