First Investment And It's A Condo Conversion. Oh Boy!
Hello folks, let me start out by saying that this is the best website I have ever come across. There is more info on this one forum than in some books I have read. Now for the question.
I have a chance to get two townhouse buildings with two 3 bedroom units in each one. So basicaly it's four units on two parcels of land that have a common parking lot and garage enterences. Three of the four units are rented at a very good rate and if the fourth one rented out it would cover my monthly expenses. Instead of keeping them for rent though I would like to convert them to condos and sell them one by one. It's a chance to make around 50k but I don't know how much is involved with this. I have set aside 5k for the lawyer and another 5k for the architect. I have roughly 12k for time that the units are vacant and perhaps other things that may come up. I contacted a lawyer and he made it sound like it would be a big deal and after reading the posts here I am begining to believe him. Another problem that I am facing is that I will have to finance this deal and if I buy them as they are I will get a res loan for the two "townhouses" but when the time comes to redeed the properties as condos and separate units I think (keyword there) that I will not be able to do anything till the original loan is paid and I have the full ownership of the properties. I think that if I did a commercial loan I would be able to do this with no problems however I don't have that much cash to throw down on it. Any help what so ever will be great.
Thanks in advance, Grush.
Congratulations on making a decision to invest in real estate. In this case, I would say if the property cash flows, buy them as rentals and keep them that way.
As a condo conversion project, unless the numbers look real good, I wouldn't recommend it for 4 units. You mention $50K profit, is that per unit or the total?
As far as expenses for a condo conversion, you only mention 3 items, lawyer, architect ($5K??) and vacancy. Other items to consider, a property condition report, city and state application fees (check with the city and state), upgrade costs (you're going from a rental to an ownership status), city permits & bonds, insurance, etc. Are the units separately metered for utilities?
Check the City planning department and see what is required for a condo conversion.
Good luck on your real estate investing career.
How is a condo different from an apartment?
Ownership divisibility and some building requirements separate apartments from condos. A condo is where you own the actual structure of the building jointly with the other members of the association, along with common areas such as swimming pools, tennis courts or other common areas. Individually, you own the airspace and interior of the structure, but not the building itself. You and the other members of the association own the structure together. Owners pay their own separate insurance, mortgage, property tax, and utilities, plus a Homeowners Association Due to cover the repair, maintainence, and insurance of the Common Area and the HOA. In our area, a certified budget preparer is needed to establish the maintenance costs and the developer (which is you) would have to put up an amount established by the city or state to start this budget. Depending on the property report, you might also have to put up money for short term and long term repairs.
A document called the “Covenants, Conditions, and Restrictions” (CCRs) establishes the rights and responsibilities of the condo owners. The lawyer should be able to help with this.
A condo conversion project is basically a one lot subdivision. So, that being said, talk with the P&Z, ask them what's necessary (fees, reports, drawings, documents, etc) to subdivide and to issue each unit a parcel number, so that that each unit can be sold individually.
Talk also with a title company (commercial division not the residential division, Chicago Title for one can help) and tell them what you are trying to do.
Architect costs: In my area, minimum is $12K and you might also need a civil engineer to do the parcel map and a structural engineer to certify the condition of the building. You mentioned it's fairly new, but the city or state wants verification. Also, you want it to CYA for your protection in this suit happy world.
Financing: We've found the local community banks to be more friendly to this type of situation. You need a loan with a partial release clause.
Good luck.
[Update]
Okay, so we went and looked at the properties again last night and are still interested in going through with it. I contacted a very good lawyer who also teaches RE law at Marquette University so he kind of reasured me that it will be a smooth transition. He said that normaly he charges around 2k to do the condo conversion documents and the condo association docs. I thought that was low balling it a bit but am counting to spend more so it's okay. He also said that he has a surveyor that he likes to use to do the plat and he charges around $2500. Once again, seems a but low so I am counting on spending more. He said that the whole process should take about 6 weeks and then we can sell off the units as long as they are not occupied. If there are people living there then we have to give them a chance to buy and another waiting period after that. From what I see so far it should not be an extremely hard thing to pull off but then again I don't really know what it all takes. If anyone out there knows a little more about this, please help. All the previous posts were great help, but I think I need to go even more into detail before I will be 100% sure that I can pull this off.
Thanks again, Grush.
Sounds like you've got it covered.
One caveat is tenant rights regarding condo conversions. 6 weeks is ambitious for a conversion. Check your state statutes and especially Wisconsin Act 283. Remember, there's the city codes and then the state statutes that you have to deal with.
Here's a link to the Wisconsin Statutes:
http://www.legis.state.wi.us/statutes/Stat0703.pdf
Read Section 703.8 regarding condo conversions.
Good luck and keep us informed of your progress.
Thanks for the fast reply! I have seen that before and you are right there is a grace period for the tenants which I am more than willing to accept. All together it's only a 120 day time frame which is fine with me since I don't want to rush it anyways. Thanks again for the support.
Grush.
How did this turn out? Just curious.
This is my first post and I would like to say I love this site!! You guys are great very generous with sharing your knowledge!
After reading this post with intrest I was just wondering if you ever put this deal together??
The next time you have $50k I would buy apartments, this is how much closing costs would be for apartments in the $1mill to $1.7 mill range and would be the biggest bang for your Buck. I hope your existing project turns out for you.
Good Luck,
Robert
Did you state in your contract to purchase that you or the owner were to pay closing costs?
Ask for a copy of the HUD-1 prior to closing so that you can review it to determine what the cost are for? Also ask your loan officer how much he/she is charging you for the loan.