Condo Deconversion

I have seen many discussions out there of condo conversion, but I am wondering if anyone knows anything about turning a condo into multifamily units. The condo I had in mind is an eye sore in class A location and it is pretty clear that the HOA is broken. There is always the slow option of buying each one as it hits the market, but wanted to hear some of your experiences or thoughts on how I should approach this.

Comments (36)

Best Response
Sep 15, 2017

I don't have a lot of experience in this but my general sense, just from listening to others who have attempted this, is that it's relatively difficult. The problem is that you will probably run into a situation where one or more savvy owners in the complex realize what you are doing, know you need to buy their unit, and then they will hold out for a much higher price than you are willing to pay for each unit. You'll also run into a timing issue because some people won't want to sell at all or in a timely manner, so if you don't execute well you could get stuck holding the bag on a large number of units without a real way to monetize effectively in a reasonable time frame. Coupled with the fact that you'd have to effectively 'undo' the condo mapping from a tax/parcel perspective, dissolve the HOA and any easements, CC&Rs, etc. You can see very quickly where the increased $ you'd have to outlay up front would probably evaporate any increased yield you would get trying to do a value add apt conversion. Not saying it's impossible but you have to be really careful I would think.

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Sep 16, 2017
MonkeyWrench:

I don't have a lot of experience in this but my general sense, just from listening to others who have attempted this, is that it's relatively difficult. The problem is that you will probably run into a situation where one or more savvy owners in the complex realize what you are doing, know you need to buy their unit, and then they will hold out for a much higher price than you are willing to pay for each unit. You'll also run into a timing issue because some people won't want to sell at all or in a timely manner, so if you don't execute well you could get stuck holding the bag on a large number of units without a real way to monetize effectively in a reasonable time frame. Coupled with the fact that you'd have to effectively 'undo' the condo mapping from a tax/parcel perspective, dissolve the HOA and any easements, CC&Rs, etc. You can see very quickly where the increased $ you'd have to outlay up front would probably evaporate any increased yield you would get trying to do a value add apt conversion. Not saying it's impossible but you have to be really careful I would think.

A fantastic example of this is Hilton Head Island. So many of the formerly high-end condos need renovations and/or a complete tear down, but good luck getting that accomplished in a condo building.

    • 3
Sep 16, 2017

Met a guy who does this on a massive level. He starts by buying one condo, then slowly buying up others until he controls the HOA. Then he makes it hell on the other condo owners until they concede and finally sell to him. He's been really successful with it. It takes time and you have to be willing to let you money sit for a while. Best part is that you can buy the condos, rent them out and generate a CF from it while you're waiting on the other condos to concede.

    • 1
Feb 27, 2018
CRE SC:

Met a guy who does this on a massive level. He starts by buying one condo, then slowly buying up others until he controls the HOA. Then he makes it hell on the other condo owners until they concede and finally sell to him. He's been really successful with it. It takes time and you have to be willing to let you money sit for a while. Best part is that you can buy the condos, rent them out and generate a CF from it while you're waiting on the other condos to concede.

which also depends on the HOA - some have clauses that restrict the amount of rental units in the building

Aug 8, 2018
CRE SC:

Met a guy who does this on a massive level. He starts by buying one condo, then slowly buying up others until he controls the HOA. Then he makes it hell on the other condo owners until they concede and finally sell to him. He's been really successful with it. It takes time and you have to be willing to let you money sit for a while. Best part is that you can buy the condos, rent them out and generate a CF from it while you're waiting on the other condos to concede.

What he's doing is highly unethical, even if it's legal. Obtaining a controlling share in the HOA and then making people's lives miserable until they sell is straight-up wrong. I'd rather never be rich than live my life like he does--as a sociopath.

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Aug 8, 2018

Agreed, imagine trying to explain to your kid what you do for a living...

    • 1
Sep 16, 2017

I've seen one firm do this in SoCal, but this was during the recession when only a handful of condo's actually sold. He only had to negotiate with a few private owners after buying 90% of the condo's from the developer.

Feb 27, 2018

Hi enti98, just trying to help:

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If we're lucky, maybe I can guilt some users to help you out: @Kim-Johnson @Porzingod1 @Porzingod1

Hope that helps.

Sep 16, 2017

You could approach the board of the HOA directly. Could be a faster route to a potential yes or hard no.

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Feb 27, 2018

Hi C.R.E. Shervin, check out these links:

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No promises, but thought I'd mention a few relevant users that work in the industry: @DC_Transplant @Stoo @drakea07

Hope that helps.

Feb 27, 2018

PM me. I have extensive experience in the space and have worked on a few deals like this.

Feb 27, 2018

Any chance we could keep this conversation in this thread? Would love to learn about this as well.

Also, what's MCI?

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Aug 8, 2018

This question actually speaks to the larger question about condo regime winddowns. The condo is a relatively new animal in the United States (about 60 years as a widely-used model), and only now are buildings starting to really become obsolete in vast quantities. The reality is, there are not many good ways to wind down a condo regime--you have to acquire 100% of units one way or the other. There is a reason that condos generally don't appreciate at the same rate as non-condo properties--as the building depreciates, maintenance and capital expenditure costs start to rise beyond the rate of appreciation, causing condo fees to rise beyond the rate of underlying land appreciation. So your condo fees rise each year to pay for maintenance/capex but your underlying unit value may stagnate.

My friend grew up in a vintage 1970's condo building; his family pays something like $1,500/month condo fee for a unit that would sell for only about $250,000--in a Class A- neighborhood. In my mind it would be in the HOA's best interest to input a provision that allows for a developer to buy out all of the units under some form of pre-determined calculation (that would end up paying out owners well above market value and making people whole who may have negative equity). I'm thinking about proposing this to my own HOA, although I fear people may fail to understand why my proposal benefits them.

Sep 16, 2017

Lots of variables. There was another thread like this a month or so ago. Lots of discussion about HOA dues.

A major driving factor, aside from a nice building to convert would be parking. You're not going to get your subdivision map in SoCal if you don't have proper parking ratios. Parking in general drives all development.

Feb 27, 2018
undefined:

Lots of variables. There was another thread like this a month or so ago. Lots of discussion about HOA dues.

A major driving factor, aside from a nice building to convert would be parking. You're not going to get your subdivision map in SoCal if you don't have proper parking ratios. Parking in general drives all development.

To piggy back, a condo conversion is no easy task. There are a hundred variables on when and why condos. If your only experience is what you read in a book, I would highly suggest not to try your hand at a for sale product like condos until you are more experienced. If you do, make sure you have a very good real estate attorney and insurance carrier on your side. You need to make sure you have the money to cover your liability for ten years. I can't emphasis enough, there is a TON of liability for you as the developer and your GC long after you sold your units.

Feb 27, 2018

Anyone have a link to a solid online resource discussing condo conversion in more detail? I am looking for more high level/general info. I don't plan to actually go do one myself.

Feb 27, 2018

General Question on this process

  1. Is there a percentage of a HOA that needs to vote for a bulk-sale in order to proceed with the sale of a condo building? Does it depend on the particular HOA?
  2. If the HOA approves, all condo owners are forced to accept the price that the HOA agrees to?
  3. If the sale is successful, can the buyer immediately change the use to multifamily or will it need to receive new zoning approvals?
Feb 27, 2018

bump

Sep 15, 2017
  1. Not sure if this is what you're asking but I'm pretty confident (95%+) that you can't sell 'the building' in it's entirety unless you own/control every unit in the condo. You can use controlling interest in the HOA to vote to dissolve the HOA, but if there's other ownership they can retain the parcel/part of the condo map that they own unless you can buy them out. So you could dissolve the HOA and then that would allow you to sell whatever interest you own, but unless you own 100% of the units in the building it's going to be a hard exit strategy.
  2. I don't think you can force the condo owners to accept any price - even if you control the HOA they still own their unit.
  3. I don't think zoning change applies here since it's already zoned for multifamily use. Whether it's apartment or condo should be irrelevant unless I'm missing something.
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Feb 27, 2018

This makes sense. Thanks @MonkeyWrench

Sep 16, 2017

No zoning change necessary to go from MF to condo and/or condo to MF.

No forced sale can be imposed HOA. They're essentially just a property management company.

    • 1
Feb 27, 2018

Thanks @PacNumber

Aug 8, 2018

Went through this recently on a deal (it's a garden property). Disclaimer, I am not a lawyer (thank god).

  1. You can sell your interest in 'the building', but you can't sell something you don't own obviously. You can sell your bulk interest. Also, a lot of this depends on your control over the HOA (i.e. do you own 25%, 50%, 90%, etc.) There are different procedures for this in all HOAs and it also depends on what state you are in. Talk to local counsel here; preferably the guy who wrote the HOA.
  2. Depending on your HOA docs and state, there is a mechanism in which you can trigger a forced sale of the condos. The process of determining the value of those condos that can be tricky (i.e. appraisal for each individual units as a condo and another appraisal of the property as if it were an apartment building) and may not yield a price that you're excited about. However, these condos are often hard for a new buyer to finance and someone likely has to pay all cash for the condo (which only the owner of the other condos can / wants to do). There are some murky legal areas here about which entity can buy the new condos (i.e. does it need to be a new entity?) which can trigger some tax reassessment type dynamics. Also, it is a PR nightmare for some real estate company to force granny to sell her condo so consider that. Easiest time to do this is at or before the sale of the asset to the next group. Can be very accretive in a bunch of ways (i.e. why we're going through the brain damage here).
  3. Agree with everyone else here you shouldn't have any zoning issues.
Feb 27, 2018

For your number 2. It seems to be in contrast to what @MonkeyWrench stated. Are you saying that the HOA docs could trigger a forced sale of the entire building?

Sep 16, 2017

I have a client I sold 30 units to back in 2008. The complex is 150 units. So few owners attend any HOA meetings because so many are rentals that my client essentially controls the voting for the community. They're great owners but they have a ton of control if they chose to use it.

Aug 7, 2018

There is no doubt to say that condos are the finest decision in order to invest. However, it is also known as multifamily houses due to several advantages.

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Aug 12, 2018

If the complex is really falling into disrepair, could you partner with the city to file for eminent domain?

Aug 8, 2018
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Sep 16, 2017