Multi-Family and Apartment Investing
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback
Updated over 5 years ago, 05/31/2019
Condo to Apartment Conversion
We have been looking into the purchase of a 24-unit apartment building in Arizona that fits our location and buying criteria, however as we dug deeper with the seller we discovered that a few years back they had converted the building to condos and never got around to selling them off. So instead of purchasing one apartment building we will have to see if we can find a bank that will offer a loan on all 24 units.
Honestly, I don't know what to make of this. Has anyone here run into something similar? Is a purchase like this much more complicated than a standard apartment building? Would it be wise to try and convert the property back to an apartment building? If so, is that a difficult process?
Any thoughts or advise are appreciated!
I've only done 18 units. I bought everyone out. Runs as an apartment now. One owner. You will need to check AZ statutes for termination of condominium, but I've now done it both ways and different markets have different valuations in each conversion, depending on your cycle (buyer's market vs. seller's market,) etc.
@Christopher L. I'm a little confused, is it an apartment building now or condos? It's condos, are 100% of them vacant? In general, people (in great areas) want to convert apartments to condos so they can get more money. But if the properties are vacant would it now be a "failed" condo conversion? Was it permitted/allowed/etc. by the city? You have the potential to run into some challenges are utilities and how they are metered. Since it's in Arizona I'm guessing you won't hit any rent control issues. If there's one thing that a lot of cities hate it's someone trying to turn rent-controlled affordable housing into condos that get sold off at a market rate. You might want post the city of the property in Arizona so that someone with more acute local knowledge can provide some perspective.
@Andrew Johnson right now they are condos, but the property is still being rented out and operated as an apartment complex. Vacancy is only at about 10%, which is high for the area but the building isn't empty. I haven't had time to dig into the permitting of the conversion but my understanding from the seller is they did everything with the city's permission.
@Christopher L. - As long as none of the units have been sold and all the units are under one entity (and in one building or combined division), you will be able to find conventional financing for it, regardless of the units having individual APN numbers. An additional loan covenant would be in place by the lender to affirm that non of the units can be separated. In effect it becomes a whole enclosed cross collateralized loan. Hope this helps.
Thanks @Chris Martin. I hadn't considered just keeping it as is and renting them that way, I guess it makes sense. There are very few condos in this part of the city as single family homes are still very affordable.
Originally posted by @Joe Hughis:
@Christopher L. - As long as none of the units have been sold and all the units are under one entity (and in one building or combined division), you will be able to find conventional financing for it, regardless of the units having individual APN numbers. An additional loan covenant would be in place by the lender to affirm that non of the units can be separated. In effect it becomes a whole enclosed cross collateralized loan. Hope this helps.
Huge help, thank you! I will talk to my lender.
@Christopher L. I'd just call the city and ask, look at the assessors site, etc. If you're right then 100% of the condos are owned by one person and you'd be buying all of them in one 'batch'. If that's the case then I would keep the zoning (whatever it is) and run it for at least a year to see how it performs. If the area is great you could conceivably start selling off some of the condos, use that revenue to pay down your debt, retain enough to control the HOA, and have a small set of debt-free condos at the end of it.
One other thing to keep in mind is pesky parking. In apartments people make allowances for crowded parking, not having dedicated spaces, etc. If you do sell them off as condos you're going to want 1-2 spaces per condo dedicated. If many of your tenants are using street parking, or don't have cars, etc. then a lack of parking could hurt the ability to sell them off in the future.
@Christopher L. - You are welcome. From the lender's POV, it's really not much different. It actually is just a bit more work for yourself and for title. But you can definitely command higher rents for actual Condo's than for apartment units. Keep in mind that you will need to consider the HOA language and standing if there is one in place. There could be covenants there you need to address. But from my experience, nothing that would prevent you from potentially having a great investment. Just know it can can affect your expense line. Cheers!
As others have said, you'll have no issue getting a commercial loan for the condo units. I would definitely keep them as condo units. You should seek bank financing that will allow for condo releases during the term of the loan. That will provide you the ability to sell them of the market heats up during the loan.
@Christopher L. One advantage would be the opportunity to sell them off as Condo's at some point in the future should values get to a point that it makes sense.
Let me know if you need an attorney contact that could review the documentation for you and see if things are actually in order.
You would/should have complete control of the HOA unless other buildings are involved or it's a master plan.
@Christopher L. This seems like a great situation to me. Having the capability to sell a few off as needed could be convenient. I've done a fair amount of research and work with the city of Scottsdale and Phoenix (not sure where your's is), and both cities seem to be reasonable with conversions if you did find a benefit going back to apartments.
It's called "bulk condo."
@Christopher L., thanks for starting this thread.
I see this is an older conversation but have a related question. Perhaps @Doug McVinua @Ryan Kinsella @Eric Schleif have some thoughts?
I'm over in New England looking at a similar type of situation. 19 condos where 18/19 units are owned by the same entity with the 19th being owned by a private owner. I'd be looking to buy the 18 units in bulk. I don't mind the 19th owner, but could be nice to try and buy him out down the road.
Regarding taxes, this issue that I'm running into is that all 18 condos are assessed at fair market condo values, substantially higher than if they were an 18 unit apartment complex (and a much higher valuation than where I'd like to purchase at).
Any thoughts on keeping these as condos but getting a tax abatement after sale? If I show the town I purchased each unit for only "$85k" will they likely re-assess valuation and bring assessed value down from the current $140k? Realize every municipality is different but any thoughts are appreciated! thx - Ben
My guess? The owner of the 18 units was consolidating with the intent to buy them all... but ran into #19. You say you don't mind #19, but what you describe is one of my worst nightmares. I don't know what your plans are, but at a minimum I'd get an idea on what #19 would want for selling to you. Personally, I'd verify how the owner got to 18, then get an (enforceable) option to buy from #19 as a precondition to the 18. I think if you don't the owner of #19, I'm going to call him "Mr. No!", will realize he controls your investment alternatives and will want to be compensated accordingly.
@Benjamin Schultz I have no knowledge of tax statues or procedures in Maine/New England. Obviously every municipality has their own way of doing things. But in speaking from experience and just in general, the condos have separate tax parcels assigned to each so it will be taxed differently than an apartment building. I see this all the time in NYC when you compare taxes on condos and coops to apartment rental buildings. I'd call the assessor's office of the local municipality to see if you have any options to apply for a re-assessment after the sale. I'd imagine they have a set of procedures in place. I would also run your numbers with the current taxes and consider any possible tax adjustment gravy after the fact since it's not guaranteed to be reduced.
I also wouldn't worry about owning only 18 of 19 units. You control the condo board so the only issue you will run into is if #19 stops paying dues which wouldn't adversely affect your bottom line. A number of lenders would finance this transaction.
Hope this helps.