Buying a Condo Conversion

Never question the ingenuity of the real estate developer.

Close to 20 years ago, two of my best buddies and I decided to pool our resources after college and get an apartment of our own.

The three of us were barely able to afford a 3 bedroom apartment that was about 10 years old at the time. We paid about $500/mo. in rent. To this day, I am not sure how we could afford that apartment.

The apartment was a dump. The flooring, the kitchen and, especially, the bathrooms were so bad, that my father walked in one day with a horrified look of disgust on his face, and refused to stay. However, that was what my buddies and I called home.

Today, nearly 30 years later I am doing loans for people buying units in that same apartment complex. Today, it’s a condo conversion!!

The entire complex has been remodeled, and the units are going for nearly $175,000 a unit.

Pure genius!

You all know about condo conversions and how incredibly hot they are in the market. Low interest rates have driven new home sales through the roof and condos are no exception.

First time home buyers are flocking to get in any way they can. This has actually crippled the apartment business and is driving the biggest condominium conversion boom in 20 years.

Over 12,000 apartment units in Las Vegas are currently mapped for condo conversions. Condo developers are paying a premium to acquire and transform old apartment complexes into condos and they are doing this all across the country, especially Las Vegas and South Florida.

The developers typically search for apartment-to-condo conversions in desirable locations where they won’t directly compete with affordable entry- level homes.

They want to offer an affordable alternative to pricier single-family homes or to costlier condos in new developments.

In many cases, condo conversions provide the perfect entry-level opportunity for renters to become home owners, allowing these new property owners to build equity and realize their homeownership dream.

Transforming apartment buildings into condominiums is quicker and less risky than construction from the ground up.

Land prices have gone up so high that many developers cannot afford to build entry-level housing, so this is a great option. Home buyers then benefit because converted units are usually more affordable than new ones, and many are in choice locations. You can find some of these units advertised locally for as low as the $90’s.

Conversion developers say they can buy something for one-third of the cost that it would take to buy the vacant land and build something on it.

The beauty for the developer is that the condo conversion isn’t going to be selling for one-third of what it would cost brand new. It’s more like 75%-85% of it.

The developers usually do a pretty nice job improving the property and the units. Upgrades are usually made to the property’s exterior and common areas. Then they add on the sizzle. Granite counter tops, upgraded cabinetry and fixtures, and wood floors are often added to individual units. The upgrades are built into the condo prices.

Once the developer acquires an apartment complex, they generally convince about 10-15% of the existing renters to stay by buying a unit. They will often offer these people discounts before they ever even market to the general public.

The obvious key to selling these units to your clients is to convince buyers that they are better off owning versus renting or to get your more timid investors to jump in with less financial risk.

People have a desire to own a home. There are very few who want to rent and low interest rates have provided this opportunity.

8 St Thomas Condo conversions create more affordable housing in areas when the price for a single-family home skyrockets like we have seen throughout the country. A single family home in Las Vegas, where I live, is averaging around $300,000. That is simply not affordable for your average first-time home buyer.

Speculators and investors make up 30-50% of all condo conversion buyers. They buy these units, intending to sell them at a higher price in a short term.

Rising interest rates historically have slowed conversion activity. This slows down the appreciation as well. It’s difficult to convince someone to pay $1200 per month on a mortgage for a 1000 sq. ft condo. However, get it under $1000 and you will find buyers.

Before you invest in one of these units and plan on renting it out, or you plan to buy one to live in, you must know a few things.

Condo conversions are marketed to the very same people who rent apartments. Thirty to 50% of all condo conversion buyers are investors and speculators.

When they go to rent their units, they are competing for the very same market as the developer of the project. Why rent when you can buy? Why rent from you either?

Once cheap mortgages vanish, and rates have been rising recently as you all know, condo conversions will become riskier. When home sales slow, converters may find it harder to sell their condos.

Once 30 year interest rates hit 7% or 8%, experts say, condo conversions will cool. Today, we are at around 6.25%. The good news is condo conversions are almost the last bastion of truly affordable housing in many areas.

Here are some things to keep in mind…

Many people buying condo conversions don’t realize that the property they are buying is different from a newly constructed unit. This means the financial exposure for repairs and replacements can be much higher.

New condominiums, built from the ground up, are constructed with the building materials of today and have to conform to today’s more strict building codes.

The condition of converted condominiums can vary. An older apartment complex converted to condos could have wear and tear and may have structural faults unknown at closing. These problems can become a real hindrance later on.

Newer apartments that have been converted to condominiums in the past few years were probably constructed under the latest building codes and have new building components, mechanical systems and interior finishes. These are a safer bet and you will want to find out the year the original structure was built.

Many older buildings have been converted as well. Some converters gut an apartment building, taking it down to its “shell,” and then rebuild it, installing new plumbing, roof and mechanical systems.

Other developers simply do “cosmetic rehabs,” leaving the building components as is and merely sprucing up the property to make units more marketable.

Buyers beware. Are you buying a fully renovated building that was taken down to the shell, or are you buying a building that someone just slapped some paint on and put in a few new windows?

What about problems to the complex? Although most developers do a terrific job in converting, what if the roof needs to be repaired after a few years? Does the association have enough reserves to cover it? Many people believe condo conversion owners can expect special assessments quicker than new condo buyers.

You do have some safeguards. As a lender for condo conversion buyers, we often require an engineer’s report from the developer before we close the loan. You have a right to this document as well.

It tells you what was done to the building and the sales office can give you a copy of this if you ask.

Here are some other things you should know before buying a condo conversion:

They usually have restrictive covenants. Every condominium project has rules and restrictions that govern what unit owners can do. If you own a pet, make sure your building is pet-friendly. Do you even get a covered parking space?

Are you buying the unit as an investor to rent out? You will want to make sure the building allows rentals and the minimum term required.

If speculators cannot resell their units they will rent them out too. If there are many renters, that can create problems with condo owners in the same building and lead to maintenance issues.

Renters tend to care far less about their homes than do the home’s owner. Too many renters can destroy the complex and it’s value.

Speculators buy as much as 70% of some condominium projects. You may be moving into a building that is nearly vacant. That may not be what you had hoped for.

Once a condominium project has more than 30% of its owners that use it as a second home or as an investment property, the condos all become “non-warrantable.”

Non-warrantable condos mean the project is not insured by Fannie Mae. This means a different kind of loan for the buyer of your condo. Many banks do not loan on non-warrantable condos. We offer non-warrantable condo loans. Even though they are very competitive, even offering 100% financing, the loan programs are not quite the same as they are on a warrantable condo.

Here is a time and problem saving tip:

When you are selling a condo, of any kind, you want to make sure you or your agent contacts the Homeowner’s Association, early in the process, and asks them what percentage of the project is non-owner occupied. If it’s over 30%, you want to communicate this immediately to your buyer. He has to make sure his lender can do the loan or he may have to change lenders. It is best if you know this early.

Many condo conversions are considered non-warrantable.

The bottom line is condo conversions offer affordable housing in many areas where the first-time homebuyer and the real estate investor, who wants to take on a little less financial risk, are starting to be turned away. However, as a buyer you want to be very cautious and ask questions about the building’s history and residential make-up.