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Condo Conversion Advantages.
Know the differences. Know the advantages.
By Kyle Dreier ~ Principal, Price Morgan
(March 3, 2007) You've likely seen a condo conversion and didn't know it. Over the past decade there has been a shift by large property owners to transition from being property owners to property managers. We've seen this with large hotel companies, small apartment owners and everything in between as they convert their properties to condos.
Why convert?
Why would a property owner sell off their property assets? They could do this for a number of reasons. One reason may be that they want to use that equity to build a different part of their business. Regardless of their reason this move creates opportunities for individual real estate investors.
Imagine if you will a real estate development environment where the cost of land and new construction have gotten to the point where existing properties now have a greater value. The concept of "a rising tide raises all ships" is definitely at play. Now, imagine an existing property which is now in the heart of an area being developed or even redeveloped. This existing property could be a hotel or an apartment complex. This existing property could be 10 years old or 10 months old. This existing property could be pristine and ready for market or it could be in need of updating and repairs.
Now enter the opportunity. Rather than buying raw land (which, by the way, may not even be available in the area) and develop a new condominium project the developer purchases the existing development and redevelops it either physically or in name only into a condominium complex.
Physical Conversion.
The most common conception of a condo conversion is when an older or distressed property is redeveloped and turned into individual condos for sale. Twenty-some years ago I watched a neighborhood apartment complex fall into disrepair then over a few months get a complete face lift and upgrade. The next thing I know they are selling the individual units as condos. They were really nice. Today, I've seen hotels in a prime location with the need for a light make-over go the condo conversion route. The end result is a class-A condo development with individual ownership, rental history and being put into service almost immediately rather than a two to three year construction period seen for new construction.
Conversion in name only.
Many times a developer will convert a property to condominiums and do little or no actual physical improvements. Newer properties may be in such a condition that no improvements are necessary to be a competitive or comparable property for that immediate market space. Again, this could be a hotel or apartment complex, either way, if the existing condition is at par or above then only the legal process of condominiumizing the property takes place. The end result in this case is the same as a physical conversion but with an even shorter time table before condos are put into service. So short that many times the conversion takes place and there is a tenant in the unit through the conversion.
Rental Income.
For real estate investors it all boils down to one thing ... cash flow. Negative cash flow, positive cash flow or neutral cash flow ... regardless of where it ends up you want to at least have an idea prior to purchasing any rental or investment property. The very idea of cash flow makes condo conversions attractive in most cases. Why? As mentioned earlier, many times a property has either rental history or may even have existing tenants. In new construction one can only speculate as to where the "heads in beds" are going to come from. In the case of a condo conversion you have the "been there, done that" advantage. Taking the occupancy variable out of the equation or at least mitigating it a bit is helpful to the purchase decision.
While on the subject of renters and cash flow, condo conversions cover the gamut of renters, from nightly to annual and everything in between. The type of renter for a property simply depends on the nature of the property and whether is it catering to long or short term stays.
Price Advantage.
So is there really a price advantage to condo conversions? The answer in most cases is "Yes." But that begs the follow up questions of "Why?" and "How?"
Why are there price advantages to condo conversions? In a word ... "basis." Rising construction and land costs put existing properties at a price advantage. Imagine if you will an owner of a property built 10 years ago. Without any special knowledge or market data you probably already assume the obvious ... the cost to build or purchase that property back then was likely lower than it would cost to build a comparable property today. The basis or cost of that property being lower give the owner a competitive advantage in pricing the property for sale.
So the next part of the question is how is this an advantage for the buyer? The easy answer is "time." Still confused? Time is money. I think we'd all agree on that. If a condo conversion developer is sitting on inventory from day one he's motivated to sell. Sure, he could list the individual condominium units at a market rate which might carry a 60 to 120 day closing cycle, or he could offer discounting that would cut that time frame in half. From the beginning he has built this into his pro forma. He has made sure he has enough equity or profit in the project and he has made sure he can pass some equity through to the buyer in the way of discounts or incentives.
It's not uncommon to purchase a condo conversion with incentives in the form of discount off price, cash back at closing, guaranteed lease back or monthly fees covered. Everyone benefits. The developer sells the property quicker and the buyer gets the property below market value.
At the end of the day, condo conversions make for an attractive purchase opportunity for real estate investors.
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