How to approach a condo conversion for 2-unit new construction

Question

I'm new to the BP community and excited to be here! I owe a 8500 sq ft lot in West Menlo Park. I plan to tear down the existing structure and build a duplex using a modular builder. I'm having trouble understanding the steps I'd need to take to convert the two units into condos (i.e. so they can be sold separately). With the high cost of construction it's become pretty important that I'm able to sell these units separately. A few questions:

1) The planning department is unlikely to allow me to split the lot into substandard lots, and so I hope I'm looking at the right option (condo conversion/ "airspace" subdivision). My first question is, is condo conversion the right option to consider here? Not sure if I'm missing other ways to approach this. I'm not interested in Tenancy-in-Common.

2) If my family lived in one unit and rented out the other for a period of time, how expensive and troublesome is setting up a condo HOA and then paying for it every month? I don't mean how it's a pain dealing with HOAs to get repairs done  - I'm referring to identifying the recurring monthly costs for such a small multifamily project. I am mainly concerned whether such a small scale project  (2 condos) will significantly detract from monthly returns due to HOA dues and condo insurance (which will be negative to start with anyway). How do I find out what those costs would be? Are there other costs I am not considering? This would inform my construction plan.

3) What kind of professional would I enlist help from to 1) Ensure I am meeting all county requirements for this new construction to be eligible for condo conversion, and 2) Help me apply for condo conversion? Should I be looking for a land use lawyer?

Apologies if this was covered elsewhere, I didn't come across these answers in other posts. Thank you all very much!

Amit M. · Answer

My comments:

1- if you’re thinking of building a new 2 unit structure, you may be able to build them as condos from the get go (i.e. have them mapped as condos as part of your approved plans.)  Ask about that, as sometimes new construction of multi family is mapped as condos as part of the entitlement process.

2- confirm that you can easily demo the existing structure. Some cities (San Francisco for example) make it almost impossible to demo existing older buildings.)

3- the question of 2 condos vs big SFH values is an important one. You really need to look at comps that sold nearby (preferably on your street) plus also talk to established RE agents that know the neighborhood well. Perhaps building an SFH with an ADU may be the best compromise, if you want to live there long term and have a unit for family. Or maybe it’s not, but you should explore all options.

Edward Liu · Answer

You should check regulations from Menlo Park and see what it will take.  As someone who lives in Palo Alto, your plan is nearly impossible to carry out, at least in Palo Alto, unless you do large development, such as convert an hotel to multi-plex.  Now days, most bay area cities are anti expansion, some cities even require vote by neighbors to allow split of lots.  I know 3 examples by friends who tried to split lots (to build 2 SFH) and failed, 2 in Palo Alto, 1 in Redwood City.

Another thing to consider is Duplex has lower resale value vs. SFH in many areas around here.  In West Menlo Park, nice 4 bedroom SFH probably cost $3.5M+.  Not sure how many investor would be willing to pay $3.5M for a duplex that probably has negative cash flow of over $100k per year.   For duplex in Menlo Park, you would be lucky to get $2.5M due to CAP.

You might be decreasing your investment value by converting it to condos that can not be sold separately, basically a duplex.  Even if you are able to sell the 2 condos separately, still not sure it is worth it.  If you must rebuild, you might as well build SFH with separate guest house for rent income.

Arlen Chou · Answer

@Nina Singh the first thing you need to do is go to the City Planning office.  Just be straight with them, tell them the address and ask if you can proceed with your plan. They might just straight up tell you that the zoning will not allow it or you lot size won't allow, etc. As for setting up the HOA fees, that "cost" is up to you.  Basically, you are setting up the HOA to pay for things like maintenance and gardening of the common areas. There are other "shared" costs that go into it, but you get the idea. There are a TON of financially under-funded HOA's and that is dangerous for the owners, but it can and does happen.

It is not really clear what your end financial goal is in building 2 condos.  Are you trying to figure a way to make your living area free to you? Are you trying to create a big paycheck to put into your pocket and you think selling 2 condos will make that check bigger vs. just renovating the existing property?

More detail will allow people to answer you with more clarity.

Nina Singh · Answer

Arlen and Edward - thank you both for helping me identify the right questions to ask. Some additional context:

-It's R2/50 zoning, North Fair Oaks, I've confirmed 2 units plus ADU are allowed. There are several small multifamilies on my street (many through the PUD process). It's also unincorporated and thus handled by the San Mateo county (not Menlo Park City) department.

-I agree that splitting the lots would be difficult, not because of neighbors (I think Palo Alto operates a little differently from unincorporated Menlo Park in that regard) but because splitting would result in substandard lots (<5000 sq ft each) which the county is unlikely to approve.

That's why I'm trying to understand condo conversion, which by my understanding doesn't necessitate the splitting of the lot/land. In other words, with a condo conversion each owner would own their own unit and either a percentage of ownership of the common lands, or an HOA would own the common lands (I'm not completely clear on those latter details).

-Arlen, thank you for prompting me to clarify my goals. Renovating the existing unit is not feasible (too tiny and too old).

Ideally I'd like for my retired parents to live in one unit and have the option to sell the second unit (as you mention, an attempt to making the living area as close to free as possible). Other scenarios are 1) Parents live in one unit and collect rental income (this will help but not make the living area free), or 2) Build and sell off. I would rather NOT sell off immediately given the continued projected market slowdown, but if that's by far the best option then we're open to it.

The most optimal goal will depend on market factors and the answers I am seeking here - that's why I'm not stuck on any single rigid goal that might end up being suboptimal.  E.g. if condo conversion or some similar alternative is not possible, I will revisit my plan to identify the next best option which might be building and selling a SFH.

Note: I am operating under the assumption that two separate units will amount to more than a single SFR. Example, two 1800 sq ft units would sell for $1.8M each whereas one 3600 sq ft SFR would sell for $3.3M+. Please stop me if this is a dangerous assumption to make.

Edward, you bring up a good point - that an SFH w/ rental unit in W Menlo Park might command a higher price point than a duplex. But what about two separately sold detached homes of "condo" status? This property is in "Menlo Park" and the 94025 zip code, but this street has many duplexes and triplexes and some scattered SFHs and multiplexes. So I'm having trouble envisioning someone dropping $4M+ for a largish SFH + ADU on this street.

Arlen, thank you for the information on setting up an HOA. What kinds of professionals can I consult to ensure I'm going about it the right way?

Many thanks for reading!!

Grigory Pekarsky · Answer

A condo conversion for 2-unit new construction is a great way to increase the value of your property. It also adds an extra unit that can be rented out, providing income and monthly revenue. However, there are many factors that need to be considered when deciding if this type of project is right for you or not. Here's what you should know before taking on this challenge:  - Decide if it will work with your current zoning laws in your area; - Understand how the process works so you don't get stuck in limbo with no idea where to go next; and - Make sure your finances are ready because this could add onto any other projects currently going on at home.

Nina Singh · Answer

Apologies - this is in California (the Bay Area, to be exact).

Jessica Zolotorofe · Answer

What state is this in?

How to approach a condo conversion for 2-unit new construction

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