Real Estate, Residential & Living

How to Underwrite a Condo Development or Conversion

Underwrite a condo development on gross sellout value, presales and absorption. Estimate unit prices from comparable sales, then subtract construction, soft costs, sales commissions, financing and carry to measure profit. Key metrics are presale percentage and deposit size, loan-to-cost, loan-to-net-sellout, absorption pace and profit margin on cost.

What makes condo development underwriting different

Condo projects are sold rather than leased, so the developer's return depends on selling units at expected prices within the expected time. Value is the sum of unit sales prices, net of commissions and closing costs. Risk comes from pricing, absorption, construction costs and buyer defaults on contracts. Presales with meaningful deposits reduce risk because they validate pricing and give the lender a defined repayment source. Conversions of existing apartments into condos carry additional issues: tenant rights, building condition, reserve studies and potential defect liability. Condo laws vary by state and affect warranties and HOA formation.

Lenders typically require presales and deposits before funding construction and size loans on loan-to-cost and loan-to-net-sellout. Repayment comes from unit closings, often with all or most net proceeds going to the lender until repaid. Equity investors focus on profit margin, the timing of sales and downside if the market weakens, including a fallback to renting unsold units. Mezzanine and preferred equity are common because senior lenders are cautious. Inventory loans finance unsold units after completion. They also consider HOA budget subsidies the developer must fund on unsold units.

Key metrics

Presale Percentage

Presales validate pricing and absorption and provide repayment certainty.

Construction lenders commonly require a meaningful share of units presold, often a substantial minority or more, with non-refundable deposits.

Deposit Size

Larger non-refundable deposits make buyers less likely to walk away.

Loan-to-Net-Sellout

Measures loan size against expected sales proceeds after costs.

Loan-to-Cost

Ensures sponsor equity is sufficient.

Absorption Pace

Determines time to repay the loan and carry costs.

Profit Margin on Cost

Margin cushions against price declines and cost overruns.

Condo developers often target higher margins than rental development because of sales risk.

How to underwrite it, step by step

Establish unit mix and pricing from comparable condo sales and market studies.
Review presale contracts, deposits and buyer qualifications.
Validate construction budget, contracts and schedule.
Model absorption, closings and release prices per unit.
Calculate net sellout after commissions, closing costs and HOA subsidies.
For conversions, review building condition, tenant laws and reserve studies.
Size construction or inventory loan and stress pricing and absorption.
Confirm condo documents, warranties and HOA formation.

Due diligence checklist

Condo declaration and HOA documents
Presale contracts and deposit escrow statements
Market study and comparable sales
Construction budget and schedule
General contractor agreement
Plans and specifications
Reserve study for conversions
Property condition report for conversions
Tenant notices and conversion approvals
Title commitment
Insurance including wrap-up and builder's risk
Appraisal with sellout value

Key risks and mitigants

Unit prices decline between contract signing and closing.

Require meaningful presales, stress sellout pricing and maintain a profit cushion that absorbs price declines.

Presale buyers walk away from contracts at closing.

Require large non-refundable deposits, qualify buyers and review state law on deposit use and refunds.

Construction delays or cost overruns erode margin and trigger buyer rescission rights.

Use guaranteed maximum price contracts, contingencies and completion guarantees, and track outside closing dates in sales contracts.

Absorption slows and carry costs mount on unsold units.

Model conservative absorption, fund interest reserves and plan an inventory loan or rental fallback.

The HOA files construction defect claims after turnover.

Carry adequate insurance, use third-party quality inspections and review statutory warranty periods.

Typical financing and deal structure

Condo projects are financed with construction loans at moderate loan-to-cost, typically requiring presales and deposits, plus sponsor equity, mezzanine debt or preferred equity. Lenders usually set release prices per unit so closing proceeds repay the loan quickly, often requiring most or all net proceeds until repaid. Inventory loans finance unsold units after completion. Conversions may use bridge loans. Deposits may be used for construction in some jurisdictions, subject to state law. Covenants include completion guarantees, presale requirements, interest reserves and pricing floors. Some projects use EB-5 or other specialized capital in the stack. The lender also reviews state rules on deposit handling.

Red flags

Presales are thin and backed by small or refundable deposits.
Pricing assumptions exceed recent comparable condo closings.
Construction budget has no meaningful contingency or fixed-price contract.
Conversion of an older building without a reserve study or condition report.
Submarket already holds significant unsold condo inventory.

Frequently asked questions

How many presales do condo construction lenders require?

Requirements vary by lender, market and project size, but many construction lenders want a meaningful share of units presold with non-refundable deposits before funding. Presales validate pricing and provide a repayment source. Projects with fewer presales may need more equity, mezzanine financing or alternative lenders.

What is loan-to-net-sellout?

Loan-to-net-sellout compares the loan amount to expected total sales proceeds after commissions, closing costs and other selling expenses. It shows how much cushion exists between expected sales and the loan balance. Lower ratios indicate more protection against price declines. Lenders use it alongside loan-to-cost and presale requirements.

What are the risks of condo conversion?

Condo conversions involve tenant relocation or rights of first refusal, building condition issues, reserve funding, defect liability and regulatory approvals. Older buildings may need significant capital before sale. Buyers and lenders review reserve studies and inspections carefully before underwriting conversion projects. Tenant protection laws vary by city and state.

What is a condo inventory loan?

A condo inventory loan finances completed but unsold units, allowing developers to repay construction loans and continue selling over time. Lenders size these loans conservatively based on unit values and absorption and require paydowns as units sell. Some developers rent unsold units while waiting for better pricing.

Underwrite a condo development deal in minutes

Drop a deck or data room. Underridge returns a verdict, investment memo, term sheet and a live model, with every headline figure traced to a page, a formula or a labeled assumption. Ten underwrites free.

Try Underridge free

Educational content, not investment, credit, legal or tax advice. Benchmarks are common practitioner rules of thumb and vary by lender, market and cycle.