Condo Conversions: What Is Going On Out There? ~ By Chris Anderson, Ph.D.March 15, 2006
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For me personally, I can't stand them as investments about 99% of the time however I really like them in the right situations. In today's article, we will give you an introduction on the condo conversion craze so that hopefully you can then make informed decisions in the future.
WHAT IS A CONDO CONVERSION?
Simply put, a condo conversion is a legal process whereby multi-unit, apartment buildings are converted to individual condominiums owned by either individual owners or investors. Depending upon state and local laws, there is a legal process whereby current renters are given the choice to either purchase the unit or lose their lease as the owners prepare to sell off individual condos.
Once all the proper legal steps are taken, the units are frequently spruced up by painting the outside (sometimes the inside) and possibly making other cosmetic changes. Depending upon the age and condition of the property, it is possible that NOTHING gets done to the units prior to sale to individual owners.
After a homeowner closes on the condominium, then a few things typically happen. First, they are now responsible for mortgage payments as well as condo association dues. Second, the homeowner can then choose to move in or rent out the condo. Finally, the owner now has the option to sell the condo at any time of their choosing.
WHY HAVE CONDO CONVERSIONS BECOME SO POPULAR?
The biggest reason is that in areas where prices have escalated sharply, it is much more lucrative to sell the apartment complex as individual condos rather than holding on and renting it or selling it as a single apartment complex.
Let me give you an example to illustrate the point. Consider a recent 200 unit complex that we recently examined. This complex was generating about $5,000/Yr net operating income per unit. If the apartment was sold as a single complex, this property would pretty comfortably sell for about $65,000/Unit or $13,000,000 total sales price.
Now let's look at this as a sale as individual condos. The average size of each unit was about 900 sqft and market price would dictate a sales price of $145/sqft. Or $130,500 PER UNIT!!!! This equates to $26 Million for the entire complex just by selling off as condos. Of course there are expenses associated with the conversion but suffice it to say that the owner put SEVERAL MILLION more in their pocket by selling as a condo conversion.
If you had an apartment complex right now, would you sell? Probably the answer is yes!
ARE CONDO CONVERSIONS GOOD FOR THE INDIVIDUAL INVESTOR?
The answer to this question depends completely on the condo conversion itself and the target market. Before we provide a check list to help you answer this question, let's step back and make sure we understand who will ultimately reward the investor by buying their investment property from them. There is a basic truth to buying condo conversions that should never be forgotten:
These properties were originally apartments thus most are going to appeal to those buyers at the lower end of the "affordable spectrum". In most locations, this will corresponds to young, first time buyers and/or retirees looking to downsize.
In many markets, the retirees are not interested in owning these properties because they are typically populated by the younger crowd. A wise analysis then is to treat your potential condo conversion purchase as a place where young, first time buyers will (hopefully) buy from you in a few years.
Now let's look at the things that you should consider about this investment.
Location: Is this a location where the young, first time home buyer would be PROUD to own? Typically means close to work, clean, young environment, etc.
Competition: Pretend they are buying this condo from you RIGHT now. Are there tons of other opportunities (like other condo conversions, starter homes, etc) in the desirable location or are they limited. Remember, there can be tons of units for sale in a large metro area but still be a limited supply in a specific location where people want to live, work, and own.
Condo: Is the condo unit something that the buyer could be PROUD to own or would it be horribly outdated and unattractive?
Price: How is the price RIGHT NOW relative to other offerings in the area.. Is it priced at or below other current "affordable housing"? This is not the same as doing a "comp" but really asking the broader question of what else might they buy instead of your condo.
Area Growth: Do you expect the need for housing in the immediate area of the condo to keep growing or will development rapidly push to a new area? So, for example, Florida's population is expected go growth by 80% by 2030. Given the already limited supply of land, this is a strong indication that prices will do well in the foreseeable future IF YOU BUY RIGHT NOW.
Rents: How do the rents and stability look for the period of time you expect to own it. Also, if this is done long distance, how will it be managed?
Cashflow: Many of the properties that we looked at that meet the above criterion will not produce positive cashflow when rented. However, for the right properties, we are more than comfortable to spend a hundred to two hundred per month. Rents, payments, HOA dues, etc have to be considered.