Unique situation - advice please

[Bryce Y.]

Hey guys, I have a question about an apartment complex my parents are thinking about selling. This apartment complex was gifted by my grandfather to his 5 children, who are now equal shareholders. He built the apartment himself. One shareholder wants to get out, either by having the others buy him out or by selling the whole apartment altogether. Here are some numbers. If you need anything else, just ask and I’ll ask my parents.

Year built: 1960~ (will double check)
Units: 24 or so (will double check)
Monthly gross rents: $24,000

A realtor said he was confident that if they sold now, they could get about $4 million (yes that’s right, this is in Hawaii where housing prices are retarded). However, my parents are thinking about doing a CPR, or basically subdividing and selling each unit separately as a condo. They have already done this before with one property and realized a much larger profit as a result. The risk is that it’s more costly and risky because it takes a long time (a few years) and the market could change during that time. But they do have some experience and seem confident they can do it again.

I mentioned earlier that one shareholder wants to get out. Well this guy is a real pain and really difficult to work with. He wants to be bought out at full market price ($800,000). My parents currently manage the property for about 13% of rents, and he constantly complains that this is too high, maybe rightly so, but they have a vested interest in the property so they do a good job. Right now the apartment is 100% occupied and the tenants are mostly all good/long term. My dad also does a lot of the handy work himself.

For the other shareholders, none are investors and so none think like real estate investors. They are very risk averse and generally want to take the easiest pain-free route (sell for $4mm). They are very worried about doing the CPR and coming away with less than the $4mm they would get if they sold now.

So here are my parent’s options as I see it:

1. Sell the property for $4 million.
2. Buy out the shareholder that wants to leave in full, so my parents would own 2/5 of the apartment, then possibly CPR (subdivide) or just hold.
3. Parents step down as managers and hire a management company for 8-10% of rents.
4. Get bought out themselves, either for full price (unlikely) or at a discount.
5. Buy out everyone else (or maybe 1 or 2 more shareholders) and CPR, thereby realizing a bigger profit if everything goes according to plan.

Sorry for the long post. I am a real estate newbie myself, so I guarantee I’m missing a ton of things, so I really could use your help. Thank you!

[Steve L.]

What do you think your parents could get for the units if they are sold as condos?

$400,000 / 24 units = ~167,000/unit

It appears these units rent for $1,000 which seems kinda low for Hawaii but I have no idea.

I think the biggest problem is, let's say they can sell them for 250,000/unit and it costs 200,000 (guessing!?!) to do the work.

250,000 * 24 = 6,000,000 * -8% for commission and closing costs = 5,520,000 - 200,000 conversion fees = 5,320,000

$4,000,000 * -6% for commission and closing costs (you won't be paying as many junk fees to an investor and you will probably get a reduced commission) = 3,760,000

5,320,000 - 3,760,000 = 1,560 / 5 partners = 312,000 extra for your parents

If it takes 2 years as you said... your parents would lose the ability to re-invest that 752,000 for 2 years. Assuming they invest it in other real estate they should be able to make 10% a year that is 75k a year over 2 years.

So they'd really only gain about 150,000 for all their work and two years of time, if my assumptions are correct (I made a lot of big assumptions).

That really doesn't seem worth it to me, especially considering the family anxiety and pressure. They are basically doing all the work for no pay. If the units would sell for closer to 300k or 350k it is a different conversation.

If it was me I would sell it very quickly... by my math they are lucky to be making a 4% cap rate on this as-is. (40% expense ratio). You parents are getting a management fee, but they work for it.