Sub(Divide) and Conquer
If it could be done easily and profitably . . . somebody already would have done it.”
–Ross Kaplan’s 2nd Law of Real Estate Development.
[Note to Readers: The views expressed here are solely those of Ross Kaplan, and do not represent Edina Realty, Berkshire Hathaway, or any other entity referenced. If you need legal advice, please consult an attorney.]
What kind of condo do you get in the Twin Cities for around $300k today?
According to NorthstarMLS, here are the average stats for the 36 condo’s currently for sale in that price range:
Finished Square Feet: 1,391
Bedrooms: 2
Bathrooms: 2
Homeowners Association Fee (monthly): $637
Now, consider 1830 Eagle Ridge Drive #3010 in Mendota Heights, on the market for $295k:
Finished Square Feet: 7,404
Bedrooms: 3
Bathrooms: 5
Homeowners Association Fee (monthly): $3,205
If you don’t have a calculator nearby, 12 x $3,205 = $38,460 in annual HOA fees.
Can you say, “outlier?”
Three-for-One
In fact, the numbers for #3010 are so far out of whack, they suggest an alternative: divide the unit into three.
Surprise, surprise, that’s how the owner originally created the unit (by combining three others).
Carving #3010 into three, equal-sized condo’s would result in these (much) more manageable spec’s:
Finished Square Feet: 2,468
Bedrooms: 2
Bathrooms: 2
Homeowners Association Fee (monthly): $1,068
“To Do” List
Of course, it’s not as simple as waving a magic wand.
The current unit would have to be physically subdivided; two new Kitchens would have to be put in; the existing Kitchen in #3010 would likely have to be replaced (apparently, it’s dated); and there would be legal fees to create three, separate PID’s (Property Identification Numbers).
Plus, the existing HVAC system would likely have to be reconfigured for three units instead of one.
The price tag for all that?
Here’s my math: 3 x $75k for the Kitchens ($225k total); $50k to create three separate units (sheetrock, new flooring, etc.); and $20k for legal, including divvying up the 5(!) parking spaces that now come with #3010.
Grand total: call it $300k, ballpark.
Carrying Costs, Legal Fees, etc.
Step #2: determining what the new units would fetch — and how long it would take to get it.
My estimate, based on recent sales at Eagle Ridge: $325k – $350k per unit, or $1M ballpark (gross) for the three.
Lemmee see . . . $1M minus ($300k purchase price + $300k expenses) = $400k profit.
Assuming a realistic timeline was 12-18 months, subtract another $50k for holding and transactions costs, including selling and financing expenses, property taxes, plus $50k for that whopping HOA fee.
Bottom line: a net profit around $300k.
Potential Hurdles
Before any of that could happen, however, the HOA would have to approve it
Given that #3010 used to be three units, you’d guess that would be easier than creating it in the first place.
But, it’s still not a slam dunk — and, given the (slow) speed many HOA’s move, there’s really no way to know if the project would be OK’d until after the Buyer bought.
Perhaps that’s why the condo has been on the market for one year, and has now dropped $100k from its initial $395k list price . . .
See also, “Huge penthouse condo in Mendota Heights has small price tag, big HOA fees“; and “What’s Below the Penthouse? ‘The Sub-Penthouse’ (as many as 14 of them).”
