Never question the ingenuity of the real estate developer.
Almost 20 years ago, two of my best friends and I decided to pool our resources after college and get an apartment of our own.
The three of us could barely afford a 3-bedroom apartment that was about 10 years old at the time. We pay around $500/mo. for rent To this day, I’m not sure how we could afford that apartment.
The apartment was a dump. The floor, the kitchen and, above all, the bathrooms were so bad that my father came in one day with a look of horror and disgust on his face and refused to stay. However, that was what my friends and I called home.
Today, almost 30 years later, I am making loans to people who are buying units in that same apartment complex. Today, it’s a condo conversion!
The entire complex has been remodeled and the units are almost $175,000 per unit.
Pure genius!
Everyone knows about condo conversions and how incredibly attractive they are on the market. Low interest rates have pushed new home sales through the roof, and condos are no exception.
First-time homebuyers flock to get in any way they can. This has actually crippled the apartment business and is fueling the biggest condo conversion boom in 20 years.
More than 12,000 apartment units in Las Vegas are currently allocated for condominium conversions. Condominium developers are paying a premium to acquire and transform old apartment complexes into condominiums and are doing so all over the country, especially in Las Vegas and South Florida.
Developers typically look for apartment-to-condo conversions in desirable locations where they will not directly compete with entry-level affordable housing.
They want to offer an affordable alternative to more expensive single-family homes or more expensive condominiums in new developments.
In many cases, condo conversions provide the perfect entry-level opportunity for renters to become homeowners, allowing these new owners to build equity and make their dream of homeownership a reality.
Converting apartment buildings to condominiums is faster and less risky than building from scratch.
Land prices have risen so high that many developers cannot afford to build entry level homes, so this is a great option. Homebuyers benefit because converted units are often more affordable than new ones, and many are in select locations. You can find some of these units advertised locally for as low as $90.
The conversion developers say they can buy something for a third of the cost it would cost to buy the vacant lot and build something on it.
The beauty for the developer is that the condo conversion will not sell for a third of what it would cost brand new. It’s more like 75%-85% of that.
The developers usually do a good job improving the property and the units. Improvements are generally made to the exterior and common areas of the property. Then they add the sizzle. Granite countertops, upgraded cabinets and fixtures, and hardwood floors are often added to individual units. Upgrades are built into condo prices.
Once the developer acquires an apartment complex, they typically convince around 10-15% of the existing tenants to stay by buying a unit. They will often offer discounts to these people even before marketing to the general public.
The obvious key to selling these units to your clients is convincing buyers that they are better off owning than renting or getting your more timid investors to participate with less financial risk.
People have a desire to own a house. Very few want to rent and low interest rates have provided this opportunity.
Condo conversions create more affordable housing in areas where the price of a single-family home skyrockets as we have seen across the country. A single-family home in Las Vegas, where I live, averages around $300,000. That’s just not affordable for the average first-time homebuyer.
Speculators and investors make up 30-50% of all condo conversion buyers. They buy these units with the intention of selling them at a higher price in the short term.
Historically, rising interest rates have slowed conversion activity. This slows down appreciation as well. It’s hard to convince someone to pay $1,200 a month in a mortgage for a 1,000 square foot lot. ft condo. Get it for less than $1000, though, and you’ll find buyers.
Before you invest in one of these units and plan to rent it out, or plan to buy one to live in, you should know a few things.
Condo conversions are marketed to the 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 same market as the developer of the project. Why rent when you can buy? Why rent from you either?
Once the cheap mortgages go away and rates have recently increased, as everyone knows, condo conversions will be riskier. When home sales decline, converters may find it more difficult to sell their condos.
Once 30-year interest rates hit 7 or 8%, experts say, condo conversions will cool off. Today we are around 6.25%. The good news is that condo conversions are just about the last bastion of truly affordable housing in many areas.
Here are some things to keep in mind…
Many people who buy condo conversions don’t realize that the property they are buying is different from a newly built unit. This means that the financial exposure for repairs and replacements can be much higher.
New, built-from-the-ground condominiums are built with today’s building materials and must meet today’s most stringent building codes.
Condition of converted condos may vary. An older apartment complex converted to condominiums may have unknown wear and tear and structural failure at closing. These problems can become a real obstacle later.
Newer apartments that have been converted to condominiums in recent years have likely been built to the latest building codes and have new building components, mechanical systems, and interior finishes. These are a safer bet and you’ll want to find out the year the original structure was built.
Many older buildings have also been converted. Some converters dismantle an apartment building, tear it down to its “coat,” and then rebuild it, installing new plumbing, roofing, and mechanical systems.
Other developers simply do “cosmetic rehabs,” leaving building components as is and simply sprucing up the property to make the units more marketable.
Buyers beware. Are you buying a completely renovated building that was completely torn down, or are you buying a building that someone put some paint on and put in some new windows?
What about complex issues? Although most developers do a terrible job on the conversion, what if the roof needs to be fixed after a few years? Does the association have enough reserves to cover it? Many people believe that condo owners can expect special assessments faster than new condo buyers.
You have some guarantees. As a lender to condo conversion buyers, we often require a developer’s engineer’s report before closing on the loan. You also have the right to this document.
It tells you what was done in the building and the sales office can give you a copy if you ask.
Here are some other things to know before buying a condo conversion:
They usually have restrictive agreements. Every condominium project has rules and restrictions that govern what unit owners can do. If you have a pet, please make sure your building is pet-friendly. Do you even have a covered parking space?
Are you buying the unit as an investor to rent it out? You’ll want to make sure the building allows rentals and the minimum term required.
If speculators can’t resell their units, they’ll rent them too. If there are a lot of tenants, that can create problems with condo owners in the same building and lead to maintenance issues.
Renters tend to care much less about their homes than the homeowner. Too many tenants can destroy the complex and its value.
Speculators buy up to 70% of some condominium projects. You may be moving into a building that is nearly empty. That may not be what you expected.
Once a condo project has more than 30% of its owners using it as a second home or investment property, all condos become “unsecured.”
Unsecured condos mean the project is not insured by Fannie Mae. This means a different type of loan for the buyer of her condo. Many banks do not make unsecured condo loans. We offer unsecured condominium loans. Although they are very competitive, even offering 100% financing, the loan programs are not exactly the same as a condo with a guarantee.
Here’s a tip to save time and trouble:
When you are selling a condo, of any kind, you should make sure that you or your agent contact the Home Owners Association, early in the process, and ask them what percentage of the project is occupied by non-owners. If it’s more than 30%, you want to tell your buyer right away. You have to make sure that your lender can make the loan or you may have to change lenders. It is better if you know this early.
Many condo conversions are considered out of warranty.
The bottom line is that condo conversions offer affordable housing in many areas where the first-time homebuyer and real estate investor, who wants to take on a little less financial risk, are beginning to be turned away. However, as a buyer, you should be very cautious and ask questions about the building’s history and residential composition.
