Buying a condo conversion in LV? It's caveat emptor

Buying a condo conversion in LV? It's caveat emptor

BY TONY ILLIA
BUSINESS PRESS

March 13, 2006

Betsy Dyson should have known better. After all, she is an acquisition specialist with Real Market Experts.

But when she bought a converted condominium at Pirates Cove and Buffalo roads in the southwest valley last year, problems soon followed.

"I purchased this property because it's located in an area where I want to live, and it was affordable," Dyson said. "But there are things you can't see." The 650-square -foot unit cost about $114,000, or $175 per square foot, in November. It was bargain-priced compared to single-family detached homes, which ran about $345,130 at the end of 2005.

Dyson's hot-water heater, however, started leaking just four months after closing escrow. The model, it turns out, is now obsolete and that means replacing it with a modern equivalent, which also snowballs into bringing the unit's aging pipes and wiring up to current building codes. It would cost hundreds of dollars to repair and none of the upgrades are covered under her one-year homeowner's warranty.

'SELLING PROBLEMS'

"It didn't cross my mind that things weren't up to code," Dyson said. "They are going around fixing up these properties, making them look nice, but what they are really selling are problems."

There were 42 apartment communities totaling 14,399 units that were being converted at the end of January, reported The Bentley Group, a Las Vegas real estate firm specializing in multi-family products. Fourteen of those conversions are now complete, 10,626 units have sold and 8,917 have actually closed.

Condominium conversions are the valley's newest and fastest growing housing trend because of the region's population growth, diminishing land supply and rising construction costs. Median new home prices rose 53.1 percent during the past five years, making affordable entry-level housing increasingly elusive, reported Home Builders Research, Inc., a Las Vegas residential tracking firm.

Developers and real estate investors are attracted to conversions because of the high rate of return, quick turnaround time and low-risk profile. It typically takes 6 to 8 months and costs around $500,000 to complete improvements to an apartment building before reselling it as a condominium complex.

LITTLE THREAT OF SUITS

There also is little threat of construction-defect litigation from homeowners since many of the buildings were built more than 10 years ago, which puts them outside the state statute of limitations.

Even if it were a newer complex, the owners can claim that construction-defect laws don't apply to converted complexes since it was originally built as rental property for commercial purposes.

" Las Vegas, before this boom, had never seen any condo conversions. So nobody knows how it will all shake out," said Christopher Bentley, president of The Bentley Group. "We're forecasting that conversions will continue, but on a more steady pace than what we've seen in the last two years."

Owners often make only minor cosmetic upgrades to apartment buildings before repositioning them for quick sale. They focus on new paint, carpeting and landscaping as opposed to more costly items like heating, roofing and plumbing.

Homebuyers may see a newer looking product, but dripping pipes and electrical shorts may lurk unseen behind the walls. If the homebuyer encounters a problem, the developer can defer repair responsibility to the building's original contractor.

"A lot of owners are taking the position that if they didn't touch or upgrade the area then they don't have to bring it up to current code requirements," said Leon Mead, a construction attorney with Mead Pezzillo LLP. "After 10 years, there is nothing the homeowner can do. The home is being sold 'as is.'"

CONVERSIONS JUST BEGINNING

The converted condo market is still in its infancy with local homebuyers, although several complexes have been converted and sold across the valley. Legal experts, as a result, feel that the worse is yet to come.

"In California, condo conversions started before the state started spending a lot of time looking at construction-defect cases," Mead said. "The problems are just starting to bubble to the surface in Las Vegas. It could create a new watershed of defect lawsuits locally."

The recent Beazer decision in the Nevada Supreme Court, making class-action defect suits on single-family home subdivisions harder to pursue, will likely push trial attorneys in a new direction. And many insiders feel that condo conversions are the next likely target.

Although units are sold "as is," homeowners may have a reasonable expectation that it meets minimum standards, creating a flash point for legal dispute.

"One of the few areas where trial attorneys can get class status is with these connected homes," said Mead. "It will be the next avenue for defect attorneys. And we won't see answers on what extent owners will have to disclose code compliance until cases are filed with our local courts."

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