What is a condominium conversion?
Condominium conversion is the process of converting rental apartments, which are rented by the occupants, into condominium units, which are owned by the occupants. Such conversions can take place in any building where tenants live in separate units, including apartment buildings, attached townhouses or townhouses, and co-op buildings that have tenant shareholders.
In some cities, condo conversions are also taking place in former commercial buildings that are being renovated or rezoned for residential use.
What is a condominium conversion?
Condominium conversions turn rental units into an individual condominium (also known as a condo, for short). In addition, condominium conversion means that tenants who become owners share common areas, such as fitness facilities, garages and swimming pools or parks.
Legal protections are sometimes put in place to protect tenants from unwanted condominium conversions. If a building owner wishes to convert the building, they must give tenants adequate notice of the change and give them the option of buying or moving to another rental property.
Building owners can use conversions as an exit strategy to cash in on ownership instead of maintaining rental income from units. If conversion protections are in place, tenants have the option to purchase their unit before it is offered for sale to outside investors or willing buyers.
Why do buildings become condos?
Converting existing buildings – whether originally residential or commercial – to condominiums is a faster and often more cost-effective way for developers to create housing. It generally takes much less time and money for a developer to convert an existing building into condominiums than to build new homes for purchase.
In many places, a condominium conversion is also driven by the fact that available land is scarce and the demand for homes far exceeds the supply available on the market. At the same time, in markets across the country, house prices are prohibitively high. Converting a condominium can allow developers to create more affordable home buying options.
How does a condo conversion work?
Many cities or states have laws in place designed to protect tenants during the condo conversion process, although the extent of these protections may vary. A developer must generally obtain approval from the local municipality for the conversion.
In some jurisdictions, tenants may be allowed to vote on whether to “go condo” or not. In others, a certain percentage of a building’s current residents must agree to purchase their apartments before a property can become a condo; in New York, for example, it’s 51% of renters.
Generally, if you are renting an apartment and the owner of your building decides to convert the units into individual condos, you must be informed in advance of the details surrounding the conversion and transfer of ownership into condominiums.
If you choose to purchase your apartment converted into a condo, you will receive title in your own name and be responsible for paying property taxes on your unit, as most landlords do, as well as mortgage payments (assuming you finance the purchase of your condo). And instead of paying rent each month, you’ll pay something called common charges.
Your monthly common expenses, also called co-ownership fees, are used to pay for the maintenance of the building, its amenities and its services, of which you will all be co-owners. You may occasionally face a special levy, levied at the discretion of the condo association. The condominium association, similar to an HOA, is an autonomous body that makes decisions about the management of the condominium. It is generally made up of co-owners.
How do condominium conversions affect tenants?
Typically, when a rental property is converted to condominiums, the existing occupants are the first to purchase their unit before outside offers or offers are considered. This process, known as the “right of first refusal,” can vary in great detail by state. Some developers may also offer tenants a reduced purchase price for the unit in order to make a sale faster.
Not all tenants can afford to buy their unit, or even want to buy their units. In such cases, that tenant will often have to find a new residence, although in some municipalities developers do not have the right to evict tenants or must meet certain conditions before doing so. Condominium conversions can make it even more difficult to find affordable housing in a community, although the owner of the building may provide relocation financial assistance.
What are the pros and cons of condo conversions?
Condo conversions have both advantages and disadvantages to consider. Here are some of the impacts of this type of development.
- Condominium conversions offer tenants the opportunity to access ownership, often at a fairly affordable price. Insider prices are often lower than open market rates for comparable properties.
- Condominium conversions offer a low maintenance approach to home ownership. The building and its common areas are generally managed by an association of co-owners.
- Tenants can participate in the management of the building by joining the association of co-owners.
- Tenants of buildings converted to condos may be more inclined to purchase their own unit immediately, which means less work for the building owner to market and sell the units.
- Condominium conversions can displace tenants.
- The purchase price of the units may be beyond the means of the tenants or may not be a bargain depending on the other housing options available.
- Building management and maintenance may decline (due to inept/inexperienced condo association).
- Too many condo conversions in a community can disrupt local property values.