Deconversions 101: The Basics
What is a deconversion?
A deconversion is the process in which the owners of a condo building sell their units simultaneously to an investor, who then turns the property into an apartment rental building.
If your condo is in an older building (built before the 1960s) chances are it was a rental apartment before it was a condo. During previous real estate cycles, condos were in high demand. So owners of apartment buildings converted the units into for-sale condos.
Now, high rents and increased rental demand have created a situation in which investors can be profitably deconvert condo buildings back to apartments, often while paying unit owners more than in a traditional transaction.
Why would I want to do a deconversion?
Condo owners may decide to deconvert for a variety of reasons. Usually, one or more of them have found it difficult to sell their unit to a conventional buyer who is using a mortgage. This happens when a building becomes unwarrantable. Buildings become unwarrantable when any single entity owns more than 10% of the units, when renters exceed owners occupants, or when reserves drop to a dangerous level.
Owners may also decide to deconvert their building to avoid rising costs of ownership or looming capital expenditure requirements. Other times, owners may be unable to or disinterested in continuing to bear the burden of managing the building.
What are the benefits of a deconversion?
Achieve a better price than if the condo sold individually.
Option to sell your condo and remain as a tenant, if desired.
Transaction costs can be lower than conventional sale.
Avoid need to rehab, paint, or update unit before selling.
Escape from high ownerships costs or from a unit that otherwise is difficult to sell.
Owners may re-distribute funds held in HOA accounts.
What kind of building is an ideal candidate?
Ineligible for FHA loans (due to 'concentrated ownership,’ too many renters, or too low reserves).
Has many unit owners who bought before the market crash.
High or rising maintenance costs and HOA dues.
Facing current, pending, or past litigation.
In an area with strong rental demand or low supply of rental product
What Does a Deconversion Entail?
The process begins when the condo board engages a broker to sell the building. An attorney should also be retained to provide counsel and prepare documents. The broker will then prepare marketing materials, conduct showings with prospective buyers, and gather all the offers.
The condo board will then call a meeting for owners to vote on whether or not they will accept an offer . According to Illinois law, if 75% of the ownership of a building votes to approve the sale, it becomes legally binding on all owners.
If an offer is accepted, the rest of the process plays out much like a conventional sale. The buyer will do an inspection and an appraisal, attorneys will draft closing documents, then proceeds are paid out to each owner on the day of the closing.
Just like assessments, proceeds are determined based on a unit’s size. So for example, a unit that is 3.5% of the building’s total square footage receives 3.5% of the final proceeds.
How Much Does A Deconversion Cost?
The broker fees, title fees, transfer taxes, and other closing costs are no different as when selling a unit traditionally. In fact, because multiple units are closing at the same time, bulk discounts can be negotiated for some of the closings costs.
The costs that differ from a conventional sale are the attorney’s fees incurred by the HOA. For most buildings, an HOA should expect to spend between $8,000- $15,000. This covers tasks like reviewing the Sales Contract, removing a building from the Condominium Property Act, and preparing corporate/closing documents.
This post is for informational purposes only and does not constitute legal or financial advice. You should always seek your own counsel before making important legal or financial decisions.
