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Condo craze' sows seeds of controversy
http://www.sacbee.com/content/business/story/10727908p-11646378c.html
Editor comment:
This is a great article that illustrates how hot the market is in Sacramento.
While there are several correlations the writer makes to prior housing markets,
keep in mind that the forecasts from industry experts suggests the hot trend to
continue for the next 4-5 years.
Sacramento has seen double-digit appreciation
on homes since 2000. In addition, I think this article has some other clues in
it, such as Bay area investors and developers looking for land, the fact that
rentals are in short supply and could get shorter, and the fact that there is a
big market for first-time homebuyers.
Nonetheless, there are many very important
points to consider before you decide to invest your money, but it is still a
good market for investors.
This is from the Sacramento
Bee.
Entry-level homes increase but apartments decline
By Andrew LePage -- Bee Staff Writer
Published 2:15 am PDT Monday, September 13, 2004
Condo mania is back.
A growing number of capital-region investors are
planning to convert rental apartments into condominiums for sale, a trend seen
at the height of California's last two real estate cycles.
One local commercial real estate brokerage
predicts today's "condo craze" could result in 2,000 apartment units being
converted to condos next year.
It would come as hundreds of newly constructed condo units hit the market. More
than 8,000 condo units are in some stage of the planning process in the capital
region, reports The Meyers Group, a real estate data and consulting firm.
The condo converters are rushing to capitalize on
overwhelming demand for entry-level housing while mortgage rates are low and
innovative financing plentiful. They're mindful that historically, condos have
been hottest just before housing markets have peaked.
"The window of opportunity for condo conversions
opens and shuts quickly - it's a risky endeavor," says Pat Cahill, who's among a
group of Bay Area investors proposing to convert a 13-year-old, 324-unit Folsom
apartment complex.
Proponents of conversions emphasize that condos
open the door to home ownership to people otherwise priced out. The median
resale price for a condo was $160,000 in Sacramento County last month, compared
with nearly $300,000 for detached, single-family homes.
But some affordable housing advocates worry about
tenants who could be displaced during conversion, as well as about reducing the
amount of rental housing. Fewer rental units could mean a shortage and higher
rents at some future point if the number of jobs grows and rentals are more in
demand.
"The single most dangerous housing policy for
tenants would be for localities to allow apartments to convert to condos," says
Christine Minnehan, a lobbyist with the Western Center on Law and Poverty in
Sacramento. "Even with today's higher vacancy rates, tenants struggle to find
apartments they can afford. If we reduce the supply, we make their task
Herculean. It's simple supply and demand, and poor tenants are always the losers
in that equation."
Typically, less than 10 percent of tenants choose
or are able to purchase their units when their apartment complex is converted to
condos, industry sources say.
Janel Mitchell, 26, a mother of five, was
disheartened when notified recently that the Folsom apartment complex she lives
in, LakeRidge, has applied to the city for approvals to convert to condos.
"I can't afford to buy right now, and if I have
to move out of here, I'd have to take my children out of their (nearby) school,"
Mitchell said.
Another LakeRidge tenant, Greg Walker, 41, is
tickled at the possibility of being able to purchase what he considers a nice
home in a leafy setting, conveniently located near shopping, a bike path and a
future light-rail station. Investors trying to convert LakeRidge say it's too
soon to say how units will be priced, but Walker's hoping it's below the
$320,000 limit he and his wife have set for themselves.
"We're looking at this as a great opportunity to
buy an entry-level home," said Walker, who lives with his wife, daughter and
mother-in-law in a three-bedroom, 1,100-square-foot unit. "In Folsom it's really
hard to get into a house right now, partially because of the price restrictions
and because there are so many buyers for every house."
The current condo conversion craze flared up in
San Diego nearly two years ago and has since spread across much of metropolitan
California.
Locally, many apartment owners are disappointed
with their rental investments because vacancies are relatively high and rents
are flat, even falling at some mid-to high-priced complexes after incentives are
factored in. It's a sign of a lackluster job market and low mortgage rates that
allow more tenants to buy.
A handful of capital-region complexes are under
conversion or have applied to a local government for necessary approvals. But
the growing interest by investors has planners scrambling to understand their
decades-old conversion rules - if they have any.
"These municipalities are dusting off their condo
conversion guidelines from 20 years ago because there's been no demand, no
requests and now they're getting those requests and asking themselves, 'What's
our process?' " said Charles DeLoney, an apartment specialist with the local CB
Richard Ellis commercial brokerage.
Folsom, for instance, is creating a conversion
ordinance in the wake of its first application for a conversion, the LakeRidge
apartments.
Typically, conversion ordinances include
provisions ensuring that tenants get adequate notice and receive some level of
relocation assistance, as well as mandates for units to meet basic health and
safety requirements.
The conversion requirements in Sacramento include
a preference for units to convert only when the vacancy rate exceeds 5 percent
in the surrounding community, though the City Council has the final say on all
conversions.
Many of the ordinances were adopted in the late
1970s and early 1980s when a red-hot housing market triggered a statewide spate
of condo conversions. They tapered off as the housing market lost steam in the
mid-1980s. A smaller conversion flurry struck in the early 1990s, which was the
last time the city of Sacramento saw an application to convert.
The conditions under which conversion ordinances
are applied can vary considerably. For example, Sacramento city planners say
their ordinance applies any time a complex is taken out of the rental market and
units sold to individual buyers - regardless of whether that complex was
originally built as condos and later made into apartments.
But Sacramento County officials say if an
apartment complex in their jurisdiction met all of the requirements at the time
of construction to be a condominium project, then converting to condos would not
trigger the county's conversion ordinance.
That's why the conversion of the 116-unit,
20-year-old Alder Grove apartments in North Highlands has not been subject to
the county ordinance. Although its units have been rented for 20 years, Alder
Grove was built as condos and met all requirements at that time, county
officials said.
The Alder Grove units, which range from one to
three bedrooms and measure 880 to 1,025 square feet, are being renovated and are
priced from about $154,000 to $190,000, with homeowners association dues
estimated at $265 a month with water, sewer and trash included. Demand has been
strong enough for the owner to push up prices several times while collecting
$2,500 deposits for a reservation list. Formal sales with signed contracts are
expected to begin within a month.
Investors looking to convert apartments to condos
are offering apartment owners premiums of tens of thousands of dollars per unit.
Many planning to convert apartments more than a decade old assume they'll be
immune from construction defect litigation, which builders insist has hampered
construction of new condos. Under state law there's a 10-year statute of
limitations on certain defect claims.
There is much debate over whether the condo
conversion trend will fully develop here. In addition to the business risks,
there can be steep political and financing hurdles.
"The market is a big enough risk, and you add
into it the entitlement risk city to city and, depending on where you are, it
can mean a very different outcome for you," says investor Cahill.
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