Generally, a condo conversion is a process of entitling an income property, often seeking approvals from both state and local authorities, in order to convert from sole ownership of the entire multi unit property into individual for sale units. Many types of property can be converted including residential, commercial and industrial.
Analyzing the Multi-Family Property
The market for residential condominium conversions typically arises when the price of single family homes increase beyond the reach of the first time buyer. There are multiple types of investors involved when there is a hot conversion market. For example, an experienced developer may purchase an apartment building, hire a consultant to put the entitlements in place, and then upgrade the building so that the sales team can sell them as individual condominiums. Alternatively, a mom and pop have owned a 20 unit apartment building for 20 years and want to sell it. Rather than selling it outright as an apartment building, they hire a consultant to process the entitlements and sell the building instead at a condo premium to a developer who finishes the job.
In order to determine the sales potential of the converted units, a market analysis is needed. This part of the process involves conducting a study of the neighborhood and of any competing complexes: an inspection of the exterior of the buildings, the condition of the interiors of the units, the condition of the grounds and the amenity package in place.
Planning the Conversion
Using the study outlined above, a conversion plan is formulated, taking into consideration both the positive and negative aspects of the property. The plan includes budgeting for needed rehab activities and the addition of any amenities that may be lacking.
Rehab and Amenities
The rehab work (interior and exterior) necessary to make the property marketable is a crucial part of this process. Certain amenities may be added, depending on what amenities are already present and what competing properties have to offer. A sales model unit can be used, which should be decorated and completely furnished. A "wish book" that depicts all of the different remodeling options available to the purchaser can also be developed.
Homeowners Association (HOA)
A condo community is governed by a homeowners association. The association, comprised of all of the condo unit owners, sets out certain guidelines relative to the obligations of the unit owners as they relate to the ownership of their unit and to their participation within the condo community. The operation of the HOA is very important to the success of the condo conversion and to the maintenance and enhancement of property values.
Marketing and Financing
The marketing of the condos can be done either through a realtor or with in-house personnel. (As outlined above, a model unit should be used in the program.) Direct mail campaigns--mailing brochures into apartment complexes--are often very successful. Television spots on cable channels can be very productive as well. Another powerful marketing tool, one that should be taken into consideration going into the conversion, is an attractive financing package that can be made available to potential purchasers of the condos.
Trends
As of 2006, the trend of apartment complexes converting into condos is gaining momentum. The low interest rate affliction that has crippled apartment fundamentals for several quarters is driving the biggest condominium conversion boom in two decades. In markets across the country, condo developers are paying a premium to acquire and transform rental properties into condos.
Controversy
While condo conversions benefit multifamily owners by shrinking the supply of apartments, condo buyers are typically renters, so conversions won't necessarily lead to a jump in occupancy rates. There is also a big incentive for a multi-family owner to do a condo conversion when they consider selling. Multi-family buildings can command a much higher selling price if there is a condo conversion and the units are sold separately. Basically, the upward spiral in home prices has caused owners of residential investment real estate to adjust the per unit value they place on their property. Yet, critics argue that condo conversions price low-income residents out of the market and drive them out of the community, widening the affordability gap.[citation needed] In addition condo units can be a good alternative investment for investors who cannot afford to invest in single family homes or multi-family unit. In some places, like Los Angeles, California, there are various incentives for condominium converters to set aside affordable units, such as to satisfy parking to unit ratio requirements or receive other compromises from the city and the public. This can also potentially benefit the low to moderate income housing market.
