let me start by saying that I'm sure I'm not the first person ask this question. I was not able to find any previous discussions on this so if you are more familiar with BP than I and have links I would greatly appreciate it.
I am looking at buying an entire 18 unit condo association. 15 are currently owned by one person and the deal has been negotiated but not finalized. Two of the units are for sale by another seller and I know what he would be willing to sell them for and I have been in communication with him also. The last one is currently being rented and at some point soon I am fairly certain the owners would be willing to sell but I have not contacted them yet.
This is a pretty good buy and I would be looking at holding it for the long term. What do you see as pros and cons of having it being a condo versus an apartment.
Pros - Buying in bulk at a discount then in a few years they appreciate and you sell off individually for a profit
Cons - Majority Investor owned condo associations are difficult to finance so you if your exit strategy is to sell them off to homeowners they will run into problems getting a mortgage.
I saw this situation fairly regularly during the crash. A builder would complete a condo building, there would be 3 buyers, and they would be stuck holding the rest of the inventory. Usually, what would happen is they'd turn the other units into apartments, and the owners would then be super minority owners in the association.
If you can consolidate the whole building, and the taxes aren't too steep, I don't see anything wrong with buying up a condo, renting out the units, and then selling them off at some future date. Just realize that what Rob said is true, and that most banks will be hesitant to lend against a super minority position in a condo. However, if you have a relationship with a bank, they may offer preferred financing to buyers as long as you make it clear your intent is to sell all the units.
There is another scenario where this occurs regularly. That is where the building has suffered some kind of catastrophic damage (massive water intrusion, structural failure, etc) and all the units are sold off in foreclosure or deed in lieu because the residents can't afford to fix the building. I would obviously avoid this scenario like the plague, unless you intend to buy up the land and demolish the building.
Follow up question:
At some point in the future when I wish to sell, it would be advantageous to sell individually as condo's. As many pointed out, financing for buyers will be an issue. Is there some way that I can get this classified differently? For example, when a developer builds a 20 unit building and sells as condo's, the bank does not view that as 20 investor owned units, they view them as 20 units that will soon be owned by homeowners. If I changed by-laws of condo to state that condo's can not be rentals (or only certain percentage) would the banks view that differently.
I would have full intention of following through with selling all to owner occupants and not try to be shady in any way.
Sounds like a great oppurtunity. When I looked into condos, it was FHA that had restrictions...so certain condos listed themselves as FHA compliant or something like that. FHA required a certain percentage of owner occupants and had requirements like the distance from train tracks...this was years ago. So it may be a matter of "conforming" loans...lenders want to able to sell loans off and they can't if they don't conform. So check GSE, fannie and freddie for condo guidelines...if you want to be able to sell a few at a time. It might be that buyers will be constrained by their guidelines, not by a particular lender.
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