Converting a multi-family rental to condos with a mortgage

[Christopher Hikel]

Hi all,

I am brand new to the game; so thank you in advance for your advice and support in getting me started. To cut to the chase, I am currently under contract to purchase a 4-unit multi-family rental building, in which I currently live in one of the units. I still have an out in the contract, should I decide to use it. My desire and intention is to convert the building to condos two years from now and sell them. This is a very hot condo market, and I expect that I could make a nice return without putting much more work into the units.

Here is the kicker: I would be financing the purchase of the building with an FHA mortgage, because I do not have the 20% down required for a commercial loan. However, I am not up to speed on whether I can convert to condos while I have an FHA loan. I am also unsure of what it takes to refinance to a commercial loan down the road, if that is what I would have to do.

So, can anybody tell me: 1) is it possible to convert to condos with an FHA mortgage? 2) If it is not, how difficult is it to refinance a building to a commercial loan that would allow me to do this?

I am trying to avoid getting into a bad situation, so any timely advice would be greatly appreciated. I have 5 days to use my out in the contract.

Thanks,

Chris

[Ryan Goldfarb]

@Christopher Hikel--

If you're purchasing the 4-unit building using FHA financing, I don't believe you'll be able to pursue the conversion while that financing is still in place. The process of converting the building to a condominium requires filing a master deed and establishing an HOA in order to end up with four separately deeded units that you can sell off individually.

When you're ready to begin the conversion, I'd suggest pursuing financing that is tailored to that strategy as standard loan documents will not cater to your plan. Your new loan will pay off your FHA loan, and will likely contain a partial lien release, like you mentioned above, which may be structured such that the lender will be made whole prior to you cashing out (i.e., you may not realize any profits until the final unit is sold).

I've looked at a few properties locally for which I was considering this strategy. In some neighborhoods, with the market as it is today, any 4-family I find that throws off decent cash flow makes a pretty solid condo conversion candidate assuming execution in that locale isn't a problem. For long-term holds, I consider that exit strategy as gravy.

Good luck!