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Updated almost 7 years ago on . Most recent reply
Multifamily to Condo conversion - Create value?
Hi all,
I want to know if converting a multifamily complex (over 30+) units to condos would create value versus the midwest cap rate for multifamily. Condos aren't really too popular here assume you can convert them to condos rather easily with little to no cost involved.
Since home prices are so cheap/depressed in some markets in the midwest, I am not sure if people would buy condos vs buying a cheap home - especially if a condo could cost more. Think about an A property in a C- minus area.
Has anyone done this with many units and can talk about their experience?
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This is like being in the pizza business. Buy the pie, sell the slices. But there is more to a condo conversion that rolling a pizza cutter over the top to divide it up.
It could create value, but it's not an exercise to enter into lightly. At first brush, take a look at the dollars per unit for multifamily sales for that vintage of property, and compare that to condo sales of similar vintage and see if there's a delta. If there's not, stop right there.
So for sake of discussion let's say the property was built in 1980 and multifamily of that vintage trades in the $60,000 to $80,000 per unit range. If condos are selling for similar prices, the conversion adds no value. But if they are selling much higher, then it might. If there are no condo sales to use as comps, that's telling you something--there's no market for condos.
Let's assume that condos are selling for $125,000 per unit for that vintage. Now there is a nice delta. But you can't stop there. You need to examine the regulatory framework for the conversion. In some jurisdictions you might have to do significant upgrades to the property to bring them up to condo specs. And these tend to not be cheap things. Things like upgrading wiring and plumbing, or adding firewalls in attics, fire sprinklers, alarms, soundproofing, wind/earthquake hold-downs, extra parking spaces...who knows...but you need to find out in advance and budget for those.
Then there is the legal cost. Forming an HOA, getting CC&Rs and by-laws drawn up, a reserve study, and funding the reserve account can add up to a big number. Then there is the WRAP insurance. As a developer you'll want to insure against future homeowner lawsuits for construction defects (HOAs are famous for litigating this type of stuff) and this insurance is costly.
Finally, there is the entitlement risk. What if the governing body responsible for approving your project says no? I'm not talking about staff...you could walk into the planning department and get all smiles and thumbs-up. It's not until after you've spent dollars on architects and lawyers that you get to the commission vote. If they turn it down all that money is gone.
So if after studying all of those requirements and adding up all of the costs, there is still a delta in pricing wide enough to give you a healthy profit margin (risk-adjusted, of course, because there is a lot of risk here) then you have a winner.
Now the elephant in the room...your example was an A property in a C- area. Would you buy a condo there???