There is a sense that converting rentals to condominiums, better known as the rental conversion market, is around the corner. The reason: growing demand for lower price housing and increasing rents.
Several groups benefit from rental conversions:
Neighbors like conversions because the painting, refurbishing, and additional landscaping that are usually a part of the process upgrade the neighborhood.
Municipal governments like them because the condominiums are taxed on their appraised value of the individual units, as opposed to the value of the building, usually yielding a higher tax base.
Financial institutions tend to like them because it is a way to free themselves from low yielding loans made on the property in the past.
The seller likes conversions for reasons usually tied to taxes and depreciation.
The converter likes conversions because he can see the product, has an idea of the property's acceptance by reviewing occupancy rates, and can get in and out of the property without the usual red tape and development costs of developing from the ground up.
While there are many that like conversions, there is one group that clearly does not:
The tenants.
Their first reaction is that they are going to have to move immediately, which is not true. Once they understand this, they settle down.
As a real estate broker involved with several rental conversions in Florida during the 80's, I can tell you that it is a huge responsibility to take on the sales and marketing of a rental conversion.
Listing a rental conversion to sell as condominiums is a lot different than listing a single-family home. If you don't sell the single-family home, the owner may choose to not sell or bring in another broker.
If you don't sell the condominiums, the owner could lose the property or suffer tremendous rent losses due to tenants who did not renew their leases.
You may be asked if you think a certain property will make a good conversion and what are some guidelines to price and market the condominiums. There are many other considerations, and specifics may vary by market, but here are some guidelines I use and teach:
Location is one thing. Unit mix is something else. People rent one-bedrooms, but they purchase two-bedrooms.
Establish price by pricing the best unit in the building, then adjusting downward by floor, view, and location.
Prices of the converted units should be at least 20 percent lower than the area's single-family detached housing prices.
Don't expect tenants to pay much more than $100 over their rent payment for a monthly mortgage payment.
Never put the entire inventory on the market at one time.
The day you announce the conversion to the tenants look for a 20 percent rent loss.
The converter should expect to recover all conversion costs at about 70 percent sellout.
Conversion properties will be purchased by people living within a three-mile radius of the conversion.
Do not expect more than 20 percent of the tenants to purchase, unless there have been major improvements and there is a long history of tenant stability.
Existing tenants are not your prime market.
In a multi-building property, convert the less desirable property first.
Do not begin your sales program until the condominium documents are recorded.
All units should be refurbished inside and out, including new appliances and new carpeting.
Offer a substantial "as is" discount to the tenants before the property is offered to the public.
Use a professional on-site sales staff, not general agents to sell the units. The sales staff should understand and know how to interact with the tenants every day, especially in the first phases of selling when rumors and questions need to be accurately and rapidly addressed.
Make appointments with each resident to present the sales program and renovation plans. Be courteous. Don't expect them to buy on the first visit. Building trust as fast as possible with the
tenants is critical.
The sales office does not have to be lavish, but the conference table should be in a private room, separate from the color selection room.
Make sure your converter is working with a good attorney, engineer, building contractor, and landscape architect.
After you price the units, expect the bank and or the converter to ask to see a two- or three-year sales projection based on your pricing and best estimates.
My counsel to any real estate agent is to "hasten slowly" when agreeing to market a rental conversion. It is a serious commitment, and the stakes are high.
Published: November 5, 2003
Use of this article without permission is a violation of federal copyright laws.
 David Fletcher has been a Florida licensed real estate broker and new homes sales and marketing consultant for 30 years. Along the way, he has sold more than $3 billion in new homes and condominium products for developers and builder/developers.
He has been broker of record for 16 rental conversions and marketing consultant in 29 lender workouts for major communities and condominium projects, a featured speaker at the National Association of Realtors, and chaired the Florida Home Builder Association's Sales and Marketing Council.
In 2008 he was named a 'Lifetime Achiever' by Keller Williams Realty's International Division. You may contact him at or call him at 407.234.2349. |
