Condo Conversion

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There's a right way and a wrong way to drive a condo conversion. Just ask Michelle Brown. An experienced Chicago real-estate broker now with Rubloff Residential Properties, she and a colleague snatched up a foreclosure property in 2004 — a 1917-vintage six-flat apartment building — planning to convert it to eight condos.

October 01, 2006

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With the original arch-top entry door, decorative masonry and period windows, the façade is as eye-catching as it was 90 years ago.

There's a right way and a wrong way to drive a condo conversion. Just ask Michelle Brown. An experienced Chicago real-estate broker now with Rubloff Residential Properties, she and a colleague snatched up a foreclosure property in 2004 — a 1917-vintage six-flat apartment building — planning to convert it to eight condos. She had invested in other properties over the years, but always with a development partner who took charge. This time she planned to be the general contractor, driving the conversion while managing her real-estate job.

But she didn't get far down the road before realizing that she was making a big mistake. That's when J.R. Graves of CMS Consolidated in Skokie, Ill., took the wheel.

False start

Before

From a real-estate perspective, the building, called Crandon Park, had a lot going for it. Not only was it in the South Shore area, a once-grand neighborhood that was making a comeback, but Brown says it also was on a premiere street with plenty of parking, two blocks from Lake Michigan and half a block from a park. Dating from an era when wealthy families rented rather than bought apartments, the building was "absolutely stunning," she says, "very majestic, on an extra-deep lot, with huge, [2,000 square foot] units. We wanted a building," she says, where "we could come in, do a nice quality rehab and be able to sell for a fair price." This looked like just the ticket.

The place was rundown after sitting vacant for many years. But "we decided to buy the place anyway, figuring, 'How bad could it be?'" recalls Brown. The answer: very bad. Once Crandon Park was theirs and some of the debris was cleared, Brown and her partner discovered that the building's condition was "ghastly, much worse than we thought." All the floors and windows — 218 of them — needed to be replaced, one side of the building needed to be re-leveled, all the plumbing and electrical had to be replaced, and the roof not only sagged but required 45 new 2×12 supports and new plywood. Managing the remodeling of this building would be an intensive job.

The original lobby was in great shape; Graves cleaned the floor tile, refinished the oak door and stair rails, and cut a stair opening to the garden level.

Brown and her partner started getting estimates from subcontractors. But "we didn't even know what to ask and when to do what" in rehabbing the building, she says. "We even needed help getting permits." Brown's friend J.R. Graves had bought and converted some 400 multifamily units over the past 11 years, so she called him for advice.

He told her to sell the place. His reasons: It would be expensive to rehab, and managing the project while running her real-estate business would be too difficult. "I was stubborn and said absolutely not. I always acknowledge when I'm wrong," she laughs.

Instead, she urged Graves to rehab the building himself. She accepted his $1,169,884 estimate without hesitation — "I trust him 100 percent," she says — and Graves got started in October 2004.

Knowing the system

Picking up where Brown left off, "I called every contractor she'd called," Graves says. Most were subcontractors she'd encountered at residences she'd sold. "Half were out of business and most of the others didn't call back. Nailing the right contractor for the job was important, too.

" It's important to ask contractors if they've done eight-unit buildings versus $1 million houses. They are two different animals. If the subcontractors are not used to doing this work it becomes a problem," he says, because they need bigger crews and a production-oriented approach to sweep through a condo building, taking care of multiple units at once. Graves lined up a plumber, a roofer and an HVAC company that he uses regularly in his multifamily projects. His son, an electrical contractor, does all the CMS Consolidated electrical work, and Graves' crew handles the rest of the interior work, from carpentry to painting. "We do pretty much all categories" of interior work, says Graves.

Unoccupied for years before Brown bought it, the building was a mess. Graves' crew completely gutted the inside of the building, with the trash being hauled away in wheelbarrows.

Getting permits and demolishing also presented circumstances most home remodelers don't have to contend with. "We got a demo permit first so we could start cleaning out the building," says Graves, only to wait another nine months for the building permit to work its way through the city system. The demo permit came in 30 days, but the demo itself took a full six weeks, mainly because there was no alley, the driveway was too narrow for truck access, and there was no room for a dumpster in the front yard. Using a small Bobcat and wheelbarrows, Graves's crew carted 60 dumpsters worth of debris from behind the building to dumpsters on the street. When finished, they had stripped the building down to the bricks and central bearing wall.

Having worked with Chicago architect Patrick Thompson of Manske Dieckman Thompson on several six-flat condo conversions, Graves naturally recommended him to Brown to design the Crandon Park Condominium. "What we tried to do is keep things simple," Thompson says. He removed a few bumps and bends in the six 2,000-square-foot, three-to-four bedroom units to turn irregularly shaped rooms into large, versatile rectangles. He added generous closets and bigger bathrooms and removed pantries to enlarge the kitchens. And he arranged the floor plans to allow flexibility so "the building is able to satisfy a lot of different kinds of buyers."

Partial walls separate the front rooms designated on the plans as living room, dining room and sunroom. Graves installed gas fireplaces in all the living rooms.

For the raised basement, Thompson designed side-by-side two-bedroom garden units, modernizing an existing apartment and mirroring it with a new one. Eight-foot ceilings made the units bright and airy, but they were not large. By absorbing 600 square feet of surplus storage space into each unit, Thompson was able to give each garden condo a roomy 1,300 square feet and still include basement storage for all eight condos.

Once Graves had gutted the building he faced some structural challenges. The main 6 by 6 wood beams in the basement were completely rotted. Graves removed them and inserted a steel beam to raise the sagging floor overhead. And because each condo got its own heating system, a 7- by 7-foot-wide chimney shaft rising from the boiler was no longer needed. It hogged bedroom space, so Graves removed it.

The building façade retains its vintage charm, as does the lobby. CMS repaired and refinished the original arch-top front door and cleaned up the lobby's tile floor, cutting into the concrete and tile to create stair access to the garden units. He painstakingly stripped and refinished the original oak stair rails to the upper floors. "It would be too costly to duplicate the woodwork at today's prices, especially for an eight-unit condo," says Graves. "The quality workmanship was worth saving."

Sealing the sale

The six apartments of the first through third floors were gracious by 1917 standards, but the kitchens and bathrooms were small, the closets were almost nonexistent and the bedrooms sprawled across the units. Architect Patrick Thompson redistributed the space, clustering the bedrooms - including a master suite - in the back, enlarging the baths, almost doubling the size of the kitchens, and creating a versatile den/dining room/office space where one bedroom had been. Each garden unit picked up 600 square feet of excess basement space, and there still was room for eight storage closets.

CMS worked at Crandon Park on and off for a year, awaiting the permit and coming in to finish off units as they sold beginning in July 2005. "As each condo sold, we finished it to accommodate the owner's particular tastes and lifestyle," he says, from cabinet finish and style to floor plan modifications, adding a nonbearing wall divider wall here, removing one there. The buyers paid Graves directly for unit modifications. Handling almost all trades with his own crew gave Graves the strict scheduling control he needed. In condo work, he explains, units are remodeled through the drywall stage, but cabinetry, finishes and other buyer options are installed in 30 to 45 days following the sale.

When only two units remained unsold, the company was able to finish them and turn to other projects. "We completed them to meet the needs of potential buyers based on the information we had learned from the previous condo buyers," says Graves.

Condo shoppers "love the building," says Brown. "There's so much space; it's so versatile, everything is new and the layout is gracious, with all the living space up front and the bedrooms in the back." The garden condos were originally priced at $159,000 but with the extra 600 square feet sold for $179,000. The larger units started at $259,000 and sold at $279,000 in part because of luxury features such as granite counters, stainless steel appliances, gas fireplaces and an additional half bath that Brown decided to add. Also, says Graves, "our workmanship proved to be superior when compared to other condominiums on the market, increasing the value of our condos."

Both Brown and Graves are happy with their numbers on the Crandon Park project. But neither is anxious to jump into a similar project. Says Brown: "I'd do it only if it were my full-time job." Says Graves: "Right now it is not a good condo market. With selling prices not going up, you can only mark up your costs so high. Materials prices are wiping out the profit." Graves's advice to remodelers is to do more than just construction. I've always told my crew to diversify and invest: buy real estate, invest in projects and master the craft of remodeling. Take the ability you've developed and capitalize on it."

 

The Financials

Gross profit on the Crandon Park conversion is at 26 percent now, but it's on the rise, even though CMS Consolidated completed construction in January 2006. Why? Not all units have sold, which means not all of the CMS profits are in. Having owned many condo properties himself, J.R. Graves knows how steep the investment costs can be. So he prices condo conversions in a way that eases the up-front financial burden for his clients, yet takes advantage of anticipated sales performance to ensure a healthy final profit for CMS Consolidated. He charges a 10-12 percent contracting fee plus a pre-set percentage of the extra profits earned when units sell for more than the original asking price.

Almost always, Graves says, sales prices go up after the first unit is sold. "I'll usually try to take a percentage of that difference in asking price," he says. "I come up with a number ranging from 10 to 20 percent," depending on the extent of his contribution of ideas on "how to make it work and increase the value of the property." On the Crandon Park Condominium project, he took 20 percent. With six of the eight units sold — all but the first going for some $20,000 more than the originally planned asking price — and a contract on the seventh, "it's all going to work," says Graves. "It's just a matter of time. I'll make exactly what I wanted to make on the job when all the units have sold."

Graves also protects his bottom line by keeping overhead to an absolute minimum. "I used to spend $3,000 or $4,000 a month on a shop and office. Then I said, 'For what?' I don't get my work by impressing people with a big office. Now we have all of our equipment in a 400 square foot garage at a property I own." Graves' office is his cell phone. "Every delivery comes through me," as does every call from client, subcontractor or supplier, giving Graves the "total control" he wants. He manages all CMS projects and pays all the bills but subcontracts the bookkeeping to his former real-estate partner.

Budget History
Initial estimate: $1,169,884
Add-ons: (added 600 square feet to garden units, upgraded to granite, upgraded to whirlpool tubs, added wrought-iron fence) $85,292
Final price of job: $1,255,176
Cost to produce: $928,141
Budgeted gross profit 27.5%
Actual gross profit 26%


Snapshot

J.R. Graves
CMS Consolidated Inc.
Location: Skokie, Ill.
Type of company: General contractor specializing in multi-use buildings
Staff model: 8 field
Years in business: 27
Sales history:

2002 $1,100,000
2003 1,200,000
2004 1,200,000
2005 1,200,000
2006 (projected) 1,100,000


Annual jobs: 10–15
Workweek: 40 hours crew, 60 hours owner
Software: QuickBooks Premier Contractor, Microsoft Word and Excel
Contact: 773-447-3992; www.cmsconsolidated.com


Products List

Appliances: General Electric. Faucets: Moen. Kitchen cabinets: Cardell Cabinetry. Windows: Republic Windows & Doors. Whirlpool tubs: Kohler.

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