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April 25, 2007
Condo Conversions - Buyer Beware
Condo Conversions - I have talked about them before. ...All I can say is ... Buyer Beware!!!!
Condo conversions are big business - converting apartment buildings to condominiums is a money maker - well, it is, that is if the market is right and the units sell quickly.
However, there are some very difficult stories out there regarding conversions. Here are some of the things that you need to know about a conversion. Turnover of an old building with deferred maintenance to a homeowners association, without sufficient reserves to modernize, can leave the buyers with a big headache .... and worse, a big expense, often that few involved can afford.
Condo conversion purchasers tend to be people who have lived in the building, or similar apartment buildings, and have not yet owned a home. They tend to be very naive. They are often excited at the prospect of home ownership. The investment to get in often eats up their entire savings. There is often nothing left over for major repairs.
With a little savvy, a person may be better able to avoid a bad deal. A watchful eye is important. An inspection by a well versed inspector is very important. A good look at the reserve study is critical. A good look at the underlying regulatory documents that contain the use and maintenance requirements and assessment provisions is important too. Unanswered questions are a red flag.
In order to get these documents, you may need to get the seller to provide them, or have the seller make a written request that the Association provide them, as I have explained in earlier blogs.
Most conversions involve older buildings, often more than 20 or 30 years old. Unless the "developer" of the conversion offers a substantially (and recently) upgraded building and sufficient reserve study with a healthy percentage of funding, the owners can end up in dire straights. An older building with lots of deferred maintenance that is either hidden or not apparent and a reserve study that uses estimates for useful life and replacement costs based on the same resources used to calculate costs for a newer building are definitely bad signs. "Underfunded reserves" is definitely a red flag in condo conversions, moreso I believe than in newer buildings, because newer buildings generally provide more time for "catch up", and rarely end up with multiple major reconstruction issues coming all at the same time.
In some cases, developers' contractors, in the process of "cleaning up", have even covered up worn out components, sometimes intentionally, sometimes not. Replacing some parts of the components without replacing all could result in a big surprise when the "covering" such as the portion of a roof or siding has to be removed because of deterioration or dry rot under the surface. It is quite obvious that no one is going to replace all components in an already constructed building. That would require starting over and rebuilding the building, and that is not the point, of course. If a developer wanted to start with a new building, they would more likely start with bare land.
Condo conversions tend to be less expensive than brand new units and would seemingly tend to appeal to people who are looking for the most "affordable" housing available. However, this creates a member base that is not rich with assets to cover unanticipated special assessments. So just be careful.
To recap:
If you are considering purchasing in a converted apartment building, check out and consider these things:
1. Look closely at the reserve study. Ask a knowledgeable contractor if the useful lifes of the components, given their age, seem realistic.
2. Check the percentage of reserves that has been funded (money in the bank, not a promise or budgetary or accounting figure) per the reserve study (the percentage funded is a disclosure requirement in California)- and give thought to whether you can weather a special assessent if the percentage funded is less than 100% (which it probably is - as it is very common).
3. Have a knowledgeable inspector do a walk through and property inspection report and note for you any areas that are questionable and that might put you at risk because of hidden damage (it seems that a conservative, and perhaps realistic approach would be to assume the worst) and if there are such areas, consider that further inquiries or tests should be explored.
4. Understand that the soundproofing, or should I say the lack thereof, is likely to present noise issues, especially if there are stacked units and there is no prohibition on the installation of hard surface flooring.
And last, but not least, have a knowledgeable person explain the covenants, conditions and restrictions to you, and opine on whether they are comprehensible.
And ............ pray for a good real estate market in case you get in and cannot stand it.
Condo living is different than apartment living in a few very big ways:
**Others make the decisions for you on how much money is needed to keep the place up, and it comes out of your pocket, not the landlord's. There is no specific limit on your risk. AND
**You cannot just move out and put it all behind you if you become disillusioned or unhappy with your purchase.
Posted by Beth Grimm at April 25, 2007 7:50 PM