First-Time Home Buyers flock to Condo Conversion Projects
In a market with sparse inventory in the entry-level price range many first-time buyers are attracted to condo conversion projects. With good reason because often it’s the only affordable option.
Over the past three years, developers have plucked one eastside apartment complex after another from the Seattle eastside landscape and created new real estate for sale.
Affordable as they are, buying a unit in a condo conversion project takes special knowledge. First, the dollar figures advertised is usually just the “base price.” Option packages can add anywhere from three to ten percent. Some sellers ask for half of the option package price to be paid at the time the buyer and the seller have a “signed-around” purchase and sale agreement (mutual agreement). This option package down payment is often not refundable. The earnest money itself can be steep, especially at the beginning of a conversion project. All this is used to ease the seller’s cash flow burden. As long as demand outstrips supply, the seller can dictate the financial terms.
Potential Financing Hurdles
Two other aspects of condo conversions are the process (timing) and the available financing to buyers. The tenants (lessee) rights are protected by their lease contract and they will usually vacate the premises at the end of the lease. This means that a complex is not being converted in the most logical fashion, i.e., one building at a time, but rather randomly as each unit becomes available for conversion. Also, tenants who are accepting the option to purchase have to move out before moving back in.
The number of lenders for conversions is usually limited because the condos are non-warrantable with the Department of Housing and Urban Development (HUD). Often, the seller advertises a preferred lender and, in addition, offers other financial incentives for buyers using that lender.
What exactly is being converted?
The conversion usually involves the gutting of the interiors, new flooring, new interior build-out, new doors, painting, trim, finishes, fixtures and appliances. Because in a condominium complex a buyer also buys a percentage of the common areas, it’s important to know which common areas and features are being improved. What about stairs and entrance ways, parking structures, exteriors, roofs, balconies, landings, windows, roof, access roads, the club house, pool, etc.
To keep tabs on their investment I recommend to my clients to join the Board of the Home Owners Association at least for the first year. That way they can play a role in modifying the initial rules of the association.
Buyers Beware!
Many first-time buyers lack knowledge and experience. Without the assistance of their own competent real estate agent they are not being given the necessary information to make a very important decision involving considerable money and responsibility. Sellers, however, are keen on NOT having buyers represented by their own agents. It saves money and makes for an “easier” sale. Many casual “lookers” who are innocently registering at the sales office are not made aware of their right to be represented by their own chosen agent. “I can write up the offer right now” sounds too tempting, especially when this is “the last two-bedroom unit” that’s available. However, given the special circumstances of condo conversions is precisely why a buyer should be represented by an agent. As always, representation does not cost the buyer a penny.
The condo conversion boom in the Seattle area is not over yet. Currently there are several projects still ongoing and others on the drawing board. This is bound to drive up rents. So buying a unit in a condominium conversion project with the idea of renting it out may be a sound investment.
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