Unless a homeowner association (HOA) has already made a collective decision to sell, the process of acquiring the bulk of units can be quite difficult and timing consuming. Getting a large group of folks with different motivations and goals to jointly agree on anything is challenging, as anyone who follows the gridlock in Congress can attest. While the laws governing the HOA dissolution process vary by state and local municipality, the legal mechanism is typically fairly easy if and when the investor is able to acquire 100% of the units. The problem arises when the developer is not able to acquire all units and owners remain who hold out for higher proceeds. In Illinois only 75% of owners are generally necessary to compel a sale from the remaining owners. However, resistant owners can slow down the process with legal action, sometimes for years.
Seller perspective.
From a seller's perspective, many condo owners find it more compelling, due to high rent levels, to rent out their units rather than sell. The higher the percentage of condos already operating as rental units in an HOA, the simpler and more natural the full conversion to apartments. While condo pricing has improved, there remains an imbalance in the market, and owners are finding that they can achieve higher sales prices by bundling their units with other owners and participating in a bulk deconversion sale as opposed to an individual sale. Moreover, many older condos that converted in the 90s and early 00s have significant deferred maintenance and inadequate reserves, and condo owners see the bulk sale as an easy exit to avoid these large and looming expenditures. Developers are often better positioned to execute these repairs more efficiently and at a lower cost than an unwieldy HOA.
What to look for in potential deconversion projects.
For developers and amateur arbitrageurs looking for bulk sale condo deconversion projects, older buildings where sales lag because too many units are on the market or dated finishes or features can often be good candidates. Other signs, aside from the combo of deferred maintenance and inadequate reserves, include small condo projects with few units and disorganized HOAs or the presence of a high number of existing rental units. Many boards have begun to realize the potential of this this path and are hiring brokers to market their bulk sale, which is evidenced by the high number of new listings for deconversion opportunities. In our experience, however, yields are so low in broker-marketed transactions that often most, if not all, of the added value resulting from deconversion is already priced into the deal, removing the appeal, since the risks remain.
How long will the trend continue?
Many cranes are in the air in and around downtown, and the supply of new deliveries is expected to outpace absorption this year and 2018, which may lead to lower rents and higher concessions and vacancy, dampening the deconversion trend downtown.
