A tenancy-in-common (TIC) is a legal scenario where several owners buy a building together which has not been divided into condos. This arrangement can be a confusing one for those new to the system, and even gives the old pros difficulty at times because of its complicated nature. Here are some tips on how to buy a tenancy-in-common.
- The Pros. First, examine the pros that a TIC will bring you. In this arrangement, you, as an individual owner, have the right to sell your interest or part of the building if you'd like. Also, if the building produces income, one owner may complete a tax-deferred exchange into another "like-kind" income-producing property. This allows the owner to avoid capital gains on the first property. All in all, if you are outpriced in the market and cannot afford a property on your own, this is one of a few solutions.
- The Cons. Examine the difficulties associated with the TIC agreement. Aside from the large amounts of paperwork, you must be willing to cooperate with several other owners. This may seem easy at the onset, but as decisions are needed further down the line, it could get ugly. Do not underestimate the stress involved with co-owning. Remember too, that a partner, upon his or her death can transfer ownership to anyone. The other partners do not have a say in the choice. This is something to consider as well.
- Ways to Buy: Enter an Existing Partnership. You may find a property that is of interest to you and find that the owners are willing to "let you in." They will formulate the cost for you to enter into partnership with them. In this model, you have the luxury of scrutinizing the books, any inspection write-ups, and usually you have some time to do some background checking on your own.
- Ways to Buy: Take over Existing Partnership. You and your associates may have the option to completely buy out the other party that owns the building. You will have to do some negotiating with the existing party to get an agreeable price.
- Ways to Buy: Start Fresh. You may choose to start a new TIC from the start with a new building.
- Ways to Buy: Convert Existing Relationship to TIC. You may convert your existing partnership or limited liability corporation into a TIC.
- Qualifications of Purchase. All of the potential owners will be on the mortgage, therefore, they must all qualify for a loan (if needed for their interest).
- Find the Property: Some existing TIC partnerships advertise buildings they wish to sell in local papers. A real estate agent in the area will also be helpful to your search.
- Background Check. Before making an offer on a building/partnership, consider the property's characteristics. Does it have a new roof? Will it require much maintenance over the years? Does it have any water issues? What is the average rental income (if it is a rental property)? Perform the same inspections and due diligence as you would with any property you would be buying.
- Make an Offer. Come up with a price to present to the existing owner(s). Plan to do some negotiating to get what you want.
- The Agreement: Not all states require there to be a formal agreement. It is a good idea, however, to make one. Have an attorney draft up papers that detail the agreement. Make sure the common area is stipulated, that the percentage of interest for each member is defined, and have a paragraph dedicated to how the group will respond to an owner who is not abiding by the agreement. Divide the interest in whatever way the owners agree. The interest percentages do not have to be equal. It is up to the group. Just make sure all parties are onboard and the attorneys have detailed the specifics in the official documents.
- Flushing out the TIC. Your agreement should have a detailed explanation investigating all the possible ways the TIC can be altered. For instance, how does an owner sell his share to another? How can an owner resell his interest to another owner? Also, what happens in case of a partner's death? Think of every scenario and detail how the outcome should happen. It may seem like overkill, but you will thank yourselves years later when you have a blueprint for action. Make sure all parties are aware of every detail of the agreement.
- Dissolving the TIC. Explore all the possible scenarios that could lead to dissolving the company. Include this in your agreement.
- Attorneys. It is suggested that each partner have his or her own attorney look at the draft to make sure his or her interest is protected. It is always better to be safe than sorry.
Buying a TIC is similar to buying any other property in that you must be careful that the property you are purchasing is priced at market value and has no structural or significant defects. The process is much more complicated, however, on the paperwork side. Since you are buying with several other people, every detail needs to be flushed out and every owner's interests protected. Even though it's very time-consuming, make your agreement as detailed as you can. Make sure to specify what actions each owner may take in commonly-owned property, what happens if one of the parties wishes to modify his interest or common area, and what happens in any other scenario you can think of. Remember, you are better safe than sorry in a TIC.