EQUITY Responds: WID Answers Your Questions
Q: I have the chance to purchase a "Tenancy in Common" with some thing called a fractional mortgage. I'm not sure what that is, but my realtor seems to think it is a good thing. What's the deal with these Tenancies in Common? Can you explain the difference in financing?
A: The traditional financing of Tenancies in Common (TIC) has several significant shortcomings which frustrate buyers, sellers and investors alike. A single mortgage covers the Tenancy in Common regardless of the number of units in the building or the number of owners involved. This means if your neighbor in unit 4A cannot make his monthly portion of the mortgage, the other owners have to cover this shortfall to avoid default on the one loan. Additionally, in the event one owner wants to sell his interest in the property, the buyer will usually have to pay entirely in cash, unless all the members of the ownership group wish to obtain a new umbrella mortgage which includes the new buyer. Lastly, in the event interest rates drop, all members of the ownership group have to agree to re-finance the property. Disputes often arise due to the differing financial and relational situations between members of the ownership group. Now, however some smaller community banks have developed a new type of financing called fractional TIC to address these problems. The fractional TIC loan is a real estate mortgage specifically tied to the individual owner of an individual interest or unit in a building. Thus, when our neighbor in Unit 4A cannot make his payment, the other owners in the building are not liable for the default. Each owner is only responsible for his or her unit much like a condominium structure. Additionally, for a fee, these loans are often assumable by the next buyer and can be re-financed at the holder's discretion. Also, because many communities exempt a TIC from condo conversion restrictions, these loans would be preferable to standard condo projects. Fractional lending mortgages include legal agreements to insure exclusive use and privacy for the owner. These exclusive use agreements, in combination with the fractional lending, ostensibly create a condominium structure rather than a TIC. It is the hope of lenders, investors and realtors that these products will revolutionize the TIC market, providing new liquidity for it and drive up the price of TIC units even in this market. In essence, this should make the loans more attractive to both lenders and borrowers. This means more loans available at better rates for borrowers and more flexibility for sellers therefore increasing their leverage in the marketplace.