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Rental Conversions and Pricing

Written by Posted On Wednesday, 16 August 2006 17:00

There's an interesting and important dynamic occurring in the rental conversion market that Realtors need to be aware of.

Brokering rental conversions is what I do, but until we conducted a focus group among Realtors recently for a new apartment we were converting, I had not given the resale aspect of rental conversions much thought.

If you are in a major rental conversion market you no doubt are reading the ads extolling the virtues of "free upgrades." At the sales office you learn that instead of paying a higher price for the upgrades, your prospect can purchase the unit "as is" for a lot less money.

Sound good?

The correct answer would be "yes" if your client buys "as is," and "no" if your client purchases an upgrade. Most will go for the upgrades.

Let's say the upgraded unit costs $250,000 and your prospect can purchase the same unit in the same building for $225,000 "as is."

Here's the problem.

When these two buyers, both owning the same unit in the same building decide to sell, which seller do you think will benefit the most?

The seller who originally purchased "as is" will benefit the most at appraisal time, because the "upgraded" unit cost more to purchase and the appraiser will not assign the same values as the developer probably charged.

The solution, according to the focus group Realtors is "consistent pricing," a term with which I was not familiar.

Consistent pricing means the developer has priced all units the same price and included the same upgrades in all of the same units in the same building.

Consistent pricing protects all buyers because they are all buying at the same price (not including premiums for views, location and time of purchase).

How critical is this issue?

To me, it is so critical that we are recommending to our rental conversion clients to offer all luxury units and not allow anyone, including tenants, to purchase "as is" if they want the local Realtors market to get behind the sellout. Not only is this the right thing to do, but it gives the developer a competitive advantage, especially if they are the first in the market to do it.

Does this mean you should not take your prospects to see properties that offer both "as is" and "upgrade" units? Not at all. If your prospect doesn't plan to move or just plain can't purchase unless it is at the "as is" price, then you are doing them a favor, as long as they understand the resale probabilities.

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David Fletcher, NHCB

Lifetime Achiever David Fletcher is Founder and CEO of New Home Co-Broker Academy LLC, home of the New Home Co-Broker (NHCB) designation. More than 4,500 real estate agents have completed the  Academy's course, How To Build A New Homes Niche, a three-hour online course, and earned their NEW HOME CO-BROKER (NHCB) certification. 

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