Converting apartment buildings into condominiums has become a popular alternative to new construction. There are a number of advantages to the developer:

Lower Cost: Buying an existing building and renovating it is often considerably cheaper than building new -- depending on local building requirements or level of renovation.

Flexibility: The condo conversion developer has flexibility on how much or how little renovating is done.

Location, Location, Location: Some apartment buildings have highly desirable locations that might not be available for new construction.

Classic Design: Older buildings sometimes have character, design and details which are unavailable or prohibitively expensive in new buildings.

Fewer Warranty Requirements: New construction typically requires a builder warranty. Condo conversions usually require only disclosure of condition and carry no warranty except for new installations like appliances, heating & cooling, water heaters, etc.

Fewer Building Code Requirements: New construction must adhere to current codes. Conversions usually don't.

Affordability: Since apartment buildings can often be bought cheaply, the converted units can often be sold for less.

While there are benefits to be had like these, there are also challenges that should be considered:

Older Buildings: All HOAs should have a 30 year plan for repairs and replacements called a "reserve study." Many states require it.

The reserve study analyzes common element components for age, condition, useful life and cost and provides a funding plan to address those future costs. Usually, reserve funds are collected with the HOA fees and represent at least 25 percent or more of the total. In an older building, original components like plumbing, common heating and hot water systems, wiring and structure often fall within the 30 year projection period. If the conversion developer does not put these components into new condition, they will often trigger a substantial impact on the reserve study and raise the HOA fees so high that the units won't sell.

Lack of Amenities: Apartment buildings don't always have things that homeowners have come to expect, like laundry facilities, storage and parking. These are standard in new construction, but more difficult to achieve in older buildings.

Lack of Sound Proofing: This is a huge one. Many wood framebuildings built from the 1950s on neglected to include soundproofing in the walls, ceilings and floors. While carpet can help, it doesn't solve the problem. And worse, in an effort to be cutting edge, some conversions install hardwood and tile flooring which amplifies the problem.

Lack of Insulation: There was a time when energy was cheap and insulation light. Now, having insulated walls, floors, ceilings and windows is a given that translates into huge energy cost savings for the residents.

Displacing Long Term Tenants: One of the most disagreeable and problematic tasks every condo converter must take on is moving existing renters. The renters are generally given the first right to purchase but some won't or can't for a variety of reasons. And if the conversion plan includes gutting the units or reconfiguring the space, there will be little choice but to vacate the residents. There are usually state statutes that control how tenant move-out is handled, but regardless of the approach, people will lose their homes. And sometimes those people have lived there for many years.

In the final analysis, there is often good money to be made by a thoughtfully executed condominium conversion. But buying the right building and doing the right renovation is paramount in the success.

Regenesis specializes in Washington and Oregon condominium conversion strategies including operating budgets, reserve studies and maintenance plans. Contact rich@regenesis.net or call 503.977.7974 for more information.

Published: August 1, 2007

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Richard Thompson owns Regenesis, a management consulting company that specializes in condominium and homeowner associations. He is a nationally recognized expert on HOA management issues. Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. To subscribe, go to Regenesis.net. He can be contacted by email at .