Ilyce Glink and Samuel J. Tamkin
Q: I am fortunate enough to be a snowbird. We own a condo in Jacksonville, Florida. Our condo is in a development that was purchased by an investor/developer in the late 1980s. The developer improved the existing units, added several new buildings, sold some of the units and rented out the rest. We think the developer still controls a bit over 51% of the units.
The developer has now sold his units to a new investor. They appear to be well-financed and deep-pocketed. They have approached me repeatedly with offers to purchase our unit. Their latest offer is probably 10 to 12% over what I think is the market rate, plus it includes an option to stay on in the unit for a year rent-free and they will cover closing costs.
Normally, this would be a generous offer, but we do not want to sell. We love the place, and for us to find another would mean taking out a mortgage, which, given my age, we do not want to do. One of the other owners and I are in constant contact. She has not, to her knowledge anyway, been contacted directly by the new investors yet – though she has received other offers.
So, the question is this: Is there any way that the new investors can force the issue? Can they create a situation whereby we would be obliged to sell? Can they say, “We are in control of the homeowner’s association and we are pulling the whole place down and redeveloping”?
A: This is a great question and unfortunately, the answer is, yes. The new developer could force existing owners to sell their units. This is commonly known as a “deconversion,” which means condo units are deconverted back to rental units and is the reverse of what happens in a condo conversion, when rental units are sold as individual condos.
But, and this is a big “but,” a majority owner in your development must exceed a certain threshold number of units to force this issue and the governing documents must allow it as well.
Your governing documents may state that a simple majority of the unit owners can force a sale; however, that isn’t likely the case. Most developers place a supermajority provision in these condominium governing documents. For example, to change key elements in the governing documents and to force a sale of the development, you might need two-thirds or even three-quarters of the unit owners, or the percentage ownership equal to those numbers, to vote for the deconversion to succeed.
These supermajority provisions make it harder for a developer to simply get a majority and force the sale. In some situations, state condominium laws or local ordinances may place an even higher burden to sell a building. We’ve seen some municipalities place a threshold of 85% on the owners to authorize the sale of a condominium development.
Depending on this key number, the majority owner might take some time to get there, which is one reason why they might reach out to you, an individual owner, with a rich offer to buy your unit. Once they reach the magic threshold, they can then force the vote to deconvert the condominium association and force the sale of all the units to a prospective buyer.
This deconversion craze has been happening with some frequency in Chicago, where condo buildings that have failed (by “failed,” we mean that units are losing value and owners are unable to sell) are bought by developers looking for rental properties. Developers deconvert buildings when the costs of buying condominium units is cheaper than finding new apartment buildings to purchase.
It sounds like you are getting a great offer – and if there are enough owners who are inclined to take that deal, the new developer may have enough votes to force the sale. While you might not prefer to sell, you may wind up with little to no choice. Instead, you should consider negotiating as rich a deal as possible and get out with a premium on your terms than down the line where the premium might not be as rich.
Having said that, Sam has found in his practice that condominium deconversions usually provide a good premium over the market price for the condominium units. And we don’t know if this developer’s offer is any good and whether you can get more by holding out or negotiating for more money or better terms.
Do a little digging. Find out who else has been approached to sell and is considering the offer. Read your condo docs and see what percentage of the condo owners must vote to sell. If you’re close to that number, you may wish to reevaluate your position, sell the property and start looking for another vacation home to love. The key is to try to get the best terms you can once you decide to sell. Remember, the offer they are giving you includes a year of free rent. During that time, you’ll have cash in your pocket and can find a different unit to buy without the pressure of having to sell and buy at the same time.
As far as getting a new mortgage, look over your finances and try to figure out how much cash you’d get from the sale of the condominium. Once you’ve done that, figure out what it would cost you to buy a new, similar unit elsewhere. If you’re swapping from one to another in the same price range, we’d assume that you’d need a loan that’s about the same amount or less than what you have now. With the premium being offered (don’t forget to negotiate), perhaps you can pay cash.
Talk to several local mortgage lenders about what it will take for you to get approved for a new loan. Don’t apply yet (so, don’t fill out an application with your Social Security number); just find out how much of a mortgage you could qualify for, and then see what properties are available in neighborhoods or communities that offer the amenities you want at a price you can afford.
The goal is to get a sense of your options, and how likely it is that the developer will be able to buy out enough condos to take full control of the property. That way, you’ll be able to plan your next move. Thanks for your question.
Contact Ilyce Glink and Samuel J. Tamkin through their website, BestMoneyMoves.com.