FEATURE ARTICLE, APRIL 2008

CONSTRUCTION TRENDS

WREB Contractor Survey (click to download article)

CONDO CONVERSIONS: ARE THEY MAKING A COMEBACK?

Khakshouri

The California housing market continues to be a topic of hot discussion. Even with the economic slowdown, affordable homes in areas such as Southern California are deemed expensive. In fact, the recent median sales price for houses is reported to hover around $425,000, about 16 percent below the peak of $505,000 at the same time last year, according to DataQuick Information Systems. So how are new homebuyers able to enter the market?

While there is a wide disagreement among economists, the recent housing prices were inflated by the easy availability of mortgage loans to people who could ill-afford them. The reality is even those earning as much as $100,000 a year may have trouble buying their first home in prime areas in California. With typical monthly mortgages averaging around $1,900, it’s no wonder that the working class has trouble meeting those payments, let alone having any funds left over for everything else.

Unfortunately, the trend of taking on a loan that’s nearly four times a person’s income is actually increasing. The ratio of median household income to median sales prices, which hovered around 3.5 in 1980, is now exceeding 4.7. This equation gets even trickier where home prices are double the median. According to the California Association of Realtors, the median price of an existing single-family home is about $530,000, and the median income is only $54,400. The disparities, given the housing prices in California are nearly 10 times the median income, mean fewer and fewer people will enjoy the benefits of homeownership. Unless, of course, an alternative form of providing affordable homes is found.

One solution is converting existing apartment buildings into condominiums. It, in fact, may be the best way to offer the first foothold into the housing market for many first time buyers. Why? First, converting an existing building is less expensive than building ground-up construction. This is particularly true given the scarcity of vacant land in dense urban areas like Los Angeles. Second, if a developer can streamline the conversion process so costs are cut and savings can be passed along to the buyer, this allows the buyer access to under-market prices, making the purchase even more affordable.

How can this be achieved? One 18-unit apartment building located in Canoga Park was a prime target for low- to moderate-income-level earners seeking a centrally located home in the valley area of Southern California. Recently, after an 18-month conversion process that included luxury upgrades such as marble bathrooms, Italian kitchens and designer lighting, the units were placed on the market. Additional cost savings were achieved by managing an in-house construction crew, negotiating deep discounts with home warranty and escrow companies, and purchasing appliances and cabinetry in bulk.  In one week alone, 8 units, all priced in the more affordable range of $269,000 to $349,000, were placed into escrow.

Part of the success of these units is the availability of a number of state or city-sponsored financing packages designed for first-time buyers that fall within specific income ranges. If the buyer qualifies, these programs, in essence, provide financing that serves as a silent second that are deferred until the house is sold or refinanced. Until then, the buyer pays no interest on this portion; however when it does sell, the buyer shares a percentage of the home’s appreciation. The result is a multifamily home that is affordable to the first-time buyer.

The same principles can be applied to entry-level housing for those that are in the moderate-income levels as well. One such project currently underway has units priced in the $439,000 to $575,000 range. Located in West Los Angeles, a prime suburb known for expensive real estate, these units would typically price out at $600,000 to $800,000, yet this process allows many first-time buyers to find housing in a desirable neighborhood in a more affordable price range. These particular units have all custom floor plans complete with large windows, vaulted ceilings and fireplaces. The original construction includes a myriad of architectural detailing and layout considerations not typically found in apartment-style design, making it ideal for condo conversion.

The Social Value of Conversions

There are additional advantages to converting apartment buildings to condo homes. While there is clearly a need for rental housing, those who own their homes contribute to the pride of ownership in a neighborhood. They care about the quality of the community, building relationships with neighbors, schools, and community organizations and groups. As a result, the community is strengthened; in essence, homeownership is the key to revitalizing specific areas of a city.

The opposing viewpoint centers on the removal of needed rental housing, which is converted, taking a chunk of housing out of the market. In reality, converting these buildings actually contributes to building a stronger community. Indeed, one of the reasons urban hubs have so many renters is do to the lack of affordable homes at every income level. This is compounded because it’s hard to accumulate sufficient funds for the down payment and closing costs. As a result, first time homebuyers and low- to middle-income residents have limited options.

Providing quality multifamily homes at affordable prices for the market, through the sale of converted condominiums, may be the best option to allow the upcoming generation an opportunity to have a stake in its city. Obviously, the market’s natural ability to adjust itself to meet the needs of supply and demand cannot be overlooked. When the supply of condominiums or market-rate rentals rises, the demand will be satisfied and prices will be lowered. For developers, who have managed to streamline the conversion process and supply high-quality homes for below-market rates, it’s a win-win situation for everyone.

Daniel Khakshouri is founder and president of Los Angeles-based Pacific Realty Ventures Corporation and its condominium division, CondoWest.com.

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