Rezoning for a Condo Conversion

10 Replies

This is my first post in awhile. I've been around, but haven't been posting. Much has happened since my last post, but I won't bore anyone with the details. In short, I began wholesaling, and recently ran across a lead that has lead me to post here.

The lead is a multifamily in the northern Boston MA area with good potential as a condo conversion. The issue is that the numbers make sense for a 3+ condo conversion, and the house is zoned 2 family. From looking over the area, talking to the owner, and town, it looks like the town would approve 3+ units, but of course, no one can make guarantees until going through the zoning board of appeals process.

This is typical of several leads I get. The owner prices the property based on what they "think" can be built on the property. The deal is good if this is true, but nothing can be guaranteed until going through the rezoning processes, and the process costs money for plot plans and possibly architectural drawings.

Back to the lead above. I've decided that I want to attempt the rezoning process and condo conversion on this property; I have no personal experience in these areas. The reason for going through the process is twofold 1] Learn the rezoning process, and see if there is a low risk way to apply this to other leads. 2] Try a rehab, and see the process through form start to finish. 

My goal in this post is to update the status of this deal and have others give their opinions. So, here were go:

The plan is to first get the property under contract, with a 14 day inspection contingency, and then to draw up a purchase and sale contract with a lawyer; certain amounts of earnest money would be put down after milestones are met in the rezoning process (this was recommended in other posts). Finally, either follow through with the rehab, or sell the plans.

I'm in the processes of agreeing on a offer which should come back tomorrow.

Some of the gaps right now are:

1] Should I partner, hire a GC, or find my own subs? I'm leaning towards partnering. Feel free to PM me if you want to discuss.

2] How to proceed with the inspection period: I made, what I think is, a conservative estimate on rehab, but would like to get a professional opinion. Should I hire an inspector/contractor, have some GCs look (possibly pay them) look over the job, or immediately look for a partner?

3] How to get plot plans and drawings for the rezoning process? pay out of pocket to a professional, look for architecture students on craigslist, etc., or again partner with an architect.? Right now, it looks like I'll have to pay out of pocket.

Enough for today. I welcome any feedback. Thanks.

Hey Christian,

Feel free to shoot me an email, but we are essentially doing this right now in South Boston.  We could only agree to the seller's purchase price if the city would approve the plans.  We put the property under contract and made the contingency set upon getting all required approvals (from the city zoning, BRA design, and ability to get demo permit).  This process began in July last year and we've yet to get full approval.  Should hopefully have it by the end of the year.

As far as who does the plans, you will be going through a lot of pain in my opinion if you attempt to skimp on professional services.  Our architect plans and attorney fees will likely end up around 20k believe it or not.  But this is because we have to demo a house and build brand new in order for the deal to make sense (increasing occupancy from 1 to 2 units).

Don't let any seller tell you what they think can be done.  Our seller was under the impression you could waltz right into 1010 Mass Ave and get all the permits in a few weeks.  Yea... right!  Educate your seller that changing occupancy can add value, but unless they are willing to do the legwork themselves, the value of the property is worth what it is right now, not what it could be.

Of course, you can dangle the carrot and offer closer to what they are seeking, fully contingent on the approval process.  Let them know that if they hold out for a little bit, it could really be worth their wait while you do all the hard work and front the money - it's a no risk offer to them - it's not their money!

Now before you go out doing this, let's circle back to professional services again.  Find out who is representing the most clients at the city zoning meetings.  That's what we did.  Hired the architect and zoning attorney who was getting things through.  It will be more expensive, but they know the process, know the people, and most importantly, know what can be approved BEFORE you sign any agreements with the seller and risk your money.  So first, find the talent (is this in Boston proper, or north of Boston?) who can help you determine ZBA approval odds, then start to tie up the property.

If the numbers make sense, we might be interested in partnering or there are potentially plenty of others.  It should be someone who has worked in that town/city before and knows the zoning laws, is friendly with inspectors, etc.  This is not an easy task, especially in Boston where demand for work is high and the good talent is either busy or doing their own projects.

Again, feel free to email me and we could see if it's something we're interested in or if we can offer additional guidance.  Hope this helps!

Great response from @Ray H.  above.  Couple points are worth repeating/expanding on. 

1.  Value - great point that the property is worth whatever it's worth today based on the current use/occupancy.  This is like when you're buying a poorly managed multifamily.  You don't base your purchase price on *potential* rents at the property, you have to price it based on the current rent roll.  To the extent you are able increase the rents after you purchase it, that's value that YOU created and you don't want to pay the seller for that.  As Ray points out, if the seller wants to stick to his number, make him come along for the ride - he'll get his price, but only if you get your approvals.  You also save big money on carrying costs by structuring the deal this way.

2.  Given that this is your first run at something like this, I would definitely partner with somebody on it.  The best would be if there's another investor in town that you've seen have success with this type of petition - s/he'll already be plugged in to the town officials and professional service providers (attorney, architect and civil engineer) who can get it done for you.  Next best would be an investor who has this type of experience in other towns - if you understand the mechanics of how this is done, you can find the right (connected) service providers and take it through the process in any town.  I'd be careful about partnering directly with an architect or civil engineer - if they were good at the "big picture" stuff, they'd be doing it full time.  Even some of the best of these guys (and gals) I've worked with are very good at their piece of it, but fall short of seeing the big picture.

Best of luck!

Both great responses. The time frame is not unusual. Here in CA the last one we did took 18 months to get to tentative map and another 18 months to get final approval. So 3 years and the market totally changed. We were fortunate that we could keep the existing home and add 6 more homes. The zoning change was actually a down zone from 10 apartments to 7 PUD homes.

As to costs every last person wants a bite of your development money so plan ahead and double what you think development costs will be.  And should you buy add more than you think possible for holding costs.  We were lucky in that because we got to keep the existing home we could rent it out while the process worked itself through the many approvals.

I don't know if MA has NIMBY's like here in CA but don't discount how much time you can waste dealing with them.

Another thought, a 3 unit condo "building" would be avoided by most buyers.  You're not large enough of course for the condos to have professional management.  So, it will be "self managed" or "not managed" properly.  These have not worked out that well with 4 plex conversions here.  Others will disagree.

A quick update on the status of this deal. The buyer and I have been trying to agree on who holds the earnest money in escrow. The seller is not using an attorney and wanted to use his own account. Eventually, we agreed on holding escrow with my lawyer; I'll be sending over a revised offer tomorrow. Thanks @Ray H. for all of the great advice in the post above and over the phone! 

Any suggestions on how to run the initial inspection to make sure my renovation costs are in line? There is a 14 day period in the offer. Ideally, I'd have plans drawn and go by when walking through. I was thinking of paying several contractors to walk through and having them give the costs under the assumption that one or two floors would be turned into additional units.

@Tom Meade   I  be setting up a purchase and sale to take the buyer through the process with me for his price, as both you and Ray suggested. Thanks for the advice on architects and civil engineers. I was actually thinking that an architect may want to partner up on a deal like this. Given your advice, it's probably a good idea to partner; anyone interested in potentially partnering, please PM me.

@Martin Scherer   Wow, that sounds like a nightmare timeframe, even worse than Ray's. Luckily this project doesn't involve new construction; so the timeframe is probably shorter than one involving changes in structure/subdivision. Preliminary due diligence with the town indicated 4-5 months for the ZBA process. Unfortunately, there are NIMBYs here too.

@Wayne Brooks   I can't comment on how well small condo developments are manged here, but I can say that there is high buyer demand for them in the Boston area.

Great feedback!

Any updates on the progress of this project? Thanks!

Thanks for the post @Rami W. I was going to update the post after getting the P+S back, but since you asked, here's where the project stands. 

I has a signed offer back at the end of March. Most of the details of the purchase were deferred to the P+S that was drawn up by an attorney recommended by @Ray H.  The P+S is structured so that the sale is contingent on the town approving rezoning for a 3 family building. Earnest money is structured as 3% upon signing the P+S and 2% upon rezoning approval by the town. If rezoning is not approved all earnest is returned.

As far as the approval process, I will be working with a couple of attorneys in the town that the condo conversion is in. They have done rezoning in the town before. I was not able to find a way to avoid putting up money before getting approval. Our first step in the approval process is to draw up plot plans and bring them to the town engineer to see if we even have a chance. My attorneys think there is a a good chance this will go through, or else we wouldn't have proceeded. After this, we will draw up a floor plan, current and proposed for the building inspector and ZBA. Currently, I am waiting on the P+S from the seller. He's been out of town, and we spoke last week. At that point he said the P+S looked fine and he was going to send it back signed. I haven't received it yet, but I haven't been following up this week because I have another deal in the works.

For the rehab process, I met some guys through the Boston BP meetup that I will be partnering on the deal. They have a lot of experience in flipping on the north shore of MA, and have done several condos.

I will post an update upon executed purchase and sale. Any feedback is always appreciated.

Originally posted by @Christian Austin :

The P+S is structured so that the sale is contingent on the town approving rezoning for a 3 family building. Earnest money is structured as 3% upon signing the P+S and 2% upon rezoning approval by the town. If rezoning is not approved all earnest is returned.

As far as the approval process, I will be working with a couple of attorneys in the town that the condo conversion is in. They have done rezoning in the town before. I was not able to find a way to avoid putting up money before getting approval. Our first step in the approval process is to draw up plot plans and bring them to the town engineer to see if we even have a chance. My attorneys think there is a a good chance this will go through, or else we wouldn't have proceeded. 

Nice!  That's how you do a safer deal than most, especially if you don't have the cash (and absolute certainty of ZBA approval) to compete with the big players who typically buy all cash and no contingencies.  You get to offer a carrot to the seller in the form of a higher price, but you get to hedge your bet with the ZBA approval.

Sounds like the option to get back all your earnest money is a great deal for you If things don't work out. Puts more risk on the seller if the market tanks after all this time. Nice work!

Christian Austin, Is there an update to this process?

For the sake of conversation, Can a buyer change the zoning on a 4000 sq ft retired fire station to a small multi ? Would the process be the same? Petition a zoning board, draw up plans with an architect, gather construction estimates? Not necessarily in that order. 

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