Is buying a converted condo safe?

[nepoez]

I`m looking into investing in a newly converted condo. The realtor said that the risk is that there are no track record as a normal strata condo would. This means the maintenance fees may change, and there could even be levies.

Is this too risky? What are ways to reduce the risks?

 

[PaulPoulsen]

QUOTE (nepoez @ Apr 16 2008, 08:03 PM) I`m looking into investing in a newly converted condo. The realtor said that the risk is that there are no track record as a normal strata condo would. This means the maintenance fees may change, and there could even be levies.

Is this too risky? What are ways to reduce the risks?

I guess it really depends on what your definition of "risky" is. We own both types of condos (condos that were built as condos and condos that were converted from apartments) and haven`t experienced any horrific problems with either type.

In theory, you should probably pay less for a converted condo than you would a new comparable "real" condo but there may be more more upkeep/repairs that need to be done and that can quickly eat up your savings. Vice versa, the new unit may cost you more upfront but could save you considerable money over the long run.

What to look for when buying into a newly converted building?
1) Ask to see the Reserve Fund Study. This is a document that outlines the life expectancy of the various components of the building and a projected cost to replace/repair said components. If the boiler has a 40 year life expectancy and the property was built 39 years ago, you may have to budget for a cash call to have it repaired or replaced.
2) Is there any cash in the reserve fund? What happens if the boiler doesn`t make it to 40 years and explodes the day after you take possession? Is there enough money in the reserve fund to cover the repair or is someone going to come knock on your door looking for money? Many of these newly converted units have little to no money in reserve.
3) Who`s on the condo board? My experience with smaller complexes (less than 20 units) is that the board is either non-existent or in total disarray. Most of these members know that they should have meetings and discuss the operation of the building but that`s where their understanding starts and stops. If you buy into this situation, be prepared to join the board to protect your investment. The best scenario is that there`s a professional property manager already on board that`s there to guide the new board.
4) What are the condo fees? If they seem artificially low to attract buyers, be aware that they`ll more than likely need to be hiked up in the near future. If they seem too high, it`s difficult to make the property cashflow and it could be sign that the complex will be in need of some major repairs in the near future.
5) What did you learn from your home inspector? If all your other due diligence checks out but your trust home inspector tells you the place is a dump, that`s a pretty clear indication that you want nothing to do with the place.

Best of luck.

 

[Sherilynn]

Paul had some excellent advice, but I would like to add that if I was considering buying another newly-converted condo, I would get trusted references on the developer.

In our case, the developer turned out to be a crook. He absconded with the reserve fund and left the country. Although we are taking legal action, it is pretty slow cross-border-shopping for our money. It would seem that he also padded a few of the condo documents that he provided with the pre-closing package.

Our soon-to-be ex-realtor said this happens all the time, but I think that is a ridiculously low expectation and that getting references for the developer could help avoid this.

Regards
Sherilynn

 

[RedlineBrett]

I won`t sell any of my clients a newly converted condo. Not until it`s hit ~75% owner occupancy and I hear from other agents in my brokerage that the condo docs and management are in good order. Converters simply do not have enough vested interest and don`t have the reputation to lose if they drop the ball. They aren`t developers that have to worry about getting their next highrise financed they just want the money as quick and painless as they can.

Had a client - young girl first time buyer that was lured in by the eye candy and location. Very excited to have her offer accepted (I had to work my butt off to get her price).

Unit passes inspection, I get her dog approved.

We get the condo docs and there is an assessment coming, reserve fund not big enough and poor work by one of the developer`s sub-contractors on a VERY expensive retaining wall job. Notes in the docs about the developer being sued etc. This is a reputable developer - they have an office here in Calgary and the whole bit.

Totally soured the deal for her and me. I was quite upset with the listing agent for not preparing me for for this. My client renewed her lease and who knows if she`ll buy when that comes up.

So - I won`t let my clients be the first ones into a conversion. Certainly not if they`re a first time homebuyer/homeowner and certainly not in this market with so much to choose from.

If it were an investor - different story as investors are typically sharper with their due dilligence.. but it`s still "guilty until proven innocent" in my eyes.

QUOTE (nepoez @ Apr 16 2008, 08:03 PM) I`m looking into investing in a newly converted condo. The realtor said that the risk is that there are no track record as a normal strata condo would. This means the maintenance fees may change, and there could even be levies.

Is this too risky? What are ways to reduce the risks?

 

[nepoez]

Thanks alot for all the replies. I guess what I see now is that if I don`t have to go into newly converted condos, I won`t.

 

[CalvinPeters]

It shouldnt matter if it is a newly converted condo or not, the same Due Diligence applies. Your job as an investor is to read between the lines and use knowledge to make and decision for this `educated risk.` The skill is being able to make a decision that you can sleep with, regardless of what you are buying. We have long standing condos that have cash calls...and new ones that shouldnt for a long time to come, if at all. I have made a lot of money off of properties that have had cash calls...other investors left them because of what was coming, we waited through it and enjoyed the capital improvements to the buildings...then the rental increase that can come after the improvments take place. As my father would say "There is more than one way to skin a cat" (just a saying, he doesnt skin cats)

One last point...I watched a building in Fort Mc. last year that was underpriced for many months. You could have bought a unit there off MLS for $50-80,000.00+ below the comps in the area. You could have bought a LOT of them...there was you see...a reason for the price. There was some lawsuits going on. Clearly, this was a case where you would have wanted to hedge your risk a little...with a good deal. If you had the audacity to buy in that building, you did good. (I know lots of people that bought in that building at that time) You would have realized a quick 100K+ gain in your networth statement...per door. with time, most of the problems are fixed. I am not saying to buy ill-managed properties on a hope and a prayer...but do your DD and make sure that there is a future and you should be able to capatalize on opportunities other people will not. Go against the crowd is I think the common advice advanced investors like Buffet use to much benefit.

It all comes down to your goals and due diligence. In adversity some people capatalize on opportunity. Dont be afraid to take calculated risk. ALL investments are, after all...calculated risks.

Just my $0.02. Cheers, Calvin