In Chicago, Illinois, 75% of unit owners can force a bulk sale and termination of the condo association.
By Deborah Goonan, Independent American Communities
Although the real estate market has improved in some parts of the country, condo sales in some markets have lagged behind. In Chicago, news outlets are reporting the hottest new trend, condo deconversions – the bulk sale of condo units by their individual owners to a real estate investor who intends to either convert the units to rental apartments or demolish the building and develop the new site from the ground up.
Readers of this blog know that I have covered the issue of condo deconversions that were forced upon condo owners as hostile takeovers. The trend has been prevalent in Florida and other parts of the U.S. and Canada for several years.
Investors have taken advantage of distressed condominium projects, acquired units at low prices in foreclosures or short sales, and then, by vitrue of holding a majority or supermajority of voting interests, have taken over their condo boards. The next step was to initiate a condominium termination agreement, and, because the investor held a controlling voting interest in the association, minority owners have usually been unable to block a termination attempt. If the investor’s first attempt was not successful, the second attempt often was.
Unfortunately, many unit owners were under water on their mortgages, and were only offered a fraction of what they had paid for their condos during the boom years when prices were high. They were nonetheless forced to sell their units, despite considerable financial loss.
Now eager real estate investors and developers are reportedly offering premium prices above current market rates to acquire certain buildings in highly desirable locations.
But, while some condo owners will find an investor’s offer attractive, others may still owe more money on their mortgage than what the investor is willing to offer – even at a premium.
As the following article explains, in Illinois, 75% of unit owners need to vote in favor of selling their entire condominium building or project in a bulk sale. The remaining 25% of unit owners are then forced to sell their units, even if they voted against the deconversion.
When is selling entire condo building the best move?
Pamela Dittmer McKuen Pamela Dittmer McKuen, Chicago Tribune
Community Living, may 30, 2017
A condominium association enters into myriad negotiations for goods and services. Sometimes the best deal is to sell itself. That is, to sell the entire property to an investor or multifamily developer who will turn the condo units into apartment rentals.
The process is known as a bulk sale or deconversion, and it’s trending across the country.
“I’m seeing a lot of interest in it,” said association attorney David Sugar, a partner at Arnstein & Lehr in Chicago. “It could be a very good thing for certain associations, but there are lots and lots of problems that need to be planned for in order to for it to work.”
Deconversions are a reversal of the boom years of the early 2000s, when many apartment buildings were converted to condominiums.
Condo buyer considerations
No matter how the industry may try to spin it, the condo deconversion game produces winners and losers. And the losers tend to be condo owner-occupants, some of them still paying off big mortgages. Likewise, condo owners who have invested considerable money in upgrades to their units stand to lose money in a forced sale during a deconversion.
If you are buying a condo purely as an investment, you may be able to purchase and resell at the right time. Perhaps you are willing to take a risk, and you feel you can absorb a loss on a forced sale.
But if you intend to purchase your condo as your primary residence, or you are hoping it can be your retirement housing some day, beware that the deconversion trend might not work in your favor.
As a buyer, be aware that many of your potential neighbors may be tenants, their units owned by investors with no emotional attachment to their condos. At any time in the future, those investor-owners can easily decide to sell their units to a bulk buyer, leading the way to a condo termination and deconversion, and a situation where you would be forced to sell your condo, like it or not.
Consider your equity position and the timing of a potential sale one, two, five, or ten years in the future. Would you lose money if you were forced to sell on short notice? If so, would you be able to afford to purchase replacement housing?
You may wonder, what if you are able to locate a condo in a building or project with a majority of owner-occupants? Would that eliminate your risk?
Just like single family home neighborhoods, most condominium associations go through buying and selling cycles. Young singles get married, couples start families, often prompting the move to a larger single family home. Older residents may need to move out to live with their adult children, or relocate to assisted living. When an owner dies, heirs usually sell the unit.
But that is just part of the cycle.
As condominium housing begins to age, assessments often increase to pay for increased costs of maintenance and repair. Conversely, if assessments remain low, maintenance is often deferred, and living conditions become less desirable.
At this point, owner occupants that can afford to do so begin to escape condo life. They either move out and lease their units to tenants, or sell their units to new buyers. New buyers are more likely to be investors. The further along a condo association is in this cycle, and the better located, the more likely there will be a deconversion in the future.
Note that an older condominium in a less desirable location will be less likely to attract an investor willing to “save” a struggling condo association by purchasing the entire building or project at fair market value. A premium sale price is unlikely.
Read more about the deconversion trend in Chicago
As the following references point out, condominiums are little more than real estate commodities for real estate investors. Where there is money to be made with deconversions and redevelopment, market conditions do not favor long-term owner occupancy of condos.
CRAINS: Uptown condos sold, switched back to rentals
Oct 4, 2016 | News
CBRE Expands Condo Deconversion Practice in Chicago
by the Editors of Multi-Housing News
Chicago Midwest Condo
Turning condos into apartments can make good money for developers, investors … if they avoid the pitfalls
July 05, 2016 | Dan Rafter | REJournals.com