Owner financed condo conversions?

Question

What's the scoop on this? Seems like a no-brainer on the right kinds of property.

Anyone here got exp. in this game?

I'm thinking in the 20-30 unit range. Older units. Package the paper and sell off the mortgages to other investors?

I know it's been played out on the coasts and in places like FL. However, there's markets here in the great expansive Midwest that haven't hardly been touched by the conversion game. Meanwhile, we've got some really high forclosure rates, and giving an owner-financed opportunity for someone to build into property ownership again seems to be a good way to hedge your bet against transient, destructive tenants.

Plus, structuring a separate paper deal for a higher interest rate certainly seems like a good play.

Account Closed · Answer

Mike, I was highlight something slightly different. If the number of units in a building that are not owner occupied is above guidelines then getting a loan as a buyer (OO or NOO) becomes difficult. Some lenders have rules about buildings that were conversions. If you seller finance the full building you might be setting up a problem for later when someone wants to sell. The risk to the notes you are holding is increased if people can not refi or sell. One reason some markets have few conversions is because the buildings are more valuable as rentals than as OO condos. The conversion costs are greater than the premium people will pay as an owner. Or there are plenty of other properties to buy as an owner so buying a conversion is not that attractive. The exception is more likely to happen when there are restrictions on new build (city center, historic areas, etc). John Corey

N/A N/A · Answer

That makes more sense. Years ago, my wife and I lived in downtown Cincy in a rehab loft. As part of a block grant for community development, the developer worked a deal with the city to contribute $15K per unit towards the downpayment towards the conversion when a tenant chose to exercise. They had a deal worked with then Star Bank (now US Bank) to do the financing as a package deal at 7.75%. The rents were $750 for a minimum of a 2000sf loft space. We figured that even at 7 3/4%, the equity gain of $15K was worth it because there were no restrictions on transfer, length of time in unit, sublet, etc... So we were in the financing process when the owners stated that they would exercise upon 80% of the tenants committing to the deal and forming the HOA. I always thought that was part of the deal with the city, and may have been. While we were waiting on the rest of the tenants to get their acts together, the Cincy PD shot and killed a minority kid that touched off a week of violent riots and mayhem. We were done. So you're describing lender contingencies such as my 80% OO example.

N/A N/A · Answer

No, I've not personally done such a deal, but I've got experience in mixed-use commercial. I'm interested because our area has been virtually untouched by the condo-conversion wave of the past couple years. I'm a reasonably intelligent business person, and I understand the importance of developing a niche for myself. Nobody seems to be doing it except for maybe the big players. I only know of a couple new condo development deals right now and that is in downtown Cincinnati at The Banks. Very high end. There's also a new tower going in near downtown that is supposed to be some architectural spectacular. Again, very high end, many, many units. All near downtown. I'm looking at something more along the lines of a vehicle back to home ownership in other areas. Without question, I agree that you have to temper the credit risk with the loan portfolio. However, given the owner-financed credit profile, it is inherently riskier regardless of what you do. Risk abatement is a question that I have for seasoned guys. Is the risk profile similar to an owner-financed SFH? Higher? Lower? Is the deal better off being structured to hold the paper and offer a syndication to other investors? What are some things I should be considering in paper re-sale covenants? What have you seen on the coasts? I'm trying to benchmark other areas right now, hence my call for someone with experience in this area.

Account Closed · Answer

Have you done deals already with seller financed condo conversions? You need to be careful about how you structure the deals. Resales are important. If I was buying a note on a unit and the whole place was privately financed I would wonder if there is financing problem related to the building. I also would be concerned if you fill the place up with credit challenged people as they are likely to default, fight HOA expenses, etc. You might be concentrating the risk so that the note buyers are more exposed than normally. John Corey