Tenants 'Best Buyers' in Condo Conversions
Builders who hope to capitalize on today’s strong demand for condominiums can convert existing multifamily rental properties at a fairly low risk, provided they have a good understanding of their market and know how to sell the units, according to panelists leading an educational session at January’s International Builders’ Show in Orlando, Fla.
Of top importance in the conversion process, “we do whatever we can to make a tenant a home owner,” said David Jacobson, senior vice president of Regis Homes in Irvine, Calif., which has completed 8,000 condo unit conversions. “They’re your best buyers. You have to do something to ‘incentivize’ them,” and “if it’s inconvenient for construction, too bad.”
Not a proponent of conversion programs that are oriented to emptying out the building, Jacobson’s company typically announces its plans at a tenant party, starting with the assurance that nothing is changing in the leases. Residents are provided with model and pricing information and a “renting vs. buying” analysis that is good collateral advertising.
Tenants usually are given an exclusive 90-day right to buy their unit and a discount if they decide to buy quickly, within 10-15 days or so.
“There are some people who have personal problems precluding them from being buyers, and we assist them in finding another community, or sometimes align them with a non-owner buyer,” said Jacobson. “Our goal is to create happy home owners.”
The initial prices on the condos are the most affordable, he said. “We do have price increases that lock in earlier buyers but we don’t want to slow down sales momentum.” Promotion of the project to the public starts a month or so after the tenants are notified.
Advertising is pitched to the demographics and lifestyles of “the people we think should be living in our communities,” he said. To tap into California’s growing Asian market, that should include advertising in Korean, Chinese, Japanese and Vietnamese.
Exciting sales offices are a must, and most existing leasing offices “are in the right place,” he said.
New paint jobs or design overhauls, necessary repairs and new landscaping are standard in the conversion process, and six to eight consultants who are specialists in these and other areas work on each project.
Conversion is a low-risk proposition, Jacobson said, because “you know your costs pretty well,” and “if you have a cyclical plunge, at least you have the rental income. It can still be an occupied community unless you take the ‘everybody out of the pool’ approach.”
In today’s market, “it’s not your father’s condo conversion,” said Marta Borsanyi, principal and managing director of The Concord Group in Newport Beach, Calif., which provides advisory services to financial entities, builders and developers and cities. Condos were primarily a relatively inexpensive opportunity to own a home up through the early 1990s, but now increasingly represent lifestyle changes for the buyer.
Condo conversions need to be based on a thorough, in-depth analysis of the market, including such considerations as the position of condos compared to new production or single-family homes; comparative site evaluations; market timing; and demographic analysis that takes into consideration unique characteristics in the populations of specific cities and sub-markets.
Identifying “the type of people who may be your buyers” is essential, she says, along with an assessment of their wants and needs.
As for prime locations, “clients are buying in newly developing centers of town, areas where the city wants ownership units,” Borsanyi said. The first suburban ring is also a good area. No more than 10% of the residents in converted condominiums have children, so proximity to schools is not as important as access to retail and hospitals.
“Timing is extremely important,” she said. “Bring the property on market when the demand is there.” But because housing is a basic necessity, there will always be some demand. “The difference between the peak and the bottom of the market is really made up of discretionary purchases,” she said.
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