Owning Majority Stake in Condo Association... Risks??

Question

I'm having difficulty finding this information.

I am looking at a condo package deal in which I would purchase multiple condos and own majority stake in the association. The 3-5 year goal is to convert it into an apartment building (deconversion).

What are potential foreseen risks of a deal like this?

It has a cap rate I'm looking for. I understand running an association likely takes a more work. Anything I should be weary of?

Justin Kane · Answer

just by the sound of your question I am guessing you havent done anything remotely close to something like this.. so i would network with local experienced and bigger investors that can help you on these kind of deals and maybe even partner with you so you dont lose your shirt.. careful out there

Russell Brazil · Answer

If 1 investor owns a majority, they will become nonwarrantable and the prices will plummet. Get ready for some angry neighbors.

Oleg Shalumov · Answer

@Kevin Danikowski it would be very surprising if the setup is such that you do not have decision making rights with majority votes.

You should be also able to put HOA Managment company that you have (I actually seen a lot of people creating their own HOA managment company) to keep HOA fee low and control the expenses) and vote it to be managing the building.

Luke Miller · Answer

Sorry, I should have been more specific. Other owners in the association have voting rights as well as HOA rights (depending on how it's structured). That's why most people shy away from buy and hold condos, but with the majority vote you should be covered for most assessments and other expensive problems.

Kevin Danikowski · Answer

@Lucas Miller Thank you for that response, very insightful. What do you mean by "outside people that will have influence over your investment", who do you have in mind? Others who vote on the Association board?

Luke Miller · Answer

@Kevin Danikowski the unforeseen risk is that you're hitching your wagon to an already existing business. That business has a track record and it can be good or bad. In addition to property due diligence, you need to really dive into the condo association and figure out what the liabilities are. If you own the majority, it means nothing other than you have the majority votes. There's still outside people that will have influence over your investment.

However, if everything in the past points to a solid investment, having a majority vote is huge and should get you out of most assessment problems. I've known a couple of people that have bought condos and done just fine. I would highly suggest not running the association yourself, hire an HOA management company and take that off your plate.

Eric Veronica · Answer

@Kevin Danikowski I think keeping the properties as condos keeps your options open to sell units individually down the road. With that being said, if you own 100% then finding financing for end buyers may prove very difficult. The lack of financing options may severely deflate the value from an individual market value perspective.

Interesting topic

Kevin Danikowski · Answer

I just wanted to say thank you to everyone that weighed in here, they have all made me adjust my approach to this deal.

@Eric Veronica I laughed pretty hard at your "ABC7 special report" haha. You are correct, it would need to be properly executed. However, after visiting the property and understanding the story it turns out there is some motivation from every owner to sell, at least from what I would be able to offer them for their situation. I actually plan to buy every unit outright. Once I have the deal under contract which will hopefully happen this week I can provide a more in depth insight on this deal.

The benefits for a de-conversion would be lower taxes and no need for separate association and condo accounts, it is also more attractive from a selling standpoint. Do you believe there are benefits to keeping them all as condos with the assumption i'll own every unit 3-4 years from now? (that's the rough plan timeline). Thank you Eric for the question!

Eric Veronica · Answer

@Kevin Danikowski curious what advantages would be associated with a “de-conversion” rather just keeping the units.

Also curious how controlling the vote would allow you to convert the entire product to a single parcel multi family. Wouldn’t this require you to buyout every unit in the building. Not like you Will be able to foreclose or use eminent domain to get rid of other owners right?

Major risk I would see is a ABC7 special report about how a local investor intentionally deflated prices to force out low income owners.  He made millions while grandmas were left homeless.

Hopefully my post doesn’t sound judgmental or accusatory.  I am genuinely curious about the approach. You don’t hear about condo de-conversions very often.

Kevin Danikowski · Answer

@Lucas Miller Yes that was what I was hoping, I'm going to receive a copy of the bylaws tomorrow I believe and can dig into it. Is it possible I could lose in decision making even though I would own majority stake? I don't imagine so, but I don't want to be blindsided haha.

Owning Majority Stake in Condo Association... Risks??

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