HOW TO SHOP FOR A CONVERSION
Presented By: Carrie Pierce

Conversions are gaining popularity in Seattle. A conversion is an apartment building transitioned into a condominium complex.  Here are some key questions to ask when shopping at a conversion condominium complex.

How old is the building? 

If the building is more than 15 years old, the life expectancy of certain items like the roof, windows and certain types of siding will soon end unless the builder replaces them.  It’s important to find out whether the builder has put band-aids on the problem or if the problem is corrected.  For example, has the builder done a patch job on the roof or has he replaced it with a warranty product?  If the builder hasn’t replaced it, then ask whether the builder will be providing enough money to the homeowner’s association to fund a new roof in the near future.  If he is not, the HOA is born with financial problems and you might consider walking away from the purchase.

In a conversion, the builder is required by the city to have 2 city inspections. The initial inspection must be disclosed in the public offering statement given to buyers.  Reading this report is essential to helping you determine the integrity of the building.  Any problems you see in the report you should ask what type of work is being done to remedy the issue.  Builders usually include their proposed remedies to the inspection next to the inspection part of the public offering statement.  Either way, find out what’s being done to fix problems with the building.  Make sure your homeowner’s association will not have to write big checks in the near future to fix things the builder did not.  Please note that the city inspection is not the same as having an individual inspection on your unit.  It is very important to have an individual inspection when purchasing a conversion. 

If the apartment complex was built 2-3 years ago, this does not preclude the building from needing building renovations.  Building errors are quite common in newer apartment complexes, which is why the Seattle Dept of Planning and Development continues to increase standards and apply new and stricter requirements on new building projects and conversions. 

According to home inspectors JJ and Suzanne Greive of Home Inspections Puget Sound (www.hipspro.com) PCO, CHI, a pattern of consistent problems arises during their inspections on conversion condo units.  They caution against complexes with composite siding products such as LP (Louisiana Pacific), Masonite and EIFS, (Exterior Insulated Finishing Systems).  These siding products are synthetic stucco panels and they have an unacceptable history of failure due to moisture problems. All of these siding products have resulted in class action lawsuits and frequently contribute to structural damage to framing materials contributing to probable conditions for wood destroying organisms.

Also, some builders cutting corners have been known to substituted aluminum wiring instead of the more costly and accepted copper. While this may have been code, they are 55 times more likely to reach fire hazard conditions. This is especially dangerous in multi family structures where multiple units have the same hazardous condition. See the link for important information from the US Consumer Product safety Commission on Aluminum Wire Problems and Solutions: http://www.hipspro.com/pubs/AlumWire.pdf.  Electrical panels are another important item to check out carefully. Zinsco and Federal Pacific are 2 brands that Suzanne and JJ always red flag.

Lastly, there are several kinds of plastic plumbing with history of failure. Polybutylene plumbing is the most problematic, and has been sued out of existence. Also PEX and AquaPex, both flexible plastic plumbing, has a higher rate of failure compared to traditional copper or galvanized plumbing. Rigid plastic plumbing (PVC and CPVC) has a much better track record, JJ and Suzanne recommend them and say they would use it in their own home, unlike the flexible counterparts.

What’s been replaced? 

Depending on the age of the building, the 4 most important items to have either replaced or have in good standing is the foundation, siding, roof and windows.  Electricity and plumbing are also important items for replacement if the building is older.  See above question for more details on which items should be replaced.

There is an important point I would like to make.  The insides of the units are typically gutted.  Everything inside the units, including appliances, flooring, bathroom and kitchen cabinetry and fixtures are typically new.  If you want something replaced that’s not in the purchase and sale agreement, get it in writing!  The only items the builder can be counted on to replace are in writing in the agreement or what you write into the agreement after your individual inspection.  If the builder verbally says he is going to pave the driveway and you don’t get it in writing, then the builder does not have any legal obligation to pave the driveway.  If you are expecting any replacement items, it should be in writing and signed by both you and the builder.  If you’re using a good agent, they will make sure all promised by the builder are in writing.

How many units are for sale and what percentage sold is the complex? 

The best time to get into a conversion is either in the beginning or the end of the sales period.  Getting into a complex in the beginning can be profitable if there are many units to convert.  A good rule of thumb with this strategy is to find a complex with 50 or more units.  If you’re one of the first people to buy, you are likely to experience appreciation from price kicks by the builder on future sales.  I’ll give you an example. I was one of the first people to purchase a particular conversion unit in an over 100-unit complex.  I felt the unit was very under priced at $205,000.  I signed the purchase and sale on the spot and gave my $1,000 earnest money.  The day after I purchased the onsite agent called me and said, “Congratulations Carrie, you just made $5000.”  It turns out they had raised prices on all units.  Two weeks later I went back to sign for my inspection and I noticed the units were now selling at $239,000.  I was ecstatic I made $35,000 in equity in just two weeks and I hadn’t even funded the property yet!  By the time the complex completely sold, less than one year later, my unit was selling for $289,000.  You see, bigger complexes have time for price raises and if you’re first, the rewards can be very beneficial.  If the complex is small, there will not be much time for price kicks.  I cannot guarantee every builder will raise prices, but I have many happy clients who have made money on their units for being first on large complexes. 

Please note that being one of the first buyers can often be a headache for early move-ins due to construction noises and messes.  And no, you cannot ask the builder to quiet down.  The contract you sign gives the builder the right to make noise and to make a mess until the conversion is sold out.

Getting in at the end of the sales period can also be profitable.  Often times the builder will have another conversion awaiting him and he cannot begin his next conversion project until he is sold out of the first complex.  With increased eagerness to begin the next project, the builder is more likely to concede on buyer requests.  Such requests can include price reductions, free parking spots included, upgrades included for free and even HOA dues paid above and beyond anything promised originally.  One of my clients received a washer/dryer upgrade, additional parking spot, six months of paid HOA dues and $5000 off the purchase price at the end of the sales period for a conversion complex.

Should I use the onsite lender or an outside mortgage broker?

We talked about how the percentage of units sold in a conversion complex is important for determining bargaining position.  But it is also important for another reason.  Condo complexes are not considered warrantable, or FHA approved, unless the complex is 70% sold AND closed.  Not having FHA approval blocks out the majority of loans that are available to buyers.  Wells Fargo, Countrywide and First Horizon are the main onsite lenders at conversion complexes and they have an automatic exception for non-FHA approved homes.  If you are not using the onsite lender, your lender will need to ask their loan underwriters for an “exception” to loan on a non-warrantable building.  If your outside mortgage broker gets your loan through Countrywide, Wells Fargo or First Horizon, he or she will still need to get you an exception no matter what they tell you.  Word of caution here, I have had many mortgage brokers tell my clients they’ve can do conversions and not one of these transactions has gone smoothly and only one of these transactions has closed on time.  Mortgage brokers have a tendency to say
“yes” people, they tell you yes to get you on board and then they can’t produce in the end.  These false promises are very frequently seen with conversions.

If you’re not convinced yet to use the onsite lender, allow me to offer one more reason.  Builders charge a per day charge, such as $250/day, for every day late you are closing the loan if you use an outside lender. The number of days includes weekends when banks are closed.  If you’re loan is supposed to close on a Friday and your lender is a day late, you owe for Friday, Saturday and Sunday. That’s an expensive proposition.  Let me give you a worst case situation from personal experience.  My client insisted on using his buddy from an outside mortgage broker’s office.  Sure enough his lender was late on closing the loan.  Rather than charge a per day late fee, the builder decided to deny our request to extend the closing date, which he has the right to do.  He then proceeded to collect my client’s earnest money.  Although the earnest money was eventually returned to my client, the builder certainly had the right to take the money and my client learned a nerve-racking lesson.  One last additional advantage worth mentioning is that onsite lenders typically offer a reward for using them such as money back at closing or money to be used towards closing costs. 

You might be wondering why the builder feels so strongly about you using the onsite lender.  In order for an outside lender to get the exception that they need to secure your loan, the lender will require the builder to fill out a lengthy questionnaire.  As you can imagine, builders have plenty to do and are not excited about filling out questionnaires for buyers.  If the builder delays completing the lender’s packet of information, you can see how this might be a problem for closing on time.  I’m not suggesting that builders purposefully delay closing, but rather suggesting that the builder is a busy individual and filling out packets all day long does not get a building built.  In addition to this, the builder feels safer with the on-site lender’s opinion on whether you qualify for a loan.  It’s best to keep it safe for everyone and use the onsite lender.

How is the contract different from any other condominium contract?

BUYER BEWARE: An important difference you’ll often find in conversion contracts is that the financing contingency will automatically expire.  Normally, financing contingencies end when the buyer signs a document delivered by the seller requesting that the buyer remove the contingency.  Most agents are accustomed to this method. But conversions often include a clause where the financing contingency automatically expires, meaning it expires without any additional documentation or signature from the buyer.  Instead of citing this in the financing contingency where buyers and agents would normally look for financing terms, builders like to hide this clause in a different area of the contract where buyers and agents are less likely to notice it.  As a result, many agents miss this on the purchase and sale.  Yes, sadly enough many agents do not read contracts in full. Be sure to read your contract in its entirety or use an agent who will read it and make you aware of important matter in the contract.

Unlike typical condominium negotiations, you do not have a choice of an escrow company or title company.  The builder has already established a relationship with an escrow company and a title company.  Due to the high number of sales closing near the same time, it’s both easier and more cost-effective to do title and escrow the builder’s way.

Lastly, upgrades like extra parking, washer and dryer and storage are often sold a la carte.  If you are early in the sales process, you might have choices of upgrades on countertops or colors.  If you are late in the sales process, it is likely the units are already built or the builder already ordered materials and you cannot pick these things out.

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