As the number of city rentals converting to condominiums grows, so do warnings for the buyer to beware.
Developers doing rentals may skimp to save money and use cheaper materials and designs appropriate for rentals but not for more expensive condos. These units may not get the necessary upgrades in conversion.
“There are many ways that an apartment developer can cut corners, and it would be very difficult for the average person to know about them until after they’ve been living there,” said Barry LePatner, construction law attorney and founder of LePatner & Associates LLP. “You see it often in the caliber of the cabinetry, in the quality of the wood floor, and sometimes in the paint job.”
LePatner said a developer begins the development process by looking at the location and the market. By talking to marketing experts, developers determine what value per square foot the locale will bear.
Then, knowing the sought-after return on investment and the cost of materials and labor, the developer works backward to pick and choose what finishes and amenities will be offered and what will be left out.
“You make a determination where you’re going to spend your dollar per square foot,” LePatner said. “The goal here is to define what will give you the maximum bang for the buck and create that fizzle that will give you an advantage over the competitors in your neighborhood.”
Some cut corners are more obvious than others. LePatner said he was disconcerted upon visiting a model apartment in a luxury highrise condo recently.
“It took me a while to figure out what it was,” he said. “The apartment rooms were smaller than average, and they put in smaller than average furniture. If they had put in a regular couch, you would have said, ‘These rooms are tiny.’ But they put in a loveseat and a small chair, and everything was cut to scale, so you wouldn’t notice unless you had a good eye.”
The one thing not cut to scale was the asking price, LePatner said: $2.3 million for a two-bedroom though the view was striking.
Other cost-cutting measures are even less obvious: for instance, reducing layers of sheetrock in the walls. Residents may not learn about that until they hear their neighbor’s toilet flush for the first time.
Kyle Blackmon, vice president at Brown Harris Stevens, said he has noticed cheaper finishes in some rental conversions.
“I’m seeing a lot of buildings built in the early ’60s to maybe the ’80s that were rental buildings undergoing conversion, and there’s no question that some of the finishes going into these condos are marginal,” he said.
They might have Formica or Silestone countertops and a wide, black refrigerator instead of a Sub-Zero.
“It’s too bad, because when developers do that, they end up losing on a price-per-square-foot basis,” Blackmon said. “Without question, we are in such a bull market that educated buyers can definitely tell the difference.”
But Leonard Steinberg, a broker with Prudential Douglas Elliman, said buyers have become so enamored about finishes, they may be seduced by them.
“Oftentimes, when you’re buying a really renovated apartment, you have to be careful you’re not buying just finishes,” he said. “You can make a windowless room in a basement beautiful with finishes, but it will never be a great apartment.”
The cost of finishing out an apartment can be marginal, though a full-blown luxury kitchen, for instance, could easily be a $200,000 expense, brokers said. But other attributes, such as location, size, layout, exposures and views, have more inherent value.
“The apartment is the big cost, and the finish out is the marginal cost,” Steinberg said. “If you’re buying an apartment because it has good appliances, you need to get your head read. That’s smoke and mirrors.”
As luxury finishes, such as granite countertops, stainless steel appliances, solid wood floors and marble baths become more commonplace in luxurious and even not so luxurious apartments, they are losing their distinction and in turn their value, brokers say. That’s a concern on the resale. Also, they may be dating the apartment.
“If you look at buildings from the year 2000, you see a lot of black granite countertops with maple cabinetry, and it looks like the year 2000, because everyone was doing the same thing,” Steinberg said. “You have to wonder where something a little special or different is happening today or are you in an apartment where all 80 units in the building have the identical thing?”
When it comes to the resale, sometimes buying into a renovation or conversion with lesser-quality finishes can be an advantage, said Daren Hornig, president and CEO of Dwelling Quest. These buyers may have the same mindset as those looking at finishing out “vanilla boxes.”
“There are benefits to a conversion scenario,” Hornig said. “If it trades at a discount of $100 to $150 a foot off a new luxury development, you can customize to your
taste.”
If you don’t want a Miele dishwasher and Viking stove, but want to go Bosch, you can. Hornig said he recently walked through a loft-type building finished with “Ikea kitchens” and “Home Depot bathrooms.”
Not only does that give the developer the marketing capability to price the properties lower and attract more potential buyers, it gives eventual owners the opportunity to upgrade finishes to their own tastes.
“Someone’s going to upgrade it, because you’re getting a 2,000-square-foot loft for $900 a foot,” Hornig said. “But now those upgrades will be customized, so in this building, there’s going to be 40 different units instead of 40 identical ones.”
Of course, a developer would be gambling that enough potential buyers have the time to renovate and the financial wherewithal as well, Hornig said.
Not all brokers believe developers are cutting corners on their rental conversions. Rick Dean, broker manager of Fillmore Real Estate’s Montague Street office in Brooklyn Heights, said the conversions he’s seeing in Brooklyn are total gut renovations. That includes University Towers, which Fillmore is marketing.
“My experience is most places that are redone are either gut renovated or built from the ground up,” Dean said.
In Brooklyn, private owners are more likely to spruce up a problem apartment with fine finishes than developers, he said.
“I think,” he said, “developers know better.”
Buyer beware: A primer
Brokers and buyers should take their time choosing a property, and have a construction expert of some kind to compare value, says Barry LePatner, a construction law attorney. They should review the development’s plans and specifications both the version provided by the developer and that on file at the city Buildings Department.
Buyers should also have their lawyer review the offering plan. Finally, if they decide to go to contract, buyers should have an engineer or construction expert inspect the apartment.
“Caveat emptor let the buyer beware,” says Daren Hornig, chief executive officer of Dwelling Quest. “They need to do their due diligence and understand what they’re getting.”