Should Your Condo Association Consider Deconversion?


Condo DeconversionIn some regions of the country, condos are a hot commodity. In fact, they are such an attractive type of property that investors are vying for the chance to buy them up and turn them into rental properties. This is most likely to happen in areas where the cost of new construction for apartments is high, rents are on the rise, and interest rates are low. Condo deconversion is controversial for many owners, but it does have some benefits. Here are some factors for the condo association to consider if an offer is presented.

Condo Deconversion Can Be Hostile or Friendly

Ultimately, the decision about whether or not to convert is made by the condo association. In many cases, only 75% of the members must vote “Yes” for the deconversion to proceed. That means there may be some owners who don’t want to sell.

In some states, real estate investors have participated in hostile takeovers of distressed condo associations, buying up foreclosed condos or investor-owner units until they own enough of the property to force the sale of the rest. In healthier markets, investors are often willing to offer condo owners a premium price (sometimes up to 40% above market value) to coax them into selling.

Who Loses Out in a Deconversion?

Condo owners who owe more on their mortgages than their units are worth will likely oppose selling. The price they get, even at a premium, may not be enough to pay off their debt. Condo owners who have invested in significant upgrades may also resist a sale, since they probably won’t be reimbursed for all the improvements they made. Other condo owners purchased units so they would have some place to live long term—maybe with plans to retire there. They will be hesitant to consider selling if they suspect they will have to move out.

Who Wins in a Condo Deconversion?

As Deborah Goonan at Independent American Communities points out, condos have a life cycle. As the units age, the costs of maintenance can increase, causing a rise in assessments and higher fees for owners. They may want to get out from under these fees and move somewhere newer. Those with growing families are often prepared to move into single-family homes anyway, while seniors may be ready to sell and transition to assisted living.

Obviously, the investors are always on the winning side of the table or they wouldn’t be making an offer in the first place. In the end, it comes down to negotiation a win-win. Here are a few of the top concerns that members may have:

Will Condo Owners be Forced to Move?

In most cases of “friendly takeovers”, investors aren’t looking to kick people out. Instead, they may be happy to have ready-made tenants with a proven track record of making housing payments on time. Of course, residents will need to negotiate their leases with care to avoid surprises.

What Happens to Reserves?

These would technically belong to the investors. But they may be willing to disburse them to the unit owners to cover closing costs and other expenses.

How Will the Property Be Maintained?

A savvy buyer will have professional property management ready and waiting to take care of their investment. Condo owners who want to stay in their units will need to understand if any of the amenities they currently enjoy will be impacted.

Regardless of the final decision, condo association members considering deconversion should remember that they will probably still be living next to the same neighbors after the sale. So, good communication is essential for keeping things friendly.

Has your condo association been approached with a deconversion offer? Talk to our specialists about how to manage this process.

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