Condo conversion on 4 unit FHA

5 Replies

I have a theoretical question that I wanted to run by the community. I am analyzing a 4-unit building in an up and coming area. The numbers pencil out fine as is but I wonder if down the line the condo market in this area picked up whether it would be possible to convert the apartment building into condos (they are all 2/2's) and then so lease options on the condos using my low FHA rate to arbitrage a higher rate on the note to the buyer.

I guess the first question is whether the condo conversion would trigger some sort of due on sale clause with that original mortgage. 

Does anyone have any thoughts on whether this is even feasible and if so whether it's a desirable strategy?

When you convert to condos using an FHA loan, at the end of the process, the bank needs to okay the condo conversion. Not sure how this would play out, and my brother and I will find out soon, as he is doing a 203k on a fourplex in DC and converting to condos. Probably the easiest way to go is to refinance into a commercial loan with 4 condos under one loan, and then if you want to sell one of the condos, they can issue a partial release, and just release one condo from the loan. I've talked to several commercial loan officers and that is what they have told me.

But you're talking about doing a lease option to sell one or more of the units. Which I believe would entail wrapping the mortgage. It's my understanding anytime you wrap a mortgage that it could potentially trigger the due on sale clause. But banks just care about payments and the great majority of the time, will not call the loan due. I'm essentially just repeating what I heard in the BP podcast in this regard, and have no first hand experiences.

The second you fijish the clause, the property that secures your mortgage no longer exists, and thus needs to be paid off. 4 seperate properties now exist. So of you do not have the cash to pay for them, you will need financing in place for those 4 units.

@Sebastian E. , you wrote ..."if down the line the condo market in this area picked up".

That sounds like a big gamble, right there. What's it like right now?

ie. If the numbers won't pan out at today's condo market prices, then... (you know the rest)!

@Brent Coombs thanks for the response. The market makes sense for rentals now so I would keep it as rentals and only do the conversion if it made sense down the line. For the area I am talking 10-15 years down the line. I was imagining a scenario where I had a 30 year fixed term loan on it and then could continue to ride that loan while seller financing but I understand now that would not be possible for the reasons @Aaron Smith and @Russell Brazil mentioned. It would trigger the due on sale clause so i'd have to consolidate the units into a commercial loan and then release them one by one. That makes a lot of sense.

Thanks all.

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