20 unit complex - condo conversion and rent to own

[TangoWhiskey]

I'm negotiating on an off-market separately titled townhouse complex operated as rentals with some vacancy issues. The seller has offered 100 % VTB for 1 year (interest free if I pay him out in 11 months or less) to allow me to use the down payment for capital upgrades in a mis-managed complex. The area is modest SFH but safe and ok. Good price per door.



I'm interested in trying sales of the units as condos as an exit strategy with investing about 10K per unit to make them shine, and for the units that don't sell using a bulk rent to own strategy.



I'm going to ask him to allow me to strip out condos one by one from the mortgage for sale to use that exit strategy. Are there any other things I should be sure to put in my offer to allow me to make full use of condo sales as an exit? Would selling them rent to own (I love this idea, the units should really pop after the work and be very desirable) somehow complicate the offer or the exit? It seems like trying rent to own means a heavy time committment sorting through for the good tenant buyers.



Also, for those who have done a condo conversion, how difficult is it to convince current good tenants to take a rent to own deal? My idea was to turn one vacant unit into a staged show unit for the sales process, plus major investment into the exterior and parking lot to make it all look good and give a quality experience right from driving onto the site.



Thanks, all answers appreciated, especially Thomas et al.



Tris

 

[housingrental]

Be careful you do not give the seller too many ideas and he implements them himself and no longer sells to you

It sounds like even if he does not have the cash available he would be able to easily get a loan for the funds needed

 

[Thomas Beyer]

Questions: does the city allow condo conversions ? What reserve fund is required ? What common area upgrades are required (parking lot, roof, windows, ..) ? What happens if you sell 8 units but not all 20 in a year ? What is the difference between your price and the exit price per unit ? Who is selling ? What is the marketing budget ? What is the current rent vs. ownership costs for a current tenant counting condo fees, 95% mortgage and insurance ? Is $10,000 per unit enough for a decent upgrade ? Can you get individual financing in a year assuming a less than 50% sellout, and if so, for what $ amount per unit ? Who will manage condo corp ? Who will manage rentals of say 12 units ?

 

[TangoWhiskey]

[quote user=housingrental]Be careful you do not give the seller too many ideas and he implements them himself and no longer sells to you

It sounds like even if he does not have the cash available he would be able to easily get a loan for the funds needed


Very smart. He is a very deep pockets hotel operator who inexplicably bought this little multi family way far away from where he runs the hotel assets, so yes, he could very easily do it. But I don't think he would, I'm more nervous about someone else showing up on the scene and screwing it up! So I'm actually trying to be fairly generic about location and identifying factors. Its a good deal that if it works at the most lucrative level (mass RTO sale) reflects the fundamental strength of the RTO strategy as a way of churning capital over a short term: you get the tenant to have more skin in the game, they're way more grateful at the start (so the RTO folks say), they take the maintenance away, they're not moving. In return you weed through applicants and have to redeploy capital every 3 years or so, with some variability of outcomes.



In fact, I think I would prefer a RTO buyer in some ways to an upfront cash buyer. Its an awesome strategy, but I'm wracking my brains to think of obstacles to implementation in 20 units!

 

[TangoWhiskey]

[quote user=ThomasBeyer]Questions: does the city allow condo conversions ? What reserve fund is required ? What common area upgrades are required (parking lot, roof, windows, ..) ? What happens if you sell 8 units but not all 20 in a year ? What is the difference between your price and the exit price per unit ? Who is selling ? What is the marketing budget ? What is the current rent vs. ownership costs for a current tenant counting condo fees, 95% mortgage and insurance ? Is $10,000 per unit enough for a decent upgrade ? Can you get individual financing in a year assuming a less than 50% sellout, and if so, for what $ amount per unit ? Who will manage condo corp ? Who will manage rentals of say 12 units ?


Great Questions from the pro and thanks for sharing some possible risks, especially those related to failing to sell out as projected.

I have answers to many of them but not all.

 

[Thomas Beyer]

Get answers to all questions or walk. RTO in multi-family works in principal but is pioneering work in Canada. Many tenant do not want to become home owners, although a few might; therefore, ask them. Also, many a (REIN) condo converter is licking her/his wounds today as the money seemed so easy - on paper three years ago. Proceed with care, especially on the financing & very (!!) cash-intensive upgrade side !

 

[MarkTorgerson]

[quote user=TangoWhiskey]Also, for those who have done a condo conversion, how difficult is it to convince current good tenants to take a rent to own deal?









I have provided the option of rent-to-own to tenants in the past. I haven't had much luck with current tenants entering into rent-to-own contracts. I considered a 12 suite condo conversion into rent-to-own contracts. Very similar to your current concept. I felt the market out first by contacting each of my tenants. There are many variables at play with a RTO deal but...in short... they weren't interested.



I have had good response for RTO with properties after they have become vacant.






In the case of a large complex, you may want to consider raising the rents. Then RTO the units that become vacant.

 

[TangoWhiskey]

What do you find to be the key variables in RTO tenant finding?



In this case its a property first strategy, ideally looking for credit challenged folks with 3-5K in deposit and a good job. Since its separate contracts, I'd basically be fixing it up, putting in RTO tenants at higher rents (not counting the deposit) on two year contracts so therefore two year debt when I refi out from the original VTB. Then as the debt rolls over and contracts are executed on (or not) stripping out the units from under a short term float debt. If some tenants can't get the mortgage that would be an issue of course ... I'm talking to a commercial mortgage guy tomorrow about this particular problem. We'll see but my research is definitely showing a sector of the population that is not being served and which is growing as access to mortgage debt tightens.



I think this strategy can work for townhouses and other starter level homes, not sure about more traditional condos. Anybody have any thoughts?