Saturday, November 21, 2009

Pros and Cons of a Condo Conversion

There is a new condo conversion in West Berkeley currently offering 2 units for sale:

•1 unit is remodeled and listed for $265,000 and just went pending

•1 unit is offered “as-is” and is listed for $245,000

Currently these units are the lowest priced 1 bedroom condominiums listed in the MLS in Berkeley. Several of my buyers in this price range have expressed interest in these units. Why? Because it’s the best bargain in Berkeley for first time home buyers.

Condo conversions often provide the perfect entry-level opportunity for renters to become homeowners. Why rent when you can own something, build equity and hopefully make a return on your investment? Condo conversions tend to be cheaper than other units on the market and definitely cheaper than new construction. From a developer prospective, it is cheaper to invest in a conversion than to buy vacant land and build something on it. Often times, once a developer acquires an apartment complex, they will offer a discount to the current tenants to buy a unit. The tenant feels like they are getting a better deal than other buyers and the developer gets the ball rolling by selling units quickly.

So what should a buyer think about when considering a condo conversion? A condo conversion is much different than buying a newly constructed unit. New construction is built from the ground up and is constructed with new building materials and stricter building codes than in the past. It’s a good idea to ask many important questions like:

•When was the apartment building built?

•Was it recently or in the 60’s?

•What exactly did the developer do during the conversion?

•What exactly was replaced in the building?

•What type of sound proofing was installed to maintain noise control between units?

•How old is the roof?

It’s also important to speak to your lender if you want to make an offer. FHA guidelines state that buildings of 4 units or less, newly converted or not, are not FHA approved. Therefore, a potential buyer must get approved for conventional financing and have a down payment of 20%. Also, in a four unit building like the one in West Berkeley, there must be three units sold or in escrow in order to close. This can be tricky and requires a certain amount of patience on both sides. However, with patience and little creativity, this could be a great opportunity for a first time home buyer.