Developers turn rentals into condos.

About a year ago, StarPoint Properties LLC bought a Winnetka apartment complex with the intention of converting the three-bedroom townhouse units to condominiums.

But before its rehab work was finished, StarPoint got an offer to sell the complex to yet another condominium converter in a deal that was completed several weeks ago.

Developers were lining up for the property--14 to be exact--in what seems to be the next thing in the residential real estate industry.

Right now the condominium conversion activity in Southern California is robust, " said Paul Daneshrad. CEO of StarPoint, "mainly because affordability issues with single family homes continues to get worse."

StarPoint chose to sell the project because it was able to make a tidy profit without waiting another 12 months or more to finish the conversion and market the individual units.

But many other developers are just as content to seize the opportunity to renovate and market these condominium units themselves.

"It's a win-win situation for the tenants and for us," said Joseph Yoon, development manager at Millennium Enterprises, the L.A. company that bought the Winnetka project. "The tenants have an opportunity to become homeowners and it makes a lot of business sense for us. The profits are there."

Statistics are hard to come by because these types of deals are recorded along with other types of multifamily projects. But StarPoint is also underway with a conversion in Brentwood. Another developer recently completed a small conversion in Encino, and three conversions are taking place in Burbank.

And in Woodland Hills the Warner Center Apartments, a 1,279-unit complex, was just acquired with plans to renovate and resell the one-two- and three-bedroom units as condominiums.

A number of dynamics are combining to attract these so-called condominium converters, developers who acquire multifamily properties, renovate them and resell the individual units to home buyers.

As prices for rental apartment complexes have soared, buyers now must hold onto their purchases for years in order to see a substantial return on their investment. But condominiums can be sold immediately, reducing the time frame for the same--and sometimes even more--profit potential.

At the same time, the demand for condos has increased tremendously as prices for single family homes have soared and first time buyers seek a lower-priced alternative to home ownership.

"Condo conversions are definitely on the rise," said Alison Rice, editor at Multifamily Executive, a Washington, D.C.-based Hanley Wood Magazines company. "As single family homes and townhouses become increasingly expensive, condos are becoming a hot property for home buyers because they are more affordable."

Other places

The trend to convert apartments to condominiums is in full swing in most other parts of the country, not only because of increased demand for these properties, but also because apartment owners in many other communities have been experiencing especially high vacancy rates.

In downtown Chicago, "the apartment market took a big dip and a lot of owners got stuck with 10 percent and 15 percent vacancies," said Nicholas Manganais, a broker with Marcus & Millichap's Chicago office who just handled a deal for a condominium conversion. "One of the easy ways to get around that is to convert it to condos."

Apartment vacancy rates are still low in the San Fernando Valley, but those low vacancies have caused the price of many of these buildings to spike, making them less attractive investments.

Not so for a condominium converter.

"The investor appetite for buildings that either have an expired track map or the potential for condo conversions has increased dramatically as cap rates have fallen," said Dean Zander, a partner with Hendricks & Partners in Encino, who brokered the StarPoint deal, "because investors realize they'll have a strong exit strategy whether they sell to a condo reseller or they end up selling the units themselves."

In L.A., there are many complexes initially entitled for condominium construction, which has different requirements for parking and other features, but were never marketed for individual sale.

Now, with the demand for starter homes far outstripping supply, some developers are seeking out properties with track maps that allow for condominium construction.

Liability leeway 

Perhaps the most attractive aspect of many condo conversions is that they don't carry with them the same insurance and liability issues that a condo developer building from scratch deals with.

Long a thorn in the side of those who build condos, state laws stipulate that a developer (along with the subcontractors) is liable for construction defects for 10 years after the completion of the project. And many developers of Valley properties, for instance, were held liable for repairs following the Northridge Earthquake, even though they had long ago completed construction with no problems.

The laws governing construction defects--along with the threat of earthquakes in the area--have pushed liability insurance up enormously for developers and the subcontractors who work with them, so much so that many developers have abandoned any plans to construct condominiums.

But if a condo converter buys a property built more than 10 years ago, and only makes cosmetic changes, like renovating the kitchens, that developer need not worry about construction defect laws and need not carry the kind of insurance required with a younger property.