Condo Conversion Deal, What do you think? - Posted by Vic Parker

Real Estate Investing
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Posted by Don Dion on August 27, 2003 at 13:52:46:

I have been the banker on several of these deals. First hurdle is generaly presales. The current renters get 90 to 120 days once a letter is sent to decided if they want to purchase their units. Once the current tennants lease is up , if they are not purchasing you can begin the remodel once they move out.

The only other glitch that comes up often in these deals is clear title. This is were you have to have a mass closing of several units so you can pay off your construction loan and building loan so you can give clear title to your buyers. With your project so heavely financed this should be an interesting time for you.

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Condo Conversion Deal, What do you think? - Posted by Vic Parker

Posted by Vic Parker on August 26, 2003 at 21:22:10:

Hi all, please disect this deal.

A broker that helped a developer putting a condo conversion deal came to me presenting me with this deal. It is to close on Sep15,2003. I will have to put up $400,000 to get 33% of profit. All the lender financing had been arranged.

This is a brick building currently a rental, underground parking. It has 8 upper floors plus a ground floor. It has a total of 34 units. 18x 1-bdrm, 16x 2-bdrm.

All the units are separate titled for condo. The developer will do the reno.

The developer pre-sold 2 units (show suites) @150,000 and the purchasers will advance $300,000 at closing.

At closing, this is the amount of cash:

32 units value at $2,805,000
Lender finance 85% LTV at 13% $2,385,000
Simultaneous close, 2 pre-sold units 300,000
Deposits by developer 25,000
I put up equity cash 400,000
Total cash 3,110,000

Purchase price $2,980,000
bank closing cost, legal, agent 111,000
Total cash needed to close 3,091,000

The developer put up $25,000 but the lender ties up all his current home using 2nd mortgage, and all his personal assets (so I am told). I am equity partner but not on title so I don’t have to be microscoped by lender, after closing I can register as 2nd. The realtor told me that she had seen the work done this developer, it was top notch.

There is $19,000 cash left over at closing for misc. Although the purchase price is $2.9M, the lender finance LTV 85% based on 32 units instead of 34 because 2 units are sold at closing (2.9M x 32 / 34 = 2.3M).

The lender also put up a $600,000 construction loan facility @13% interest. The timeline for completion of renovation is May,2004 (unrealistic?)

The building is bought at 90,900 per unit. The developer itemized the reno cost =$30,000. Realtor estimated she can sell them for $161,000 per unit. (Which is pretty close to the current selling price per square foot per unit). So there is about $40,000 profit.

Although there is $40,000 profit, the final profit after various cost and interest is estimated to be $660,000. So I get $220,000 for putting up $400,000.

Do these number make sense? Should I go on title too? Should I get better % of profit?

All your comments will be appreciated.

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Re: Condo Conversion Deal, What do you think? - Posted by Steve Leon

Posted by Steve Leon on September 11, 2003 at 02:32:22:

I think you definitely need to get more of the profits. I’m working with owners as the developer. The owner is putting up his building and financing and getting 70% of the profits. I work in San Diego. email me at seunglee@denovoventures.com if interested.

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Re: Condo Conversion Deal, What do you think? - Posted by Tim Burns

Posted by Tim Burns on September 03, 2003 at 22:46:35:

Hello
I am in Minneapolis, MN. Unless I missed something, you didn’t say what city the project is in. Certain markets are overbuilding and are set for a down turn.I have completed 5 reno’s in four years acting as the sole investor and contractor. One thing I noticed is that time and money are both almost always underestimated. But $90K is an amount per unit that indicated a larger unit. There are formulas for this process ranging from $100.00 to $400.00 per foot. I just completed 3 units that I am taking condo before the end of the year. I invested in total $325,00 and am realizing a profit of $75,000, selling the units for $135,000 each and helping current tenants with closing costs. I am please as heck to have made $75K in my “spare time”. If your figures are anywhere near right you stand to do quite well but put the screws to your contractor with fines for going over time and budget.
Also note the release of the following publication :“The Coming Crash in the Housing Market” by this Wall St Guru type named John R Talbott. Published in 2003, I think he has a point, the downturn is starting to appear in certain regions and will soon hit all areas of the country and affect our markets in the 30% range, that being DOWNWARD.
Invest only what you can afford to loose. Best of luck in your venture. Risk is what it takes to make a good profit. Also see the web site www.depression2.com
I’m not a gloom and doomer, just trying to listen to all camps and see when and when not to invest.
Tim Burns