Condo Deconversion Forced on Owner

Condo deconversion is being forced on all owners. Is that fair?

Q: My daughter purchased her first home – a one bedroom condominium in a suburb of Chicago back in 2017. Recently, she was notified that the building was going to go through a condo deconversion become a rental building. We are questioning all parts of this move as very little real information has been made available.

Is it legal to deconvert a condo building? It seems like she has no choice in the matter. The price they’re offering is the same for all one bedroom condos. This seems unfair as her condo has been updated and she has all new appliances and granite in the kitchen. She also updated her electric main panel box.

This is her condo and she planned to stay until she could buy a small house. And, it seems like it would be difficult for her to sell it herself now. Can you give us some guidance?

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A: A condo conversion and a deconversion are usually both legal. A conversion is where a real estate investor decides to convert a rental building into condominiums. In a deconversion, the opposite happens. A rental building investor buys out all of the condominium units and creates a rental building.

But just because it’s legal, doesn’t mean it’s easy to do. A condo conversion will require giving notice to all of the tenants. The investor must satisfy any state or local laws regarding the timing of the notice you must give to the tenants, the time they have to move out if their leases are expiring, and any options the tenants may have to purchase units in the newly converted building.

With a deconversion, the investor buyer may buy up condo units one by one or may make an offer to the building as a whole for all of the units. Here again, the investor buyer must abide by any local or state laws governing the purchase of the condominium units. Plus the investor must also comply with the condominium associations governing documents.

Condo Reserves: Buyer Beware

Your daughter bought into a condominium building that has certain governing documents. Those documents may permit the sale of the building as a whole. But, and here’s the big but, the association documents could require 100 percent agreement by each owner of the building to sell to the developer. Other governing documents may provide for a lower number of say two-thirds or three-quarters of the owners to agree to the sale.

By the way, when we talk about the percentage ownership agreeing to sell, that usually means the percentage of owners given their ownership interest in the building. A one-bedroom condo likely has a smaller percentage ownership in a building than a three bedroom condo. So you can still sell the building once you reach the percentage of ownership provided for in the governing documents or applicable laws.

Some local and state laws require a certain minimum threshold of owners to agree before the property can be deconverted. In Chicago, 85 percent of the condo owners must vote to pass the deconversion. We suspect that the prospective buyer of your daughter’s building has made an offer for the building as a whole.

Condo Reserves: A Growing Issue

Now, all of the unit owners will get together to discuss the offer from the investor. They will get time to decide whether to vote in favor of selling to the investor. The building will then set up a time for a vote. If the vote passes, and complies with the requirements of the governing documents and applicable law, the building will be sold to the investor.

In some situations, dissenting unit owners may have the right to go down a different road with the investor, but that depends on the governing documents or applicable laws. For example, a dissenting unit owner may request that their unit be appraised and be paid the appraised value.

Sam has worked on many deconversions. He has found that investors prefer to get all of the owners to agree to sell and get the deal done all at once. So, investors might approach individual unit owners and try to persuade them to vote in favor of the sale. At that point, your daughter could let the investors know about the improvements she made to the unit and hope they agree to pay her extra for the improvements. If they offer her enough, it might make it worth her while to sell to the investor.

Condo Deconversion Might Net Owner More Money

Another thing to note. Frequently, investors are only willing to proceed with condo deconversions when the investor can offer more than the going rate for the units. In this case, your daughter should be able to get more from the sale to the investor than if she tried to sell the unit in the open market. The reason for this is that most unit owners won’t sell to the investor if the investor is paying them less than what they would get if they sold with a broker. The unit owners will only agree to sell if they do well with the sale.

We’ve heard that in Florida, there is talk of having older condo buildings deconvert. Some of this is due to recent legislation that requires condo associations to have sufficient funds on hand to make necessary repairs to their buildings. In some cases, condo buildings are increasing monthly assessments to balance out reserve funds with required improvements. But some buildings are sending out extremely expensive special assessment notices.

If the owners don’t have the funds to pay for these special assessments, they try to sell their properties. If enough owners try to sell at once, it drives down the property values. A savvy investor would step in at that point and offer to buy the condo building. The investor can make the repairs and then rent out the units.

At the end of the day, if every unit owner in your daughter’s building votes to deconvert, she will have to go along with that. It is one of the challenges of owning a condo versus owning a single family home.