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How to Break into the Condo-Hotel Market

Robert Malanga
Now’s the time to think about alternative income channels. This expert says the condo-hotel market is hot, and ready for ambitious real estate professionals.

Most real estate sales professionals have heard of the condo-hotel market, but few have ventured into it. A new market with great potential, the condo-hotel sector is a growing entity that can be rewarding both for developers and for real estate sales professionals willing to put the time and effort into learning its ins and outs.

At its simplest, a condo-hotel is a hotel that a developer has decided to sell as individual units or rooms for buyers to use as second or vacation homes.

Condo-hotels come in two types: the “luxury hotel,” or a multistory building containing not only standard-sized rooms, but also units with up to three bedrooms each; and the “common variety,” which consists of a three-story motel with single rooms of units that could even be combined to create units with a separate bedroom (or two).

The key differences between the two types are price and size. The first type usually sells for $300,000 or more, and is typically located near the water. The second type costs $100,000 to $200,000, and is attractive for out-of-town buyers looking to own a piece of real estate near Disney World, Sea World and other Florida attractions. With either type, owners get a vacation home that can be placed in the condo hotel’s rental program when not in use by the owners, thus generating income while ensuring that the place is kept clean and maintained.

Since getting into the condo-hotel market in 2004, I’ve spent much time learning the ropes of selling this type of product, and am currently selling nine different projects in Central Florida.

Along the way, I’ve learned what works and what doesn’t. Here are four steps I take when working in this market:

1. Do Your Homework
I get to know my product before I start selling. I learn about the condo-hotel’s amenities (such as kitchenettes, pools, restaurants and exercise rooms) and about its owner-rental program.

I keep in mind the fact that the Securities & Exchange Commission regulates this corner of the real estate industry, prohibiting me from discussing that rental program with prospective customers. In other words, I can’t tout the “income-producing” aspect of condo-hotel units when selling them, but if a buyer has questions on the rental program, I can refer him or her to the condo-hotel’s management, which answers the questions that I’m prohibited by law from answering.

I also learn about the incentives that developers are offering. They vary from cash rebates to developer-paid taxes or homeowners’ association (HOA) fees over a certain period of time. I can then use those incentives to entice prospects.

By doing my homework, I’ve positioned myself as a sales associate who truly understands the condo-hotelmarket and never asks irrelevant questions like “How many bedrooms does the unit have?” (The question is usually irrelevant because most condo-hotel units don’t even have bedrooms; they’re hotel rooms.) Instead, I know to ask about the ownership documents, which management company is handling the project, square footage of the unit and available financing options.
 
2. Ask Tough Questions
Before I get involved with selling a unit, I always make sure it appraises for the sale price. The developer or seller will usually have a unit appraised prior to selling, so I ask for a copy of the appraisal. I also ask for the condo documents, which lay the groundwork for the project. I read through them (because I know my customers usually won’t) and ask questions about maintenance fees, the time limit before someone can resell the unit and the number of days of the year the owner may occupy the unit (most have limitations).

Asking questions usually turns upinteresting facts that I wouldn’t otherwise have known, and that I can share with my buyer. I once worked with a 32-unit condo-hotel development that—had it ever burned to the ground—would have been allowed by the county to rebuild only 24 units. That made for an interesting discussion.

I also ask about HOA and/or maintenance/management fees, which cover electric, cable, water, sewer, garbage, pool maintenance and, in many cases, insurance on the structure. Some insurance policies cover the contents as well, so I ask a lot of questions in this area and share the knowledge with my buyers.
 
3. Work with Developers
Much of my business comes from referrals these days, but if I were just getting into the market, I would call a half-dozen condo-hotel developers in the vicinity and set up appointments to discuss with them (in person) how we could work together.

If you get in on the ground floor with the developer, you may even wind up educating him or her on the fine points of converting hotels into condo-hotels, pricing such units and marketing them to the masses.

Before I start working with a developer, for example, I’ll complete a pro forma estimate of what the units will be able to be sold for, and do a comparative market analysis (CMA) before the developer even gets the initial property appraisals. I can then help him or her budget for the conversion and get a good idea of just how profitable the venture will or will not be.

For every project I get involved with, I turn down two. My reasons vary, ranging from overpricing and location, to the way the documents are written, to excessive and unsubstantiated HOA or maintenance fees. This allows me to keep my buyers’ best interest in mind at all times, despite the opportunity to sell more product by signing up with such developments.

4. Understand Financial Nuances
Three years ago, it was nearly impossible to get a mortgage on a condo-hotel unit, particularly those that lacked kitchenettes. The situation is much better today, and continues to improve as lenders learn about the concept, and the risks involved. The fact that most units are smaller than 500 square feet presents a problem even today for banks that write the mortgage and then turn around and resell it on the secondary market.

The best place to get a mortgage for these smaller units is one of the private mortgage companies, which line up investors to take a portion of the project portfolio, and then underwrite a percentage of mortgages on a project. There aren’t many private mortgage firms out there, but those that exist have the experience needed to get the job done.

The actual amount of financing that a buyer may get is another issue. In most cases, lenders will not go over 80-20 loan-to-value (LTV), although some get creative and do 80-10-10. Private mortgage companies will go up to 90-10 LTV or, in rare cases 100 percent LTV.

The good news is that condo-hotel developers are lining up these institutions before they start selling units, so I always talk to them about these options before bringing any buyers to the table.
 
A former vice president at G.E. Capital Corp., Robert Malanga has parlayed his experience in corporate America into a real estate practice centered around the condo-hotel market. Licensed since 1996, he is a sales associate with Complete Realty Store LLC in Longwood. At press time he had closed or had under contract $5 million in condo-hotel sales for 2006.