Want to know more about condo conversions and whether it's right for you? Check out the FAQ's below and we will do our best to help you decide. If you're still unsure, just go to our contact page and get in touch!
A condo conversion is the process of legally turning an apartment building into individual condos to be sold separately for a profit.
This can be done to a building you already own, or to one you purchase. Often, condo conversions also include renovations to the buildings and individual condos to increase salability and market value.
In a condo conversion you are taking an existing multi-unit building which is purchased at a wholesale price based on a rental operation and/or market comparables and then converting these individual units into condos which are then sold at a retail price. The price received upon the sale of the individual condos is much greater than the pre conversion value of the individual units.
Each multi-family property is different in terms of convertibility. The location and the market in which the property is located will dictate the potential of the conversion. The experience and training of the owner will dictate whether the owner should attempt to do a conversion. The profitability of the conversion will be affected by the commitment and time the owner is willing to give to the conversion.
A conversion of an individual complex may offer great potential but may only be able to be achieved by the employment of a professional conversion company. There are many professional conversion companies and the owner of a complex should do their due diligence in selecting one.
The purchase financing of a complex for conversion can be obtained without requiring a burdensome down payment. In most cases, the lending institution will only require a down payment of 10 to 20% of the cost of complex. The complex itself will be the collateral for the loan.
The next concern is how to pay the debt service on the note that the financial institution holds on the complex. In most conversions, the debt service from the rentals of the apartments will cover all or most of the debt service. This is assuming that the apartment complex has a high level of units under a rental contract. The monies required for the model unit and rehabbing of the units can be included in the initial loan or from other sources. As each unit is sold, the profits are then used to pay for rehabbing the next unit to be sold.
It is advisable for the owner to work out a favorable "partial release" provision with the bank that is providing the purchase loan. This allows the owner of the complex to only pay a percentage of each sale to the bank which allows the owner to put the balance of the sales proceeds into the rehabbing of the next unit or to enjoy the profit from the sale. A typical partial release ranges from 40 to 70 percent.
It allows the owner to enjoy the equity in their property now as opposed to waiting for the rental operation to pay off the mortgage. It allows the owner to sell a number of condos to pay off the mortgage and then enjoy the rental income from the remaining units. The owner of a complex may not be able to justify rehabbing the complex for a rental operation but a condo conversion may justify the rehab. The owner of a complex may want to purchase another rental complex. The sale of a number of condos may provide the down payment needed for that purchase.
The owner may want to purchase another investment property but does not want to have any tax consequences from the sale of some of the condos. The owner can achieve his goals by exchanging a number of his condos for the desired investment property. This can be accomplished through the use of a "1021" tax free exchange. Due to the fact that not all properties qualify for this tax treatment the owner should consult his accountant and attorney.
The costs are: Purchase cost of the complex, cost of exterior/interior rehabbing, cost of any upgrades to the amenities, financing costs and management costs.
The costs of doing the actual conversion include: Fees of the company doing the conversion, cost of surveyors, engineers, inspectors, appraisers, realtors and contractors. The need for and the amount of work to be done by these professionals varies in each conversion. The sales costs can be reduced by allowing the in-house personnel to sell some of the units.
Analyzing the Multi-Family Property
In order to determine the sales potential of the converted units, a market analysis is needed. This part of the process involves conducting a study of the neighborhood and of any competing complexes, determining what condos of the same size are selling for in the current market, an inspection of the exterior of the buildings, the condition of the interiors of the units, the condition of the grounds and the amenity package in place.
Planning the Conversion
Using the study outlined above, a conversion plan in formulated, taking into consideration both the positive and negative aspects of the property. The plan includes budgeting for needed rehab activities and the addition of any amenities that may be lacking.
Rehab and Amenities
The rehab work (interior and exterior) necessary to make the property marketable is a crucial part of this process. Certain amenities may be added, depending on what amenities are already present and what competing properties have to offer. We recommend setting up a sales model unit, which should be decorated and completely furnished. This is the tool that will allow you to show prospective purchasers what their unit can look like. We usually have a “wish book” that depicts all of the different remodeling options available to the purchaser.
Homeowners Association (HOA)
A condo community is governed by a homeowners association. The association – comprised of all of the condo unit owners – sets out certain guidelines relative to the obligations of the unit owners as they relate to the ownership of their unit and to their participation within the condo community. The operation of the HOA is very important to the success of the condo conversion and to the maintenance and enhancement of property values.
Marketing
The marketing of the condos can be done either through a realtor or with in-house personnel. (As outlined above, a model unit should be used in the program.) Direct mail campaigns – mailing brochures into apartment complexes, cable TV ads, open houses and listing with a realtor.