Striking Gold in the Denver Condominium Market
Denver was founded on the cry of “There’s gold in them hills!” and to hear Tim Wayne, CCIM, a broker with Re/Max Central Realty talk, you begin to wonder if the streets are now paved with the shiny stuff.
In a manner of speaking they are, but it’s in the guise of apartment buildings built between 1902 and 1911. Wayne’s success at converting these early 20th-century buildings into condominiums for a 21st-century market of young professionals has him riding the crest of a new gold rush called gentrification.
Since returning to Denver in the mid-1990s he has completed 24 conversion projects in the Capitol Hill and Uptown neighborhoods. “In my 27 years of commercial real estate brokerage, this is the most fun I’ve had and [it’s been] the most profitable,” he says. And this is from a broker who left town in 1991 because business was so bad.
But Wayne isn’t the only one who’s come back to Denver. “Everyone is moving back into the city,” he says. In fact, after losing residents for the past three decades, Capitol Hill has gained 4,000 new residents in the past four years, and experts estimate 3,000 more will move in by 2003.
The Right Move
When Wayne returned to the area and began selling apartment buildings, one of the first things he noticed was a disparity in price. “Apartments were selling way below condos,” he says. Working with an investor, he decided to try his hand at conversion. The investor doubled his money in a year.
It was the right move at the right time. “The biggest thing in real estate today is the gentrification of America,” Wayne says. “People want to be in an established neighborhood, not a disconnected suburb. And they want to be where the action is, walk to restaurants, and meet for an espresso.”
While urban rebirth has been happening for several years in major markets, Wayne was one of the first to tap into this potential in secondary markets.
And it’s not just Denver. “I’ve scouted other secondary cities that have no conversion going but have the properties and no restriction against converting them.” he says. “Why is there no business going on in these cities? Because [developers] haven’t looked at the numbers.”
The numbers do sound good. “Typically on day one, we put in 15 percent of the entire project costs, usually around $300,000 and a year later, we get back about $600,000,” he says. “This is in addition to selling commissions and other fees. A lot of time we do way better than that. Sometimes we triple our money and once we got $4.5 million out.”
But Wayne works hard for his profit, managing all aspects of the conversion process — from acting as a general contractor on the rehab, to overseeing legal issues and marketing. “Mostly it tells you how good you are,” he says. “If you can juggle five balls and I give you 40 more, can you keep them all in the air?”
Open, Open Space
Working in his favor is the fact that he has matched up his housing stock with the appropriate buyers. The units sell to 25- to 35-year-old professionals who often are first-time buyers. They are sharp, educated buyers looking for appreciation value. “They know if they buy it for $98,000 they can turn around and sell it in a year for 20 percent more,” he says.
While he sometimes hires a decorator to help with the finishing touches on the model units, Wayne has distilled the conversion process down to its essence by concentrating on what this market is looking for: a mix of old ambience and new convenience.
“What they want is high ceilings, sunny, bright rooms, and open, open space. We take out almost all the walls. We open doorways to 6-foot-wide spaces. We keep wood floors, any natural woodwork, and fireplaces. We create big square rooms and one 45-degree angled space. We do all new kitchens. In the bathroom, we keep the old clawfoot tubs, reporcelainize them, and add new other bath fixtures,” he says.
Along with cosmetic changes he puts in all new electrical and new vertical stacks for plumbing. “But you have to be careful,” he warns. “If you open up the walls, is there asbestos? Lead?” The age of the building and his knowledge of construction help him determine how far to go with the rehabilitation.
Another potential trouble spot is the quality of the construction. “When it comes to construction, you have to have a noble mission,” Wayne says. “For most developers, the mission is take the dough and run. To me, success is going to that first homeowners’ meeting, when you turn the condo association over to the residents, and you see them almost smiling and there are no lawsuits against you.”
To avoid repercussions, “you need to go into this for the right reason, creating a nice place to live,” he says. But Wayne also cites the current “consumerism mentality” and the fact that most of these buyers are former renters who don’t really consider themselves or their fellow condo neighbors as homeowners. They view the developer as the landlord, responsible for continuing maintenance.
Before construction and marketing, of course, Wayne gets the financing in place and plans the conversion process. To buy a building, he gets a purchase/construction loan, usually within 60 days. He figures that construction on a 30-unit building takes about six months and he wants to be out of the building in a year. “You need to map out how you want the tenants to move out and construction to roll in. Lenders want things done in phases. Say you have a 10-story building, they want it sold in five phases. So the first phase is 20 units and they want 70 percent of that sold out” within a certain time, he says.
Price fluctuation is key to meeting his projected deadline. “You decide how many units you need to sell to get out by your projected date. If you’ve got momentum going, you sell at full price. If they’re not selling because it’s the beginning of January, then you drop the price 10 grand. You do what you have to do to keep them selling.”
The other half of that equation is keeping a handle on construction costs. On most projects, Wayne acts as general contractor, subcontracting work to what he calls the “little guys who are cost-effective,” he says. “Bigger projects require bigger companies and they are notoriously more expensive — costs are about 50 percent more per unit.” Part of the challenge is building a “construction team that is fun to work with and that will work well together,” he says.
Wayne’s rehabilitation of 24 buildings has contributed to the upswing in property values of Denver’s Capitol Hill and Uptown neighborhoods. Prices have gone up so much that it is getting harder to find a bargain. “We used to be able to buy a building for $18,000 a unit. Now it’s up to $65,000, sometimes $100,000, just for raw space.”
However, Wayne is thinking of taking his show on the road to other secondary markets where little conversion is occurring. In these cities, as in Denver, he will follow what he calls “the sensible approach.”
When he zeros in on buildings that look good for conversion, he talks with other brokers in the area to determine the market, the improvements necessary, and the minimum sales price. Then he decides how to configure the units, picks a theme for the building, develops a bid sheet on hard and soft costs, and prepares a pro forma on conversion. He also puts together a short appraisal of the property as apartments. By comparing the two values he determines whether the differential is great enough to offset the investment, time, and risk.
His advice to first-timers? “Find someone else who has done it all and hire them to lead you through your first conversion,” he says. “Think about it realistically. Do you have 15 major contractors you can work with? These are major thresholds. There are much easier projects around.”