There are several reasons to consider converting a multi-family apartment building into a condominium. You may be tired of managing the building, you may have trouble getting tenants, or you may just think it is a lot more profitable to sell rather than rent. Whatever your reason, there are a few things you need to consider before converting the units into condominiums.
The Value of the Building as a Single Entity versus as Condominiums
Your first question is to determine if the value of the condos will be worth more than the building as whole. Ask a highly experienced agent in the multifamily space to give you a current price evaluation. A good agent will pit together a market analysis based on several comparable properties.
One analysis will be of the current market for multi-family houses in your area. The second will be for the condo market in your neighborhood. You’ll want a separate analysis for all the units in the building unless they are identical. Using these reports to give you an estimate of your home’s value you can figure out how much you can put into your condo conversion.
The Costs Associated with the Condo Conversion
There are several steps to the condo conversion process, and each will cost you money that needs to be factored into your decisions. The two largest of the expenses are going to go to your lawyer and contractors.
The first thing you need to do is hire a real estate attorney. He or she will help you write and file the conversion documents, and advise you on the legal process. Ideally, they should be someone familiar with the rules and regulations in the community your building is in. Ballpark costs are between $2,000 and $5,000 depending on the complexity of the property.
To convert your existing dwelling into condos, there are lot of things that will be required by the city or town you live in. An inspector will need to come out and check to make sure it’s up to code. Anything that isn’t to code will need to be updated before you can get the certificate of occupancy required to sell your units.
The majority of properties in Essex county that are likely condo conversions were built more than 50 years ago. Depending on how much work you may have done, there may be a significant amount of work that needs to be done in order to meet today’s plumbing, electrical, and safety codes.
Get a reputable licensed contractor to give you a quote (probably several) before proceeding.
The Expense of Selling the Home
One other thing people forget is that they’ll be paying real estate fees for each of the units. That includes commission to your agent and in some cases, an engineer’s report for the condo conversion. It’s not a significant amount, but if you have 3 or 4 units, you’ll be paying these fees three or four times over.
Apartments aren’t required to have parking. Condos usually are; you’ll need to comply with Town bylaws. You may not need a space for everyone, but you will need to consider either creating new space or arranging parking in another lot.
Estimate Fees for the Condo Association
There are now several people responsible for the cost and upkeep of this building and it is up to you to figure out how much they will pay. You will need to figure out how to pay things like taxes, water/sewer and insurance based on the percentage of ownership per unit.
Let’s say for example that you have a 4-family building you’re converting. To keep it simple, we will assume that all units have an equal value and each totals 1/4th share of the building. Typical annual expenses include:
- Taxes: $5000
- Water and sewer: $2400
- Insurance: $4400
- Snow removal & maintenance $2200
- Annual Savings/Reserves: $4000
- Overall Fixed Expense: $16,000
With this math, you’re looking at splitting $16,000 four ways. Each unit will pay $4000 annually, or roughly $334 per month for condo fees.
Make sure you separate the heating, plumbing and electrical for common areas vs. per unit. Because the building is longer owned by a single entity (you) individual unit owners need to be able to manage separate utility expenses while accounting for joint expense (like heating common areas, or lighting outside and hallways.)
Notifying Your Tenants
In MA, your tenants have the “right of first refusal”. You’ll need to give any existing tenants the first chance to buy the units, before they are offered to the general public. Its critical to give notice of your intentions of condo conversion with plenty of time to any existing tenants. Regulations may vary by community. If you are looking to keep your existing tenants and convert them to owners, be sure you understand what they can afford before investing the money to convert the condos. If you’re planning on your tenants moving out, be sure you can afford the mortgage and expenses without the rental income until the condos sell.