I just read through the thread on rentals, and I wonder if any of you have had experience with converting a building from rental units to condos?
This past week I signed a purchase agreement with a partner for 3 unit rental unit in one of the prime residential in our area, and our plan is to convert the building into 4 condos.
The deal is contingent on getting city permission, which we assume will not be a problem, since there are many similar buildings in the immediate area that have already gone through this process.
The building is structurally sound — so we will do new kits/baths, paint/redo the floors, and spruce up the unpainted (but beautiful and quite elaborate) woodwork in the existing units.
We will form a LLC for the project, and both of us have had considerable experience with renovations, but never on an investment property.
So if any of you have thoughts and suggestions, I would be grateful to have your advice.
Replies
You are entering an area I want to get my feet wet , but we dont have one condo in this town. I think we need some definately, but to pioneer . mmmmmm I did pioneer nice three bedroom rentals in quanity. That worked.
Nikki, I like the idea. Do your homework, no one else will.
Tim Mooney
Around here (MSP) it seems that most of the nice rentals are heading toward condos. More and more, if you want a decent rental, you have to go to the suburbs. Is there much townhouse development in your area?
There are some older town houses , yes. They also need rehabbed, but they are not yet for sale.
Tim Mooney
Isn't there anyone out there who has converted a rental unit to condos?
Mostly just us carpenter guys here. Sounds like you might want a zoning/land use/real estate attorney in your area to get you up to speed on the process, as it applies to your town.
What's happening in my area is that folks who know renovation (i.e. carpenters) are hooking up with real estate people to buy shabby houses, which they then bring up to the neighborhood norm and sell -- at a substantial profit, if done right. this process has been going on for years.But in the past few years, they are using this same process to take small rental buildings and converting them to condos -- again, at a very good profit if done properly. In other words, it is a way an entrepreneurial carpenter can leverage his skill to earn way more $$ than one could just working for someone else (either at an hourly or job rate).
It's a really interesting idea. I know that builders of condos suffer a lot of lawsuits because lawyers have caught on to the 10-year window of responsibility on them and file class actions. I wonder if you'd be subject to the same potential problems if you converted a building to condo use. Dick Seibert over on the JLC board might know.
David asked me to comment:
We used to do a lot of apartment to condominium conversions here in California in the ‘70s, but the business has dropped to nothing. There were lawsuits on conversions as well as new condo construction, and the suits were much larger.
The problems with condo conversion (bear in mind that I am talking California here, so check with your own state):
1) You have to file a subdivision map with the state and get it approved, because you are dividing units up into separate pieces of property. You have to have firewalls at the new property lines between each unit. There are other building code issues, like stairs, which have to be altered to conform to the new usage.
2) Apartments have been built to minimum standards, while condos are individual homes and must be built to higher standards, a rented apartment is just that, a condo is a man's castle, he owns it afterall!
3) California has a 10-year statute of limitations for latent defects, and so many defects have been found in apartment, and/or condo construction, that condo associations routinely bring lawsuits prior to the expiration of the statute, sometimes at 9 years and 11 months just to be safe. The courts have ruled that if a condo association doesn’t bring an action against the builder prior to the expiration of the statute, that the board members are personally liable if defects are later found, so boards always sue before the expiration of the statute. The primary things that are always used on in apartment conversions are cantilevered deck joists, not being properly flashed, windows improperly flashed, and shear wall nailing under wood or stucco, things like 4" shear nailing actually being 4½" o.c.
4) Insurance companies no longer insure builders that build, or remodel condos, I know my insurance excludes building or working on condos, read your policy and check with your insurance broker or company. Some insurance companies have recently reentered the condo market, but with “Wrap†policies, that require minimum premiums of a million dollars (that’s right, a million dollar minimum *premium*). I wouldn't even think of building a condo, or converting an apartment into a condo, my insurance "sunsets" in 4 years, and I *would* be sued at 10 years, it would bankrupt me.
By 2002, only a couple of insurance carriers offered coverage for condo developments. Now, six or eight companies offer such coverage, said Mike Strech, director of risk management and insurance for the California Building Industry Association. Builders say the premiums on a liability insurance policy covering a 100-unit townhouse development costs about $1.5 million. ¹
¹ http://www.contracostatimes.com/mld/cctimes/business/10163680.htm
Dick Seibert, J.D. Cal Lic #243571
Dick,Thanks very much for your reply.Does the CA law extend to existing rental buildings that are converted to Condos? We are talking about a 4 unit rental building ( built in 1911).My deal here has no yet been finalized, but my lawyer and banker have not raised any red flags on this issue -- but I will ask them more specifically what liabilities may be entailed.
nikkiwood :
Yes it does, are you located in California? If you are, and your attorney isn't pointing out these things to you, print out my post and talk to him about it. What about your insurance broker, have you talked to him about this? Insurance is usually the deal-breaker on these types of projects.<!---->
Dick,No, I am in MN -- and haven't heard a peep about this problem. In the MSP metro area, very substantial numbers of the better quality, small rental units (6 units or less) are being converted to condos. Renovating these buildings is not financially feasible if you want to maintain them as rentals, but the brisk demand for condos in this type of building can can make a conversion reasonably lucrative.Sounds like a problem unique to California, but I will check anyway.Thanks for all this information.
nikkiwood:You are where we were 30 years ago, go for it and make some money at it before the lawyers catch up. I would discuss this with both my attorney and my insurance broker, but lots of guys made tons of money doing conversions in the '70s around here. I would incorporate a business to do the conversions, then you can liquidate the corporation when you are done and not be personally liable when the lawyers find the gold mine in suing contractors that have done them.
Dick,Our lawyer has counseled us to set up an LLC, which we did. Is that the best way to go in your opinion?
Yes
Nikki,
You might want to check in over at http://www.creonline.com/ Sort of the BT of the real estate investor/rehabber world.
You'll need to seperate the wheat from the chaff over there just like you do here. There are some real pros over there - you can figure out who they are by lurking for a while. As a start, try to track down Ray Alcorn.
Best of luck,JohnTN
Thanks very much -- this is exactly the sort of information I was hoping someone would suggest.