Need advice on how to price a 21 Condo unit

[Christopher Fasheh]

Hello all,

I'm so excited this is actually my first discussion on BP. I need help pricing out a rented 21 Unit condo in Bayonne, NJ. 

The building has 21 units 1 bedroom and 2 bedroom, gross income is 190k. 

The building is rented out in full with 0% vacancy. Income after expenses is only 45k. 

Obviously the building is miss managed and has low rent cash flow, some units are rent control. 

What is the best way to price the building? Should I advise my client to convert the building to condos and sell them individually for best return?

[Dion DePaoli]

Not fond of the terms usage here.  If the property only consists of the 21 units you mention then this is more of an apartment complex and not a condo complex.  If the property has more than the 21 units, which are owned by others, where you are only buying the developers or an investors unconverted units then this is a defective condo conversion.  The later may come with additional liabilities for the failed conversion.

As far as converting those units, it depends on more than than the information provided.  Setting up the CC&R and improving the common areas and units is not a cheap enterprise.  Developers who can take the property through that cycle do make good returns but there are certainly pitfalls along the way depending the details.  

Just because a multi-unit property can be converted doesn't mean it should be.  Condos need to qualify for financing if you wish to sell to a wider buyer base.  That is referred to as Condo Warrantability.   If you don't ensure that they can be financed you limit yourself to cash buyers only which increases the amount of time it takes to sell the units out.  That will also drag down the price a bit.

At $45k, you are making about $175+ a door.  It is not clear what the mis-managed upside is.  You may have a nice equitable gain if you can increase the rents over time and then sell it as a complex  years from now.  

As far as pricing for purchase, you always want to price the property in the state the property is in now.  Not a future value.  So if the local cap rate is 8% the property is worth $562k.  If the Seller is asking for a better rate, you can consider a small premium if you really believe you can add value quickly.  With the property at 100% occupied, there is limited short term upside more than likely.  You can only increase rents on those contracts that renew or turn over.  Obviously, you need to do due diligence on all the financials being stated by the Seller.  Good Luck.