“THE CONDO CONVERSION CRAZE”

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MERIDIAN PRIVATE RESIDENCES

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.

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.

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.

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.  

Condo conversions create more affordable housing in areas when the price for a single-family home skyrockets like we have seen throughout the country. 

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. 

Before you invest in one of these units and plan on renting it out, 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?

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 our area.

Here are some things to keep in mind….

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

New condominiums, built from the ground up, are constructed with improved building materials and must conform to the more demanding construction codes of today. 

The condition of converted condominiums varies widely.  An older apartment complex converted to condos could have wear and tear and may have some inherent structural faults unknown at closing.

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.

However, 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.

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.   Lenders for condo conversion buyers often require an engineer’s report from the developer before they close the loan.  Clients 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.   

Are you buying the unit as an investor to rent out?  You better 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 friction with condo owners in the same building and lead to maintenance issues.

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. 

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.

Condo conversions we have created more home ownership opportunities by creating a new product that is now available in the housing market.    

We are creating housing ownership opportunities in areas with existing infrastructure such as roads, sewers, water and schools. 

In Las Vegas, condo conversions produce an affordable element for those looking to enter the housing market that wouldn’t be there otherwise. 

There is no actual increase in the number of housing units.

Condo conversions are an important inexpensive product to help meet the housing crisis we face in Las Vegas, especially for young families and first-time homebuyers.  

These conversions may provide the best opportunity for renters to become homeowners.... If you have any questions, please don't hesitate to give me a call.