Use Caution Before Buying a Condominium Conversion
Just What Is a Condominium Conversion?
A condominium conversion is when an entire property held under sole ownership is changed into individually sold units as condominiums. (A change of use).
Frequently these properties were originally apartments and sometimes they were buildings such as factories or schools.
Our History Before Our Residence Was Converted
I lived in an apartment building for seven years and loved it. It was in a residential area of mostly private homes. The building was a pentagon having five sides. In the center, on the first floor, was a fountain with sparkling colored lights. The second and third floors were open and one could look over the railings into the fountain. It was unique and elegant and yet no more expensive than other rents in the area.
Each of the five sides had two apartments on it coming off the center in a pie shaped wedge. It made for a most uniquely shaped apartment. As one walked into the wedge the widest part opened on to a balcony which over looked gardens.
We had a buzzer security system and a video camera in the lobby long before video cameras were the norm. One simply needed to tune the television to channel 9 to see who was buzzing them. Soft music played on the speaker system throughout the halls.
We had a beautiful swimming pool which was kept immaculately clean.
The building was occupied mostly by young professionals and the owner screened the tenants. There were some incidents of tenants playing excessively loud music, but they were evicted promptly.
To me, this was an idyllic residence. Then, I received the notice that the apartments were being converted to condominiums. Once a unit was purchased, the existing tenant would have to leave.
You Love Your Residence, but It Is Going Condo
What would you do if you were faced with eviction unless you buy a condo?
I Made My Decision Based on Assumptions (Bad Idea)
I thought the price of the units was so very reasonable that it would be a good investment. It would be a good way for me to build up equity and in a few years use that to purchase a house.
My assumption was that as it was such a great place to live, most of the other tenants who I had come to know, at least casually, would also be purchasing units. I assumed the character of the building would remain the same and probably the quality of life would go up as everyone would have a vested interest in maintaining property values.
There was a small down payment, my mortgage payments were low and the condominium maintenance fee was reasonable.
Indeed, upon purchasing a unit, I was given the by-laws. A legal size book about an inch thick. It outlined all the do's and don't's. To me, it seemed with everyone following the rules, and the rules so clearly spelled out, my future happiness living there was guaranteed.
Reality Hit—It Took Awhile
Only a few of the existing tenants purchased units. They had their reasons. Young couples opted to go straight to home ownership; some expected to be relocated by their company and others did not have a down payment. Their reasons varied and I was sad to see some of them move.
About half the units (thirty) were purchased by speculators. Absentee investors interested in having rental income and then, perhaps, turning over the property at a profit. Problem? Most of them had neither the resources nor the inclination to pre-screen tenants. If their tenants blasted music at 2:00 a.m. they could not care less as long as their rent was paid. If their tenants were selling drugs, they turned a blind eye. We had an owner who rented to a young woman who worked in a donut shop. However, the apartment wasn't for her, she was sent by her boyfriend to rent it. He wanted it as a clubhouse for his street gang. Thus, we had young men walking in and out of the building with baseball bats slung over their shoulders. They were never without them, and they were not baseball players.
You would think the by-laws would prevent this. But in reality few of the board members had the courage to be the one to enforce the rules. The property management company did it for them in extreme cases but evicting someone is not that easy. It seems a lot of these tenants knew "how to play the game." Many claimed an illness or disability which prolonged the eviction process. Over the months that the process took, we had to endure their shenanigans.
The Financial Consequences of Shared Common Expenses
The maintenance fee covers all the common expenses for maintaining the building. As the building expenses go up, so do the maintenance fees.
Unfortunately, although each unit paid its own telephone and electric bill, the water and natural gas were not metered separately. Each unit had its own thermostat and heating unit and could control the heat as needed, but we all shared the expense of the gas.
Theoretically, this should all even out. In reality consider two examples of the more serious case studies:
Barbara D: She had chronic fatigue syndrome and stated that due to her illness she needed to keep the windows wide open in the winter (in Connecticut) as she needed fresh air. However, she also needed to be warm, so she set her heat on 85 degrees.
John T: One of his neighbors complained that he was constantly hearing running water, it was driving him crazy. The maintenance man obtained permission to enter John's apartment and as he approached the bathroom from the living room a thick cloud of steam was coming out of the bathroom. In the bathroom, the hot water was surging out of the bathtub faucet. Apparently, it had been doing this for some time as the bathroom walls and adjacent living room wall were covered with thick furry black mold. Fixing a plumbing problem was the individual unit owner's responsibility and John didn't want to hire a plumber, so he just let the hot water gush.
Oh yes, our beautiful fountains. As the quality of our residents went down, so did that of their visitors. It seems often visitors to the building thought it would be humorous to throw soap in them. They must have seen funny movies where the soap bubbles up. But ... in reality the soap doesn't cause bubbles. It just sits there and then it clogs the water pump. So we would have to buy new pumps periodically and invest in man-hours to drain the fountains and clean out the soap. So every time someone had a visitor with a "sense of humor" it would cost us $300 in overhead.
There were so many similar stories. Expenses caused to all of us by a few people's carelessness. Thus, our maintenance fees were rising.
And the Financial Situation Got Worse
At onset, the Board of Directors had it set up so that the property management company made out the checks and brought them to the monthly board meeting for the board to review. Each check needed the signature of two board members.
Our then elected president decided that she was far too busy to be troubled by having to sign checks, so she gave sole check signing authority to the property manager.
The next elected president decided she did not even want to be bothered seeing the checks at the board meetings. She told the property manager to just sign them and send them.
Somewhere down the road it was discovered that our whole reserve fund of $30,000 was gone. The electricity for the lights in the halls, parking lot, and laundry room was three months behind. The natural gas bill was also three months overdue. So we now owed $60,000 to utility companies. This, as the building was falling in disrepair as nothing was being maintained.
The result was our maintenance fees went way up. We were also assessed $2,000 each in January and again in March.
It seems the board chose not to pursue prosecution, as the way the by-laws were written, if money was missing the board members would have to personally make it up. Thus, if they pursued the property manager and lost, it would be an admission of missing money. They chose to just declare themselves "not responsible".
(As an aside: My cousin lives in a condominium that was originally built as such, not a conversion and the same thing happened. They now have run down property and no funds to fix it.)
My Suggestions—If You Are Going to Buy a Condo Conversion
- Check to see how the common utilities are metered. Look for individual metering—each owner pays their own gas, water and electricity. I cannot stress this one enough.
- Find out who is their property management company. Do an online search for the company's name and see if anyone has written negative comments about them. Check out their rating with the Better Business Bureau.
- Contact the property management company and see if they intend to continue to manage the property. Several companies dropped us as we were too small to be profitable. That is how we ended up with the manager who absconded with the funds.
- Ask questions about how many units are owner occupied and how many are owned by absentee owner-investors.
- Ask if any major expenditures are anticipated in the near future—such as paving the parking lot, re-lining the pool. Think of anything large that might need doing and ask when it was last done. Drive around and see if it appears there is something major that is going to need repair, such as the roofs or siding.
- Ask when their last assessment occurred and if any are anticipated. Find out when the maintenance fee last went up and by what percentage it is traditionally increased.
- Drive around the units at different times of the day and night to see what kind of activity you see. For example, if you see units where packages are going out the window and money is coming in, there is probably drug activity.
- See if you can spot some of the current owners and ask if they are happy living there.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
Questions & Answers
Is a PDI required for a conversion?
I was living in the building as a renter prior to buying a unit. I don't know what the building owner was required to do to convert the building from an apartment building to condos. I remember we received a letter indicating the owner was applying for the right to convert and then a notice when it was converted along with our options. As a buyer, I was not required to have a PDI and I didn't. The owner provided the mortgages as a selling feature and therefore there was no requirement on the part of a mortgage company.
© 2017 Ellen Gregory