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Fractional ownership provides alternative For priced-out home shoppers

By Jeff Lazerson


What I think: If you’ve been knocking yourself out trying to figure out a practical, affordable way to purchase your first home in super-expensive Southern California, you might consider buying a portion of a place.

Fractional ownership, or TIC (tenancy in common), is relatively new to Southern California even though Bay Area buyers have embraced this homeownership model for three decades.

Not to be confused with condos, co-ops or timeshares, TIC’s are a unique way to carve up and co-own some fractional interest in real property, including the benefits of mortgage interest and property tax deductions.

Single-family residences, 2-4 units or any size apartment building can be carved up into fractional ownership. The property deed is recorded with each co-owners name and percentage of ownership. The TIC contracts are not recorded.

Each co-owner has the exclusive right of occupancy for a specific, space-assigned section of the building through the tenancy in common agreement.

“Cities cannot regulate these. You have a constitutional right to do what you want,” said Andrew Zacks, an attorney with Zacks, Friedman and Patterson. The contracts typically include private arbitration agreements, he said.

To illustrate, let’s say I own a four-unit building, and I see financial upside in selling building portions. You see an opportunity to buy into an ideal location at a more affordable price. I retain unit A, sell unit B to you, sell unit C to your best friend and sell unit D to my best friend. Our new fractional percentages ownership are recorded by grant deed. Our space rights are completed using a TIC agreement.

Los Angeles-based real estate agent Liz McDonald, a.k.a. The Rental Girl, sold 50 Los Angeles-area TICs in the past two years.

“Buying this way is 10 to 20% cheaper than buying a condo,” said McDonald.

“Legal costs for a TIC contract are $2,500 for four-units or less,” said Rosemarie MacGuinness of Sirkin Law APC. “Five or more units is $15,000 to $20,000 as the California Department of Real Estate requires a budget (and other items).”

More fractional lenders are expected to move into this market. But for now, Sterling Bank & Trust is the only lender willing to provide fractional mortgages in Southern California. Northern California has a plethora of providers.

Fractional financing is available with as little as 10% down, up to an $850,000 loan amount for an owner-occupied mortgage, said Henry Jeanes, assistant vice president of Sterling Bank.

Fractional financing precludes having any sort of master deed of trust or blanket mortgage. The property must be free and clear to allow fractional mortgage loans, Jeanes said. Multiple fractional loans (by a single or multiple lenders) to multiple building co-owners are allowed.

Some San Francisco building owners have self-financed TIC borrowers.

Why would an apartment building owner to carve it up and sell it instead of selling it as one building?

“The sum of the parts is worth more than the whole,” said Jeanes.

Next week: My plan for Governor Newsom to rapidly increase homeownership using TICs and tricks to entice apartment owners to convert.

Mortgage broker Jeff Lazerson can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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Jeff Lazerson - Mortgage Columnist since 2011