The 5 people you need to talk to before a condo conversion.

Let’s talk about converting your multifamily into condos. What does it entail, who are the people you need to speak to, what are the things that you need to consider? I have a lot of clients that often come to me and say, “I have a two-family, I have a three-family, I have a four-family and there are some condos selling in my neighborhood, and I’m considering instead of selling my multifamily as a multifamily, what do you think about converting this building into condos and selling them off individually as condos? A couple things. I’m going to go over five things that you want to consider, five people that you want to speak to and get their advice before you make that final decision.

Number one, the number one person you want to speak to is your local real estate agent, a real estate agent that is versed in the multifamily, in condo sales within your market, within your neighborhood. What you’re trying to find out from that real estate agent is two things. One, “What would my multifamily building sell for if it sold as a whole, multifamily building?” The second number is, “If I break this into two units, or three units, what are those individual condos going to sell for?” That seems pretty elementary. Of course you want to know that. In addition to that what are the things that need to be done to these condos? What are the quality of the finishes within these condos that are required for the sale?

Again, if I’m renting … Right now if I live in unit one and I’m renting units two and units three, and I have laminate flooring and formica countertops and Home Depot cabinets, is that okay for this neighborhood? Is it a requirement for me to upgrade now to granite, to hardwood flooring, to stainless steel if I’m going to convert these into condos? What is the quality of the finishes needed for me to actually put a finished product on the market and actually have them sell?

Once you get those two comparisons. Let’s throw some numbers out there and let’s say we’re in a the high-end Cambridge market, let’s say it’s a three-family unit, and I can sell my multifamily for, let’s say, a million bucks. I’m looking at the condos in the same neighborhood and the condos are selling for let’s say six hundred apiece. This a pretty good spread. You have a million bucks as a multifamily. You have almost 1.8 million dollars in sales as a condo conversion. Most people would say, “Pretty straight forward.”

1) Talk to your real estate agent first and foremost and then toggle through the next four. 

2) Bring in my general contractor and say, “I’ve spoken to my real estate agent and I’m considering going the condo route. Here are the things that I want to do. Based on what my real estate agent is telling me, I need to gut this kitchen and new hardwood floors, stainless appliances. New plumbing. I’m probably gonna change out a couple furnaces in the basement and separate these into different utilities for each unit.... What is that full renovation budget gonna run me?”  Have them give you a contracting proposal so you know exactly what you’re getting yourself into. The reason you want to do that is because, again, there’s an $800,000 spread between selling it as a multifamily and selling it as condos, but if you come in and your contractor says it’s gonna cost you about a half a million dollars to convert these into condos, is there still an $800,000 spread? Now there’s only a $300,000 spread.

The other things you want to consider, $300,000 spread still a lot of money.  There are realtor fees, there are three realtor fees because you’ll be selling three condos. There are attorney fees. There would be three attorney fees because you’re selling three condos. There is also a bit of a home warranty that you as a developer, or you selling these condos also have to create a warranty to hand over to the condo association that you are creating. If the utilities break down, if the furnaces break down, those condo buyers are going to be looking back to you. There are a lot of considerations there.

3) Speak to an architect. They will prepare condo documents that details the exact floor plans and square footage per unit. Typically condo fees are based on the square footage. Everything is laid out in these documents and the architect is going to be the person that is going to come in and make sure that all the details of this building are specifically laid out, and then transfer all that to the attorney.

4) The attorney is going to talk to you about the process of drafting up condo documents, splitting your units into three separate entities, or three separate deeds.

There’s a lot of legality that go into taking one deed, one multifamily, and dividing it up into three separate living quarters.  You want to make sure that you are on board and fully understanding all legal requirements.

5) Your CPA, or whoever does your taxes.  You want to make sure that they fully understand the capital gains tax and how to utilize a 1031 exchange (if you choose to roll over your gains into a new, bigger investment).  What are the tax implications for selling 3 condos versus 1 multifamily building?  

Talk to your real estate agent. Ask a lot of questions. Run the numbers and the value of your time.  Does it make financial sense? The each step is an important decision point.  If you go through the whole process and ultimately decide not to convert to condos - you've learned a lot in the process and will be better equipped for the next opportunity that presents itself.