Based in Las Vegas, Douglas french writes about the  economy and book reviews. 


Apartment conversions are all the rage in Las Vegas. Anyone looking for an entry-level priced home in a nice area will likely be relegated to buying what amounts to be — an old apartment.

More than 17,000 apartment units in Las Vegas are to be converted into condos, according to Dennis Smith, president of Home Builders Research. Approximately 7,500 are currently on the market, with another 10,000 to be converted by year-end.

These former apartments of various vintages are priced from $120,000 to $250,000. Buyers of lower priced units will park under carports, while higher-priced units include garages. All are affordable alternatives to the $304,734 median new home price.

This writer can attest that business is brisk in condo conversion land. I toured a 424-unit conversion project last week and was given the opportunity to take the plunge before the units would go on sale to the general public the next day. Insiders had snapped up all but a dozen or so of the units according to the agent who showed us around.

The model units in the complex sported the fine touches of professional decorating and that's primarily what we saw; however, we were warned that none of the units that were actually for sale looked like the model units.

One for-sale unit was available for inspection. Although it was clean, the cabinets looked like they had been constructed from leftover plywood scraps, and when asked the age of the appliances, the sales woman couldn't even hazard a guess. If we wanted to buy a unit, a check for ten percent of the purchase price secured a reservation ($5,000 for buyers that intended to live there). And, it was made clear that we were not to dawdle, the remaining units would likely be gone the next day.

The basic two bedroom, two bath unit, measuring just over a 1,000 square feet, was selling for $184,500 or thereabouts, depending on location and whatnot.

These units were being rented for $800 per month — give or take a few bucks. So that's what the would-be condo punter could expect for rent. But, the saleswoman was quick to point out that each unit's homeowners dues would run over $150 per month and the master-planned community dues were $69 per month.

Thus, for a cash paying investor the return would be less than 3.8 percent, assuming a diligent warm body could be retained to pay the rent each month. A tepid return even when matched against 5-year US Treasury notes, with many times the risk.

But who in their right mind pays cash for real estate?

Over fine wine and French cuisine after the tour, I was enlightened about the future of Las Vegas real estate by a mortgage broker and fellow condo tour taker. He called these units "no-brainers." "These will be $300,000 units in five years," he exclaimed.

He scoffed at my suggestion that the price per square foot seemed rich. "People freak out about $200 per square foot. It will be $300 per square foot in a couple of years, maybe $500." Where had he received this clairvoyance? "I'm from southern California, I've seen this happen already."

Although I believe that it's a certainty that rents will be increasing in Las Vegas — due to the large numbers of apartment units being sold and torn down with few being built to replace them — I expressed my concern that for the short run, if debt were used to buy, the monthly cash flow would be negative.

"No way," the mortgage master said. "I'd take out a negative amortization, interest-only loan that you would only pay 1.75 percent interest on for the first five years. After five years, who cares what the payment will be, you'll be cashed out."

Of course during this five-year hold period, the unwitting borrower will be adding more principle to the loan balance every month, given that the note's rate of LIBOR plus whatever will be more than the 1.75 percent being paid. But, that's OK because real estate always goes up in value.

"Values will go up eight percent a year minimum," the mortgage man explained.

I said something to the effect that I thought real estate values were already inflated beyond reason, and asked him what would happen if in five years we could only sell the condo for what we bought it for?

"That's impossible," he snorted, "There's like maybe a one percent chance that could happen."

"I think you're confusing the future with the past," I countered. "How much will we lose if values don't go up at all?"

"I dunno," he said, "you might lose 10 percent."

Of course, he understates the pain if heaven forbid these early 1990's apartments — I mean condos — can't be peddled for more than $184,500 in the summer of 2010.

A person will lose six percent on the sales commission for sure, and of course there are loan fees and closing costs that add to the cost right away. Plus, the carpet, appliances and linoleum will likely have to be replaced to move these units if the market is anything less than en fuego. And, who's to say LIBOR will stay tame over the next five years.

But, while most everyone — like my new mortgage friend — has seemingly been getting rich in Las Vegas real estate, I have been putting extra money toward my mortgage balance and buying gold. Silly me.

Being so wrong for so long, I thought I should get another opinion on these things. I related my condo tour story to a long time Las Vegas real estate appraiser. His response: "condos are the last segment of the housing market to catch fire in a boom and the first to crater in a bust."

Management: Enemy of Enterprise