Condominium conversions usually take place when the real estate market is thriving.
When the real estate market is booming, condominium conversion is a hot commodity. Renters do not want to throw their money away on rental units -- they would rather spend their money on a mortgage where they can write off the interest. Converters purchase building units, transforming an entire building into separate, homeowner-based properties. This metamorphosis does not happen overnight; whether the converters choose to incorporate luxurious condominiums into the equation or just market the units as condos instead of apartments, there are certain requirements and procedures to consider.
Condominium converters usually seek out apartment-to-condominium conversions in popular locations, oftentimes where the buildings will not need to compete with other entry-family homes. The converters want potential homeowners to purchase their condos as an alternative to the single-family dwelling or other nearby, perhaps costlier, condos. According to the National Association of Realtors, new housing sales have fallen by almost 60 percent over the last three years. Condominium conversions, however, do not fall under the label of new homes. They are remodeled apartments that have been flipped and improved for owners and not renters.
Many of the same companies that compete with developers for apartment investments are the ones who sell the properties to converters for a handsome profit. The converters are willing to pay extra, which is more than the typical investor, because it ends up costing less to buy, renovate and ultimately sell the condominium than it would to build a brand-new one. Homeowners are interested in the newly renovated units for the same reason; they look just as good as a brand-new condominium but cost a fraction of the price. These units look even more appealing with lower interest rates and affordable mortgages.
Condominium conversions benefit multi-family owners by diminishing the number of rental units. However, since the condominium buyers are most likely renters, the occupancy rate within the building does not necessarily increase. The buyers of these converted condos are the same as any regular unit: first-time home buyers, empty nesters and retirees. The simple reason is that these groups seek secure and gated facilities, fewer maintenance concerns and lower prices.
Condominium converters purchase the entire unit first, and then work with existing renters to secure deals. According to the National Real Estate Investor, the converters normally need to convince 10 to 15 percent of the current renters to buy their units, most often at a much lower price than offered to outside buyers. After that step is met, then the converters must take into consideration whether any mortgage loans remain against the property. This can determine how many units need to be marketed.
Before diving into the repairs, condominium converters need to verify whether or not there will be major physical changes made to the structure. If the building is smaller, such as a two- or three-family dwelling, the units might need separate heating and cooling systems installed. Additionally, in order to comply with fire codes, the units need two separate exits/entrances. Some converters fix up the entire building, from the lobbies to the hallways, landscaping to the facade. Others decide to spend money on forming luxury condos that include granite counters and stainless steel appliances in the kitchen, high-end window treatments and luxurious master bathrooms.
After the units have been renovated, the seller must secure condominium insurance for the building. This type of insurance covers the entire building, not the separate units. That type of insurance is left to the discretion of the condominium owner in the form of homeowner's insurance. The building insurance covers such issues as fire hazard coverage. At the time of closing, the lender is presented a certificate of insurance that states the unit is insured.
Those who want to purchase a converted condominium should make sure the developer has left enough monies in reserve to cover future replacement needs. Since the building is considered a new condo community, those living inside the dwelling will not have contributed several years worth of funds to replace such items as a leaky roof or faulty plumbing. This money should be set aside before the complex is turned over to the homeowner's association that will take care of instances like this in the future.
Before purchasing a condominium conversion, a potential homeowner should employ a real estate lawyer who can verify that the unit adheres to all the zoning rules. These lawyers can draft up condo documents and oversee the entire conversion process, if the potential homeowner is interested in the property from the moment the conversion begins.