What happens when the banks want their money back from a condo conversion
Started by homeboy
almost 18 years ago
Posts: 2
Member since: Jul 2008
Discussion about
I have been looking at a condo conversion and it appears the condo has sold less than 50% of the units despite being on the market for approximately 10 months. I have been told the developer has been laying off workers since money is tight. I have also heard the bank is forcing the developer to lower the asking price for some of the units. I am a novice at real estate to I am not sure how the... [more]
I have been looking at a condo conversion and it appears the condo has sold less than 50% of the units despite being on the market for approximately 10 months. I have been told the developer has been laying off workers since money is tight. I have also heard the bank is forcing the developer to lower the asking price for some of the units. I am a novice at real estate to I am not sure how the financing works for a developer. I assume the developer finds a project, gets bridge financing from a bank and pays back the bank as sales are made.
Should I assume if the conversion is less than 50% done and money is tight, the project can potentially fall through unless the developer puts in more equity? Does this mean that trying to buy on the cheap is a big mistake since the developer is probably going to cut costs with the remaining renovation?
Love to hear everyones thoughts and opinions.
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Response by West81st
almost 18 years ago
Posts: 5564
Member since: Jan 2008
homeboy: In general, this sounds like a very risky situation. On the other hand, risk is fine as long you price it right. A few questions to help quantify the danger level here...
1) Has the condominium plan been declared effective by the Attorney General?
2) Have closings begun, or are the sales so far just signed contracts?
3) Do you have a copy of the prospectus, or can you get one? Do you know anything about the sponsor's funding source and terms?
4) How many insiders/tenants bought? How many are still there as renters? Out of how many units total?
5) Where is the building? (The "fringier" the area, the riskier the conversion.)
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Response by anotherguy
almost 18 years ago
Posts: 168
Member since: Oct 2007
I'm no expert on this sort of thing, for sure, but my impression is that the worst that can happen is that unsold units go back to being rentals. Over the long term, eventually everything should get sold, but the timing can stretch out. (Of course, that has no bearing on whether the price paid today will seem too high looking out a year or so.)
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Response by homeboy
almost 18 years ago
Posts: 2
Member since: Jul 2008
West81 and Anotherguy, thanks so much for your input. I understand you posted to give me guidance. However, I will provide the answers that I know.
The condo is a conversion of an office building. Thus, there are no renters.
Closing have begun. And, as assumed, the move in date has been pushed back.
I don't have a copy of the prospectus but that is a great start. Hopefully, terms of the funding are in it.
Its my understanding about 40-45% of the building is sold and the building is located in a pretty good neighborhood.
So, I am guessing from your comments in most cases (not necessarily in this case) the condo developer probably gets about 100% financing for the project. And if sales aren't robust, the developer will still complete the project but will pay the bank back based on the rental income generated by the units. Makes sense. Also makes me wonder why I heard the bank was forcing the condo developer to lower their asking price.
Will keep everyone up on this one.
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Response by TenthStreet
almost 18 years ago
Posts: 48
Member since: Jul 2008
Homeboy, developers are required to put their money in first, followed by the construction loan. If the project is short money, that's because it's over budget (otherwise the construction loan would cover it). Lots of problems can arise in an under-capitalized building. The work can get done late, or very late. The developer can cut corners on quality. Some of the units could be rented (could be a very different tenant than the likely buyer). Promised amenities / services could be cut once it opens. Common charges could be higher given the lower number of occupants. The quality of life in such a building could be very low, with lots of risk on the downside. I would tread carefully here.
homeboy: In general, this sounds like a very risky situation. On the other hand, risk is fine as long you price it right. A few questions to help quantify the danger level here...
1) Has the condominium plan been declared effective by the Attorney General?
2) Have closings begun, or are the sales so far just signed contracts?
3) Do you have a copy of the prospectus, or can you get one? Do you know anything about the sponsor's funding source and terms?
4) How many insiders/tenants bought? How many are still there as renters? Out of how many units total?
5) Where is the building? (The "fringier" the area, the riskier the conversion.)
I'm no expert on this sort of thing, for sure, but my impression is that the worst that can happen is that unsold units go back to being rentals. Over the long term, eventually everything should get sold, but the timing can stretch out. (Of course, that has no bearing on whether the price paid today will seem too high looking out a year or so.)
West81 and Anotherguy, thanks so much for your input. I understand you posted to give me guidance. However, I will provide the answers that I know.
The condo is a conversion of an office building. Thus, there are no renters.
Closing have begun. And, as assumed, the move in date has been pushed back.
I don't have a copy of the prospectus but that is a great start. Hopefully, terms of the funding are in it.
Its my understanding about 40-45% of the building is sold and the building is located in a pretty good neighborhood.
So, I am guessing from your comments in most cases (not necessarily in this case) the condo developer probably gets about 100% financing for the project. And if sales aren't robust, the developer will still complete the project but will pay the bank back based on the rental income generated by the units. Makes sense. Also makes me wonder why I heard the bank was forcing the condo developer to lower their asking price.
Will keep everyone up on this one.
Homeboy, developers are required to put their money in first, followed by the construction loan. If the project is short money, that's because it's over budget (otherwise the construction loan would cover it). Lots of problems can arise in an under-capitalized building. The work can get done late, or very late. The developer can cut corners on quality. Some of the units could be rented (could be a very different tenant than the likely buyer). Promised amenities / services could be cut once it opens. Common charges could be higher given the lower number of occupants. The quality of life in such a building could be very low, with lots of risk on the downside. I would tread carefully here.