Condo conversion yields few options

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Dear Real Estate Adviser,
About two years ago, I bought a condominium. In September, the building was sold but two other condo buildings in the same complex were not, so the old management decided to offer them as rental units. What impact will this have on my ability to refinance or sell my condo? What rights do I have?
— Esther

Dear Esther,
A lot of condo owners such as you are being caught off guard after thinking they were buying into a stable ownership community, only to see a parade of renters enter the scene. The problem is exacerbated by the still relatively large number of lower-priced, bank-owned condos and other homes that continue to temper housing prices. Such conversions are less problematic for condo owners in New York City and a few other metro areas where condos are the most common form of homeownership, but your concern is valid. Business news sections elsewhere are full of stories on such conversions.

There’s another issue, too. Lenders are shying away from condo loans because of their pricing instability and reluctance by major mortgage insurers such as the Federal Housing Administration and the Department of Veterans Affairs to back them, especially if fewer than half of the units in a condo complex are owner-occupied. This formula applies to refinancing as well.

However, it is much better for you that the old owners are setting up those other buildings as apartments and that the new owner is keeping your building a separate condo-only development. That probably changes the minimum “half owner-occupied” lending formula in the eyes of bankers, assuming more than half of the units in your building are indeed owner-occupied. If they are, you should be able to refinance or sell to someone who can get ready financing.

If you are seeking a near-term exit strategy, you could try to sell the unit back to the new owner, which isn’t too likely to happen, or offer it as a rental yourself, assuming your condo association bylaws allow. While it’s kind of a long shot, you may have legal recourse if the old owners made contractual representations regarding owner-occupancy or minimal resale value, or if they contractually stated the other buildings would remain condos. But you would have to go to court and that could be costly, frustrating and complicated since your building is now under new ownership, which tends to muddy liability.

The silver lining in this is that the apartment conversion will at least keep the entire project viable and occupied — albeit with renters — until the overall housing market recovers. Besides, continued efforts to sell the units in the other two buildings as condos would have necessitated a huge price cut that would have really whacked into your unit’s value for years to come. Moreover, the owners probably structured the conversion of the buildings to apartments so they can be reconverted to condos once the market can support, assuming it ever can.

But these are all cold concessions to you at best, I’m sure. I sure wish I could paint you a rosier picture.

Good luck.

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