Condo Deconversion as a Solution to Aging Communities

The article linked below pulls together a few discussion threads we've had around here: the Surfside condo collapse and the increase in investor purchases of HOA/COA properties.

Condo Terminations Take Hold as an Exit Strategy

Here's a question to ponder: have condo owners demonstrated that they're unable to effectively manage their properties in the long term?

Very cute question. [chuckling here]

The answer is yes.



From the article:

In a market with little undeveloped waterfront properties [in the Miami area in particular?], combined with the recent influx of well-heeled new residents, offering to purchase all a community’s units in order to demolish a building and raise a new one presents a potentially lucrative development option.

I have this picture in my mind of well-heeled developers appearing at waterfront COA meetings and making their pitch. Their smiles are as wide as the horizon. Dressed like... well-heeled people. Making their pitch.

Developer Slim Pickens:
... and we will pay you one-and-a-half times the market value of the condo.

Owner Tim:
Hm. Aren't they getting two times the market value down the street?

Owner Pat:
Another developer called me yesterday and said she was putting together a package paying 2.5 times the market value.

Owner Cathy:
Isn't the market value going up, on account of you developers buying up old condo buildings? Why not, say, four times yesterday's market value, in anticipation?

Developer Slim:
All right, we'll talk with the Board and see if we can offer two times the market value.

Director Kerry:
Ya know, Mr. Pickens, I am not asleep over here. You developers want our condos. [shaking head and making notes on her computer] You hafta offer enough to each owner to win 80% of their votes. If you do not want this to go to litigation no way and no how, 100% would probably be best.

Director Bill:
I know of at least two other developers interested in this building. Just saying.

Director Lori:
Mr. Pickens, how about you put together your best offer and have it ready by next week?

Director Adam:
Whoa there, just a second. Perhaps the board should invite blind bids? Best bid wins the chance for the owners to approve termination of the condo?

Director Kerry:
Deal.

Director Bill:
Done.

Director Lori:
Now we're talkin'.

Director-President David:
All in favor, say aye.

[all directors and a few owners roar 'aye']

Director-President David:
Mr. Pickens, best of luck in the bidding. Motion to adjourn? [so motioned] Second? [So seconded] All in favor? [unanimous ayes] Meeting adjourned.

Cathy:

You ask:

Here's a question to ponder: have condo owners demonstrated that they're unable to effectively manage their properties in the long term?

I believe many are unable to properly manage their association and the more high rise an association is, the more dangerous it becomes ala Surfside. I say the main problem with most associations is not having a Reserve Study and/or not properly funding a Reserve Fund.

Ah, democracy at its best. And really, states/associations that allow homeowners to vote down assessments are no different than the Robert's Rules students who think they should be able to vote down anything they don't like.

I think one of the problems condos have is that their demographic tends to be different from that of HOAs. Condos attract first time buyers who may not have much money and down-sizers/retirees who may be on fixed incomes and who will probably move on to continuing care communities. This shorter-term perspective means they aren't invested in maintaining the property since they won't be around that long.

My state among others requires condo associations to fund their reserves as specified in the most recent reserve study. But there's a loophole: owners can vote not to do this (ie, we can be dumb but we have to actually make the decision to be dumb).

I also think that after a number of years of this, it becomes much harder to play catch up. Once a community has started down that path, they'll probably stay on it unless something unpleasant forces them off it.

It's one reason I recommend that condo buyers look for younger communities that haven't had a chance to run themselves into the ground yet.

Well said.

I am surprised to learn even one state (Ohio) has such a requirement. But there it is in Ohio statute section 5311.081 | Powers and duties of board of directors (reserve requirement added in 2004).

Based on the article, what interests me is that, for Florida hi-rise oceanfront properties in grave disrepair (such that demolition seems to be the preferred choice), failing to fund the reserves may have paid off better than funding the reserves. Is this possible?

How many home buyers think the land underneath their home is likely to be worth way way more than the house, such that the land, and not the house, is the nest egg. Is this possible?

"Market value" must be taking on a whole new meaning for condos so situated. My addled brain may explode trying to parse what this means for the condo market in Florida in the short term.

I am likely misconstruing the financial math here.

As noted in the article linked above and other articles linked here at hoatalk recently, the strategy often is for the developer to buy one condo at a time. The developer, now a multi-unit owner in the condo association, gets more and more of the vote. Think of a snake slowly eating a small animal? The owners who do not want to sell are taking a real risk that suddenly the super-majority threshold to terminate will be reached. Then the hold-outs may have to sell and at bad prices. This other thread started by CathyA3 from a month ago has another linked article that describes this, but in Arizona:

https://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/321911/view/topic/Default.aspx

I am not sure whether Florida condo law is like Arizona's in this respect. If Florida's statute is like Arizona's statute, now things can get very bad for those condo owners who hold-out while the other owners vote to terminate. The hold-outs may be forced to sell.

I have not looked at Florida statutes yet on this point. But if developers helped write them, the Florida statutes may be as bad as dis-favorable to condo owners as Arizona's.

This is significant leverage that developers have. Developers say: Owner Jane Doe, you want to sell to us now, because once the tipping point is reached, and termination is approved by the super-majority, you will not receive nearly as much money for your condo.

If I were in these Florida condo owners' shoes; I loved my oceanside condo; either {Florida condo laws were like Arizona's}, or {the Declaration's terms of termination were like the Arizona statute's}; I would be torn. I would also probably be frightened.

I wonder if this possibility should have been considered more in the article linked in the first post above. The article linked in the first post seems kinda joyous about this option for Florida condo owners who believe their condo association is facing what the Surfside condo association faced.

Adding in the themes from the Arizona article to all this, I especially agree this is about luck and timing. I too cannot recommend a strategy of anticipating the land beneath my condo building will be worth way more than my condo unit so I can sell to a developer (before the point is reached where I am forced to sell at a bad price).

This is exactly the strategy: accumulate enough units under one owner who has a super-majority and controls the outcome of any vote. This happened a lot in Florida during the Great Recession. You're correct that the holdouts who didn't see the writing on the wall often lost some or all of their equity in their homes. They couldn't believe that the process could possibly be legal and learned a very painful lesson.

It's why rental restrictions are a favorite hobby horse of mine and why they're so important. So many owners may vote against having them because they want to preserve their right to rent out their home. But they don't realize that many of the current laws limiting HOA/COA ability to restrict rentals aren't there for the benefit of Mr. Average Homeowner who has to relocate because of a job and who can't sell his home right away. They benefit the investors who, if they're allowed to gobble up units in HOAs/COAs unchecked, will make it difficult for Mr. Average Homeowner to even own a home. Just look at the bills' sponsors and the lobbyists who support it. Follow the money, in other words.