Developers Build Condos Again as Market Resurges.

Darin Davis' favorite book is titled "Only the Paranoid Survive." In his business, it's pretty good advice.

Davis and partner Stephen Bock specialize in building condominiums in the San Fernando Valley, a market segment that languished through much of the past decade. Today, the demand for condos is increasing, and their Tarzana-based company, D and S Development, is growing right along with it.

But you never know when another down cycle could be on the way. So, the partners say, they had better be prepared. "It's an adventure," said Bock. "Our job is to watch the economy and catch trends and make sure we survive the slings and arrows."

Bock and Davis started the business three years ago when the economy started to turn around, and they sensed that attitudes about condominiums, which consumers traditionally viewed as a poor cousin to single-family homes, were changing.

Since then they have either renovated or built 22 units, and 1999 sales hit the $10 million mark. This year, the firm plans to build another 100 units, including two projects already underway in Sherman Oaks.

"As single-family home prices go up, so do condominiums," Bock said. "We're really comfortable with this niche."

Many people turn to condos because they can't afford single-family homes. During the recession of the early '90s, the price of single-family homes fell so dramatically that even first-time homebuyers could afford to enter the market, and condominiums went begging.

Attorneys' bonanza

To make matters worse, developers became targets of a flurry of lawsuits after the Northridge earthquake. The structural damage suffered by condominiums was no different from the damage to single-family homes. But attorneys' potential payoff for suing on behalf of condominium associations was far greater than representing a single homeowner, and attorneys aggressively pursued such cases.

Because of the rash of litigation, many insurance companies discontinued providing insurance for condominium developers, and those that did offer coverage increased their premiums and added expensive deductibles.

The market downturn, coupled with the insurance increases, chased most developers out of the condo market. But in recent years, the rising price of single-family homes has significantly improved the demand for condominiums.

In November 1999, the median price of a single-family home in the San Fernando Valley was $222,000, up 13.8 percent from the like period a year earlier, according to the Southland Regional Association of Realtors.

Data from that same group shows that the median price of a San Fernando Valley condo rose 7.2 percent to $124,900 during the same period. A total of 346 condos were sold in November 1999, compared to 256 during the same period a year earlier.

"This kind of housing is really needed," said Juan Acosta, a lobbyist for the California Building Industry Association, a trade group. "There is a market for it."

The increased demand and relative lack of competition convinced the D and S principals to enter the condominium market. Bock, a former residential real estate broker, and Davis, who owned a company that renovated foreclosed homes for resale by banks, have known each other since grade school. It made sense to combine their skills in their own company, where Bock handles marketing and Davis handles contracting.

Focus on smaller units

While the partners are aware of the condo market's potential pitfalls, they believe they can avoid the risks by keeping their developments small.

"If you've got 300 units, you become a faceless developer and (if there is a problem), people end up getting angry and calling the attorney," said Bock. "We're going to be doing six, eight, 16 units. We can get to know our buyers on a first-name basis, and if there is a problem, our motto is, 'Call us, don't call your attorney."'

So far, D and S has completed a 16-unit rehab in Glendale, where sale prices averaged $125,000, and six townhome units in Sherman Oaks, where the average sale price was $230,000. Both projects have been sold.

Upcoming projects range from a 20-unit development the company is renovating and converting to condominiums in West Toluca Lake to a new five-unit development in Sherman Oaks, where townhomes will sell for $260,000 to $280,000.

Meanwhile, the two are already planning for the next market slump. They expect to plow some of their profits into buying apartment buildings so they'll be able to fall back on the rental business when the real estate market for homes begins to decline. "We'll be able to have more cash and then, when the market goes into foreclosure, we'll be able to buy more (homes and condominiums at low prices)," said Davis.

After years in the real estate business, Davis and Bock have seen first-hand the ups and downs of the market. "In the old days, you'd start a business and expect it to continue (in the same form), but we've been slapped around a lot," said Davis.