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.
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.
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.