By Andy Friedman
The current condominium deconversion trend in Chicago is still relatively new. The wave of apartment-to-condo conversions in the mid-2000’s has begun unwinding as condominium units are now often worth more as apartments, and as many HOAs now find themselves facing large assessments to address deferred maintenance. Many developers and investors reach out with unsolicited offers directly to Condominium Associations and often to condominium owners not on the Association Board. A colleague of mine on the legal side of these transactions calls these unsolicited offers the “Grenade in the Lobby” for the massive chaos that it creates.
Once an unsolicited offer is made, huge uncertainty is introduced to individual owners in a building. Some are interested in selling, others aren’t sure, and some would rather get a root canal than sell. With little factual evidence of what a fair market price for their building would be, some owners think an offer is too good to refuse, and some think the offer is too low and insulting. Rumors start to fly, tensions rise, and a once-peaceful condominium building turns into a war zone.
At this point, the HOA typically becomes focused on the offer at hand, and what it would mean financially for each unit holder. The more time that an association spends engaged without representation from a multifamily real estate broker and only one offer on the table, the more vulnerable they become. Without proper guidance, the HOA is in a reactive state versus a pro-active state, with decisions being made in an information void. Along the way, the buyer is stacking the deck in their favor in ways that the HOA doesn’t understand.
Instead of being consumed with the one offer at hand, an HOA should be looking for answers to the most relevant questions:
- How much is the building worth if put on the market?
- Would that price level be agreeable to 75% or more of the individual condo owners?
- What is the physical condition of the building, and how will that impact a potential sale?
- How can an HOA maximize the likelihood of closing in the least amount of time, without being taken advantage of?
- How do we allocate the sale proceeds across individual units? Most importantly, how can this process be handled in an orderly and professional manner that holds the owners’ interests first?
The simple solution for an HOA is to seek professional representation from a multifamily brokerage, in addition to legal representation. The first thing a multifamily broker will do is provide a complementary sales analysis to give the HOA a price range for the building. After that, the HOA can begin to make informed decisions on how to proceed. There have been many high-profile deconversions in the press lately, and some are textbook examples of what happens when a Condominium Association only engages with their one unsolicited offer. My advice—diffuse the lobby grenade before it explodes.