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Condominiums Are Coming Back! Can Rental Conversions Be Far Behind?

Condominiums are coming back because large numbers of home shoppers can no longer afford or qualify for a single-family home, and some of those who can, cannot move fast enough to buy one. It appears that condo sales are moving in the same pricey direction. "Condos are selling above asking price for the first time in at least nine years, and the typical condo is selling in record 22 days," according to Redfin, the technology-powered real estate brokerage and public county record.

"Many buyers priced out of the market for single-family homes have turned to condos," said Redfin Chief Economist Daryl Fairweather. "Earlier in the pandemic, many buyers shunned small condos in favor of large detached homes with space for offices and homeschooling. But now that many Americans are vaccinated and some are returning to the workplace, extra space isn't necessary. The benefits of shared amenities like a gym or a pool are more attractive. And the biggest benefit of condo living is the more affordable price."

Demand for condominiums is excellent news for current condominium owners. And there seems to be no end to this as there is one more product that might surface sooner rather than later. And that product is rental conversions.

It is safe to assume that hundreds of apartment owners assess the tax ramifications of selling their apartments to a third party to convert to condominiums or convert to condominiums themselves. Either way, some tenants win early pricing. Some will even move to other apartments or buy somewhere else.

Might there be a pricing bubble down the road? Maybe. Maybe not. The important thing here is understanding who buys condominiums.

The Three Types of Buyers For Condominiums 

Speculators

These are early buyers who have no intention of closing. When prices start to rise, they resell or assign their contract to a second buyer who intends to close escrow. 

Speculators will purchase multiple units, making the absorption rate rise to the hype—hype as in, "Condos sell out in three days,” for instance.

These sorts of announcements do not include the low refundable deposits or what percentage of these buyers are speculators or investors.

Investors And Second-Home Buyers

These sort of buyers intend to close and some will purchase multiple units. 

Investing is a risky business for presale high-rise condominiums because investors will walk away from the closing if interest rates rise and monthly payments exceed their projected revenue from rentals.

With rental conversions, there is no risk because there is no preconstruction. They can see what the units look like in person and thus evaluate the mortgage costs accurately.

Condominium documents limit the percentage of investors who may purchase, but this can be abused by lenders.

Permanent Buyers

These buyers are moving out of rentals to stabilize their housing costs and to build equity.  They prefer a single-family home but can't afford one, so they pivot to townhomes because townhomes and villas are the closest lifestyles to a single-family home.

Rental conversions may be their only choice in the months ahead.  

What Opportunities Are Available to Real Estate Agents?

  1. If you are in commercial real estate, look for apartment owners so you can start talking to their tax consultants about maybe converting their apartments themselves. Or you can try to convince them to sell to a professional rental convertor like a REIT or other parties. 

Reach out to your attorney, appraisers, and tax accountants to ask what they are hearing. It could lead to an apartment sale for you.

  1. If you are a general real estate agent, look for out of town and out of country investors to purchase the apartments and bring in local brokers to sell and market the conversion.
  2. If you are a broker/owner, expect inquiries from your agent about getting in on the listing side and the selling side of the retail sales effort.

In our opinion (having converted a dozen or more apartments and recruited, trained, and supervised full-time onsite sales teams) accepting sale and marketing responsibilities can be both an excellent opportunity for the agent and a solemn obligation to the developer.

The developer puts a level of trust in the listing agent that defies logic in some cases. 

Required services could be expansive, such as: 

  • Working with attorneys
  • Land planners
  • Marketing companies
  • Mortgage lenders
  • And more

These all depend on the developer's expectations. Or it could be as simple as staffing and selling the units.

Hasten slowly

An experienced developer will not hire you based on the number of sales agents in your company. They will know that they will need more than your agents. An experienced developer will need every agent in MLS, which any Realtor can provide. 

If your office has a new homes division, and a growing number of you do, this will help. But it's not an imperative feature. Our best advice: don't insist on control.

Let's hope that lenders will be willing to hold developers accountable to protect serious home shoppers from price gouging. As affordable as mortgages may be, they cannot replace the home shoppers need –a home they can afford that gives them room to build equity over time.                    

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