Condo Conversions

The Truth About Condominium Conversions

As home prices climb in major metropolitan areas, many real estate developers are converting apartment buildings into condominiums. These developers usually renovate kitchens, baths and flooring, replace light fixtures, add a coat of paint and voila! the transformation from apartment to converted condo is complete.

Affordable Housing

In California, these condo conversions create affordable housing for home buyers in many areas where new single-family homes or condominiums have a median price that outpaces average income. Home buyers benefit from the developers? savings: it costs less to convert apartments to condos than it does to build a project from raw land, particularly in areas where land is at a premium.

Condo conversions generally sell at a discount compared to new condominiums. For buyers, the downside is that they are buying a refurbished older unit as opposed to a brand new one. The obvious upside is that with discounted pricing comes greater accessibility to a broader demographic of potential home buyers. In San Diego, California, for example, a flood of condo conversions over the past few years has created a large inventory of condominiums for sale, resulting in some price decreases in the marketplace. Buyers are offered incentives ranging from cash to cars as developers try to sell their units to recoup the conversion costs. However, each local real estate market is different, so be sure to research the current conditions in your area.

Buyer Beware

Although the carpeting, granite counter tops and remodeled bathrooms inside a converted condo are new, the building?s exterior may or may not have received the same attention or renovation. Buyers should hire an inspector to check the condition of the unit, as well as the entire complex, including common areas, plumbing, and roofs.

Through their monthly home owners? association fees, condo dwellers are responsible for a prorated portion of building maintenance and upkeep. The developers may have skimped on upgrades or maintenance to the exterior, roof, elevator, pool, wiring, etc. Should any structural problems arise in the future, deferred maintenance items could result in significantly higher homeowner dues to cover the cost of repairs.

While the home inspector is evaluating the building?s condition, be sure to find out how high the cash reserves are in the home owners associations? bank accounts. Ask for a copy of the Reserve Study and compare the recommended reserve balance with the actual reserve balance. If the home owners? association has little cash on hand, residents will need to raise money to perform routine maintenance, and you?ll be in for a surprise should the structure need any significant work.

Condo Controversy

When developers buy apartment buildings to convert to condominiums, the existing renters are displaced. Several cities have recently created new laws to protect the rights of these renters. As a result, we are starting to see a decrease in condo conversions as many cities impose greater restrictions on condo conversions.

While some renters have been displaced, others are having difficulty finding an apartment at all. In some areas, the condo conversion trend has decreased the pool of available rentals. Near-term predictions for the rental market already show an increase in demand for rentals due to rising interest rates. As demand increases and the supply of rentals decreases, expect to see rents trend higher in many markets.

In other areas, where the inventory of condos for sale exceeds the number of buyers, developers are turning condo projects into apartments or putting them back on the market as rentals. Some landlords are even inviting back the tenants they displaced because they can't sell the units to developers. So, in these markets, as the supply of rentals increases, renters may benefit from lower prices.

The Bottom Line

For many buyers, condo conversions fit the bill and their bottom line perfectly. These remodeled units compete well against the existing resale condo inventory, many of which have not been renovated and have older fixtures. Assuming that You've done your due diligence and that the complex?s structure and finances are in good shape, condo conversions may offer the affordable housing alternative You've been seeking.