What It Means to be 'Tenants in Common'

By Janet Portman
Saturday, October 13, 2007

Q: I'm looking at a "condo-like" unit that is being marketed as having "TIC" ownership in a new four-unit building in California. All four units are for sale. Is this a good way to hold title, and are there pitfalls in this type of ownership? -- Glenn R.

A: DEAR GLENN: While what you're describing may look "condo-like," it's quite different.

With a condo, each owner has title to his or her unit and jointly owns common space, such as the entryway and grounds, with others. But when owners hold property as tenants in common (TIC), each owner has an undivided interest in the whole property.

For example, in a four-unit building, you will own a portion -- perhaps one-fourth -- of the entire property, not a specific unit. Unlike with other forms of joint ownership, tenants in common don't have to own equal shares, so you could just as easily own one-tenth. The portion you own usually relates to the size and quality of the unit you live in. (It's best to have this value set by a professional appraiser.) TIC owners can sell their interests whenever they want, without the consent of the other owners.

There are drawbacks to a tenancy in common. You'll be buying property with people you don't know. Because you all own the entire building, you will have to agree on how to handle things like improvements and repairs in any of the units.

You can limit the impact of some of these drawbacks by drafting an agreement to deal with these issues. You can make the agreement "condo-like" by setting up a maintenance fund to repair common spaces and allocating responsibility to each owner for the repair and improvement of the unit he or she lives in. You may also agree that if any of you want to sell your share, you must first give the other owners the right of first refusal.

In cities where real estate is expensive, TICs give many buyers an affordable opportunity to enter the real estate market. In fact, that may be your only option in this situation, unless you can afford to buy the whole building. To avoid some of the hassles of TIC ownership, you and the other owners may want to consider converting the building to condos later.

My sister is trying to sell her home. Her listing agent brought her two purchase contracts at the same time. One bid was for an amount close to her asking price but was contingent on the sale of the buyers' home. The second was significantly lower than her asking price, but the potential buyers were preapproved and were prepared to close that month. Her agent recommended the lower offer.

My sister accepted the lower offer, and her listing agent obtained a deposit. Two months have passed, and the buyers have been denied a loan, so the house is back on the market and the deposit back to the buyers. Does my sister have any recourse against the buyers, against the bank that gave them the preapproval letter for funding or against the listing agent for not verifying the validity of the preapproval? -- Jean D.

DEAR JEAN: Your sister isn't the first home seller to learn the hard way that many preapproval letters aren't worth the paper they're printed on. In fact, a nationwide survey of real estate agents in 2005 pointed to faulty or bogus preapproval letters as a major factor in the breakdown of home sales before closing.

In the worst cases, the lender hands over a preapproval without even running a credit check or asking for proof of the buyer's income and assets. Such cases are becoming rarer since the collapse of the subprime mortgage market. But even responsible lenders normally add qualifiers to the preapproval letter, such as "subject to a full appraisal, formal underwriting and receipt of an acceptable contract." They also specify what evidence they evaluated before issuing the letter.

Where does that leave your sister? Not with any recourse against the bank, because no seller has a right to rely on a preapproval letter. Nor against the buyers, who were probably as disappointed as your sister. They had every right to get their deposit back, assuming that the purchase contract contained a financing contingency allowing them to pull out of the deal if their financing fell through.

The listing agent's behavior in all of this looks more questionable, however. A good real estate agent will review the preapproval letter, note its failings and get more information or assurances from the buyer or mortgage broker when appropriate.

Of course, it's entirely possible that the letter looked great but that last-minute information scuttled the deal. Still, the agent should at least have warned your sister early that the preapproval letter wasn't a guarantee. The agent could also have asked the second-choice bidders to sign a backup contract to put them in line for the house if the first deal fell through.

Your sister's best bet is to raise her concerns with the agent and the agent's supervising broker. If they can't come up with solid explanations, she should take a look at the listing agreement she probably signed to see how they can part ways without her owing a sales commission. Or she might renegotiate the agreement to lower the agent's commission.

We repaired the backyard fence we share with our neighbor, who orally agreed to pay half the repair cost before we had the work done. Now that the job is finished, he has refused to pay. What can we do to get paid? -- Ron P.

DEAR RON: The fence you share is known as a boundary fence because it sits on the line dividing your properties and is used by both of you. Questions about who owns such fences -- and who is responsible for maintenance -- are common, as are disputes such as the one you describe.

Fortunately, chances are that your state's law has some guidance for you. State boundary-fence laws (and local laws, which will override state law) make neighbors equally responsible for maintaining these fences.

Let's give your neighbor the benefit of the doubt and treat his refusal as momentary stubbornness. To bring him around, look up your state or local law and, with a copy in hand, have a chat across that nice new fence. If friendly persuasion doesn't do the trick, you can always take the matter to small-claims court, where you can point to the law and bring up your neighbor's initial agreement to pitch in.

All states have made their laws available free online. One way to find your state's fence law is to go to http://www.nolo.com and search for "state laws." You'll see a list of links for every state. On your state's page, type "fence" into the search box. You'll probably get several hits, but high on the list will be your state's law.

Perform the same search on your town or city Web site to see whether your local government has also passed a relevant fence law.

When it's time to paint or fix that fence, get your neighbor's agreement in writing. A written agreement won't guarantee payment, but it's much better evidence in court than what you have now.

With 1031 exchange investing, what is your opinion regarding the hold period? Can I roll over my 1031 investments from one qualified investment to another in less than a certain hold period? I have heard that to take advantage of the tax savings, the length of time I hold the property is not the issue, but my intent is. As long as I can prove the needed intent, I don't have to hold for a requisite one year or more, right? -- John C.

DEAR JOHN: A 1031 exchange is a great boon to real estate investors. Done right, it lets you defer capital gains taxes on the sale of business or investment property when you reinvest the gain in other like-kind property. But business or investment property is the only kind of property eligible for a 1031 exchange. Property held primarily for resale is specifically excluded.

You're right that the IRS will look at your intent to decide whether you hold property for business or investment or for resale. The problem is that the length of time you hold the property is a strong indicator of your intent. If you hold a property for only a short period, it looks as if your intent all along was to treat it as inventory to sell, not as an investment to hold.

Exchange specialists differ about how long you should hold property to prove your intent. Relying on cases dealing with this issue, many specialists agree that if you hold the property at least two years (some say two tax years, meaning that it shows up on two years' worth of filings), this will probably establish your intent. Others say you're safe if you hold the property for a year and one day because the IRS generally doesn't audit exchanges when the property is held that long.

Janet Portman is a lawyer and managing editor at publishing company Nolo. She specializes in landlord-tenant law and is co-author of "Every Landlord's Legal Guide" and "Every Tenant's Legal Guide." She can be reached at janet@inman.com. Nolo editors Mary Randolph, Alayna Schroeder, Illona Bray and Marcia Stewart contributed to this column.

Copyright 2007 Inman News Service