3 Things You Should Know About a Condo Conversion

If you are thinking about changing your residential property into a condominium this guide can help you get a better understanding of what condo conversions are, why you might choose to complete one, and potential pitfalls to avoid. A condominium conversion changes one type of residential property into another. Real estate investors may choose to complete such a conversion to earn more from the property. However, there are certain things that property owners should know before choosing to purchase a building with condo conversions in mind.

Multi-family residential properties have various uses and ownership rights when it comes to completing a condo conversion. As a result, the laws surrounding the property and who is responsible or liable for damages or issues can depend heavily on the property type and who owns what.

What Is a Condo Conversion?

A condominium conversion is the process of converting an apartment building into a condominium complex. Considering that apartments and condos are both individual living spaces within a larger building, it doesn’t seem like a big deal. However, there is one critical difference between the two. Apartments are typically rental units owned and maintained by the building owner. Condos contain units owned by the resident within a building comprised of shared spaces overseen by an HOA. Shared spaces within a condominium complex are co-owned by condo owners.

For many reasons, a condo conversion can be a lucrative choice for property owners. Selling off one or more rental units in a building allows a property owner to maximize property values. If your rental units remain in good repair, you might not even have to spend much cash to update them. However, updating the units can be costly if they are dated or unattractive. Establishing condos that will be appealing to buyers can require upgrading appliances and replacing aging components.

Significant construction can also generate potential liabilities. Such conversions are also regulated by state and local laws that can include additional costs and even make certain properties ineligible for conversion.

3 Things You Should Know About a Condo Conversion

Condominiums can offer a low price barrier for prospective home buyers hoping to enter the housing market. To meet demand and maximize their property value, owners of rental properties are increasingly converting buildings into condominiums. However, several factors should be taken into consideration before making a final decision.

1. State and Local Laws Concerning Condo Conversions

Massachusetts state law regarding condo conversions falls under the Massachusetts Condominium Conversion Statute. The legislature describes several requirements to protect tenants during condo conversion.

• Timelines for Evictions: All tenants must be notified in writing that you have filed a Master Deed, and you must provide tenants with one year to leave the property. Protected tenants (those over 62, handicapped, and with low/moderate income) have two years to leave. This can extend another two years under certain circumstances.
• Right of First Refusal: Current tenants will also have 90 days to decide if they want to purchase their soon-to-be converted rental before it is offered to the public.
• Relocation Assistance: Landlords must provide their tenants with relocation assistance in the form of $750 to a tenant to assist with moving expenses within ten days of the tenant vacating the unit. The tenant must provide documentation to prove costs.
• Protected Tenants: Tenants with disabilities, over age 62, or with low or moderate income must be provided with 2 years to vacate the premises, and relocation assistance is increased to $1,000. The landlord must also assist protected tenants with locating comparable housing.

Alongside state laws, many cities have additional municipal restrictions, which may include:

• Increased time for tenant eviction
• Additional tenants are considered protected tenants
• Increased relocation assistance provided by the landlord
• Additional filing requirements
• Restrictions on the percentage of units converted annually
• Lastly, zoning requirements

2. Insurance Considerations

The nature of condo conversions makes them a target for various lawsuits. Litigation often leads to insurance problems. Unfortunately, if the right insurance policies aren’t in place, property owners/developers, contractors, or condo owners can end up paying out of pocket if issues arise. Consider these important facts about insurance coverage during a condo conversion.

• Insurance covering apartment construction typically excludes condos.
• Contractors often can’t get coverage on their regular general liability policy for condos. The only other option is typically an Owner Controlled Insurance Policy (OCIP).
• Properties are usually sold “as is”, which indemnifies the seller from existing construction defaults.
• The age of the property can make it difficult for a property owner to obtain insurance coverage for a conversion.
• Typical home insurance policies or apartment policies likely won’t provide coverage for a condo owner. Condo buyers should be encouraged to obtain condo insurance.
• Lastly, condo unit insurance doesn’t cover shared spaces in a condominium complex. Condo master insurance is a necessary investment to cover the building’s exterior and shared spaces.

3. Hidden Costs

Most property owners choose to complete condo conversions to increase overall profits. However, the conversion process is typically not cheap or simple. It’s easy to overlook these costs that arise during a condo conversion.

• Refinancing: It’s often necessary to refinance to cover the cost of upgrades and other construction.
• Professional Fees: A condo conversion requires services from a realtor, lawyer, surveyor, accountant, tax consultant, and engineer.
• Inspection Costs: To ensure buildings are up to code, each unit will have to pass certain inspection criteria. Depending on the age of the building, this might include destructive testing.
• Holding Costs: Tenants have the right to take months or years to move out, which delays conversions significantly. During this time, the property owner is responsible for holding costs like utilities, taxes, insurance, and debt service.

Learn More About Condo Conversions

A condo conversion can be a great way to get the most value from your property. However, without the right approach, you can face serious costs due to unexpected renovations, professional fees,  or litigation. Before purchasing a property with condo conversions in mind, it’s important to talk to your independent insurance agent about the insurance coverage you need, and the steps you can take to decrease the risk of lawsuits in your future.