Hello Everyone! Recently I was scanning through loopnet and I came upon this deal in New York which read" 19-Unit Sponsor owned Condo package Rockaway NY". Being a new investor, I have never heard of a Sponsor owned Condo package. Can anyone in the land of Bigger pockets tell me what does this mean and how different it from other real estate deals and how should I approach this deal. How do I protect my self, what to look out for. Any insights will be helpful. Thank you all, Gary.
The Sponsor could be the original developer of the condo or someone that purchased the original developer's interest or a subsequent sponsor's interest. If the condo was converted with a non-eviction plan then many of the sponsor owned units could be occupied by rent regulated tenants. The play there is that as regulated tenants leave the apartments can be renovated and rented or sold at market rate. I'm not that familiar with conversion plans, but I think the sponsor might have to sell units as they become vacant or within a certain timeframe. That kind of info can probably be found in the bylaws. Keep in mind if one entity owns more than 10% of units the condo is no longer Fannie approved and buyers and sellers will have a more difficult time trading there which could hurt sales prices somewhat. Also if the number of units rented is more than 50% that would also make the condo non-warrantable. You're going to want to take a close look at the lifespan of building systems, the facade, roof, boiler, etc. Any special assessments could kill your cash flow. You'll probably want to get on the condo board as any financial decisions are going to affect you x19.
I invested in condo and bought some from sponsors.
Sponsors are owners of a condo complex or coop building. They're either the developer who built the property, or owners of vacant or occupied buildings who submitted and completed a conversion plan that can now sell units to end buyers.
When they mention a sponsor package, instead of selling units individually, they sell a number of units, in this case, in packages of 19, usually at a discount to selling individual units. So the buyer of such a sponsor package can now sell individual units to owners, hopefully make a profit buying at wholesale and selling at retail.
Usually right after conversion, in the case of coops or condos, a certain number has to be sold before the HOA is formed, and in the meantime the sponsor is in charge. For instance, if someone buys a condo to rent out, usually the CC&R stipulates the HOA must approve. Though they had an initial CC&R that says up to 20% of the units in my building can be a rental, my attorney pointed out to the sponsor attorney that as the sponsor, he can bypass all of this, and write this directly into the deed, i.e. my condo is a rental condo. At the time I bought, the HOA was just formed, new, and it would be a pain to get the approval, as no one knows who is in charge yet, so they decided to go this simpler route.
Many established apartment buildings in NYC converting to COOPs are done this way, with sponsors initially selling to a groups of wholesale investors. A 100 unit building can be sold to 6 to 10 wholesalers through such sponsor packages. It is at this stage that financially, the COOPs are at the most dangerous. Since the COOP building has an underlying mortgage, if one or several such wholesalers can't pay their monthly fees, the COOP cannot pay the underlying mortgage, the bank can foreclose on the entire building.
Condos does not run into this same problem, has it has no underlying mortgage, though banks have foreclosed on sponsors. I bought a condo through a foreclosed sponsor, and believe it or not, it was during the last S&L crises, and the foreclosing bank was foreclosed on as well. At my closing, my attorney was wondering who's coming representing the seller.
Fortunately, the entire building was refurbished, and rebuilt from the former high school, everything inside is new, so we got warranties on everything.
If you wondered how I know all of this, the bank lawyer representing the sponsor at the closing was late, my real estate attorney well versed in all of this, so my he went into the intricacies of HOA's, sponsors, CC&R's etc. to pass the time.
Thanks Jason for sharing your experience with me, your information has helped me quite a bit. How do I find out all this information you shared before I decide to make an offer. That kind of information can help me decide what I am willing to offer and tell me what flexibility I will have selling vs. renting long term. The building was built in 1961
Thanks Frank for the information. It has made me realize I need to get more information and or get a lawyer consult before I make an offer.