Is Your Building Going Condo? Here's What You Should Know

As apartments increasingly convert to condominiums, renters face a tough choice: buy their unit or move on. Terri Cullen looks at financial issues potential buyers need to consider.
By: Terri Cullen: The Wall Street Journal Online
After signing a one-year lease in May, Lisa DaFoe started settling into her apartment rental in the Glenn Allen suburb of Richmond, Va. A month later, the legal notice came.

Her apartment building was "going condo" -- Ms. DaFoe would either have to buy her apartment, or move. The notice left her angry and confused, says Ms. DaFoe, a 43-year-old marketing coordinator. "A condo conversion? I didn't think this sort of thing still went on," Ms. DaFoe says. "I finally get around to unpacking everything and now I may have to pack it right back up again."

I know what you're thinking: Condo conversions are so 1980s. But the boom is back, fueled by the torrid residential housing market. Low mortgage rates and creative financing have turned thousands of would-be renters into homeowners, and a growing number of building owners have decided to cash in on the trend by converting apartment units to condos. The boom started heating up in 2003 as the broader real-estate market experienced a home-buying frenzy.

And, as has been the case in other areas of the real estate market, lenders are doing their share to feed the beast. "As conversions became more profitable, banks have become more readily willing to loan money," says Dan Fasulo, director of Real Capital Analytics, a research and consulting firm in New York that tracks condo conversions.

Investors and developers have also jumped on the conversion bandwagon, buying buildings from owners and immediately flipping them as condo conversions, he says. The number of rental units sold to be converted to condominiums nationwide reached 131,762 as of Nov. 1 this year, compared with 75,385 for all of 2004, Mr. Fasulo says.

This week, as part of our Chasing Condos series, I'll look at a number of financial issues renters need to consider when mulling the purchase of an apartment in a condo conversion.

A Condo-Conversion Craze

The price of the condo is the first of many expenses that renters should consider when determining whether to buy the apartment or take a pass. In addition to the down payment, mortgage and annual maintenance fees, buyers should consider the cost of insurance, the possibility of special one-time assessments, and any legal expenses that may arise when sharing ownership of a property with other people. On the other hand, renters who decide against buying may face moving costs and higher rents elsewhere.

When an apartment building converts to condos, a buyer purchases the walls and interior of the apartment, as well as a percentage of the building's common areas. The building is typically managed by a condo association, made up of condo owners.

A condo conversion can end up being a boon for some renters. When a building goes condo, renters may be given "right of first refusal," or the opportunity to buy their apartments before any other offers are considered, depending on their state's regulations governing condo conversions. It's also not uncommon for building owners to offer price concessions for a limited time to make a quick sale.

The promise of an upfront discount can be attractive at a time when condo prices have surpassed those of single-family homes. The median price for an existing condo in the U.S. reached $213,600 in September, up 9% from the same period a year earlier, according to the National Association of Realtors in Chicago. The median price for a single-family home was slightly lower, at $212,200 in September, up 14% from a year earlier.

Kuazine King and his wife Mimiko jumped at the chance to buy their two-bedroom apartment when their landlord offered a discount on the space, and $1,000 in temporary relocation costs while their building was being renovated prior to the conversion. The couple paid $369,000 for their San Diego apartment, while similar units in the building offered to the public were priced from $379,000 to $389,000, according to Mr. King.

Mr. King, a real estate agent, said the discount allowed his young family to find affordable housing in a good neighborhood. "If we were looking to buy a condo in this neighborhood that wasn't a conversion, it would definitely cost a lot more than what we paid," he says.

But for some, buying an apartment may prove too costly, even with a discount. The owner of Ms. DaFoe's building gave her the opportunity to buy her one-bedroom apartment at a $12,000 discount to its $142,000 asking price for 60 days. But she didn't bite, because she remains skeptical the space is worth the price. "With the $300 a month condo-maintenance fee and mortgage, that pushes the monthly outlay to over $1,000," she says. "If I'm going to pay that much, I'd probably look to buy something a little bigger." Her monthly rental on the apartment was $800.

A Condo Glut?

One wildcard for renters may be what some in the industry say is a looming condo glut. About 78,000 newly-built condos and townhomes will be ready for occupancy this year and another 118,000 will be available in 2006, according to Property & Portfolio Research Inc., a Boston company that tracks 54 markets.

"Over the past three years we've seen a rampant uptick in condo construction and conversions," says Robert LaQuaglia, real estate economist at Property & Portfolio Research. Prior to 2003, condo conversions have been relatively rare since the conversion boom in the '80s, he says.

In many regions, older units that are being converted are now competing with spanking new condos and even luxury hotels that are converting to condos.

With so many buildings converting and new units hitting the market during what certainly seems to be a mature real-estate market cycle, there's a greater possibility that condo-conversion owners may find themselves with buildings that are only partly sold. For renters, this scenario could play out in one of two ways: the owners might reduce the asking price to convince renters to buy, or owners might hold on to unsold condos and continue to rent them out.

Ms. DaFoe hopes a real-estate investor will buy her apartment and allow her to continue renting out her apartment. "I'm hoping I can stay here and continue to rent, no matter who the owner is," she says. "Right now, I'm just going to stay put and see what happens."

Doubling Down on Insurance

Another financial consideration when switching from renting to buying is insurance. Typically, the condo association pays the premiums to insure the shared space within the building and the grounds with association maintenance fees, as governed by the articles of the association and state laws. When theft or damage strikes inside your unit, however, it's generally your problem.

Condo owners will need to purchase a separate personal home insurance policy (called type HO-6), which is designed for condos. Premiums vary depending on location: In suburban Chicago, you may pay $150 a year for $38,000 in property protection on a one-bedroom condo, which also provides $25,000 for building protection and $300,000 in liability protection, according to Allstate Corp. in Northbrook, Ill. Condo owners in urban areas typically will pay $100 more each year than suburban homeowners for the same coverage.

If you decide to buy, you'll need to get a look at your condo association's master policy to determine what is and isn't covered, and then sit down with an agent to ensure you get the proper level of personal coverage. Because condo association rules can vary, condo buyers may misunderstand what they're responsible for under their own policy.

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