Condo conversions can leave buyers with structural, legal surprises

By Robyn A. Friedman
Special Correspondent

October 9, 2005

In the sizzling South Florida housing market, developers have pounced on the condo conversion trend. The reasons: Transforming apartment buildings into condominiums is quicker and less risky than construction from the ground up. Home buyers also benefit because converted units are usually more affordable than new ones, and many are in choice locations.

But while purchasers flock to conversions, many don't realize that the asset they're buying is different from a newly constructed unit and that their financial exposure for repairs and replacements can be much more extensive.

That matters a lot in South Florida, where conversions are even more popular than in other markets where the trend has caught on, such as Las Vegas, Phoenix, San Diego and Orlando. More than 17,000 apartments in Broward, Palm Beach and Miami-Dade counties were converted to condominiums last year, according to Jack McCabe, a Deerfield Beach housing analyst. This year, 27,772 units have hit the market through Sept. 12.

"New condominiums are constructed with improved building materials and must conform to a more demanding construction code than in years past," McCabe said. "An older apartment complex converted to condos has wear and tear and may have some inherent structural faults unknown at closing."

The condition of converted condominiums varies widely. Many new apartments that have been converted to condominiums in the past few years were built under the latest building codes and have new building components, mechanical systems and interior finishes.

But many older buildings have been converted as well. Some converters gut an apartment building, taking it down to its "shell," and then rebuild it, installing new plumbing, roof and mechanical systems. Other developers do "cosmetic rehabs," leaving the building components as is and merely sprucing up the property to make units more marketable.

"Buyers really need to understand what they're buying," said James Helman, executive vice president of the Florida Division of New York-based Tarragon Corp., a developer and converter. "Are they buying a fully renovated building that was taken down to the shell, or are they buying a building that someone just slapped some paint on and put in new window boxes?"

What is disclosed

Buyers do have some safeguards. Before developers can convert a building, they must submit a host of documents to the state about the condition of the apartment building and about the condominium they intend to create.

Developers must also provide purchasers with disclosure documents that clearly lay out restrictive covenants that will bind unit owners, such as a "no pets" rule.

They must also supply a detailed analysis of the condition of the building prepared by an architect or engineer. That analysis must disclose the "useful life" -- or how much longer a system will last -- and the estimated replacement cost of 11 building components: roof, structure, fireproofing and fire protection systems, elevators, heating and cooling systems, plumbing, electrical systems, swimming pool, seawalls, pavement and parking areas and drainage systems.

Because condo owners must assume upkeep of the building, the disclosures help buyers understand their potential liability for repairs and replacements.

Where problems can arise: If the roof is estimated to be good for five more years, and the association has reserves to cover the cost of a new one, all is well. But if the repairs cost more than expected, condo owners can face a special assessment to help cover the expense. Special assessments are possible, but less likely in the early years with new construction.

While all these responsibilities are laid out in disclosure documents, it's well known in the condominium industry that few condo purchasers actually read these materials.

"It's very common that buyers -- despite the fact that they're making the biggest investment of their life -- don't take the time to read about what it is they're buying," said Mark Grant, a senior partner at Fort Lauderdale law firm Ruden McClosky who specializes in representing condominium developers. "The state requires a lot of disclosure, but they can't force buyers to read it."

`Poor workmanship'

Grant said while state law requires developers to disclose the condition of a building undergoing conversion, it doesn't require developers to actually make any repairs or do any upgrades. If a code violation results in a lien filed against the property, however, the developer is responsible for correcting the violation.

Mark Collins was thinking of buying a converted condominium in Fort Lauderdale selling for $279,000, but was wary about the quality of craftsmanship. The price of the two-bedroom unit was right, but the building was from the 1970s, said Collins, an administrative assistant.

He said it had wood laminate flooring that wasn't installed properly. "All the units were redone, but it was poor workmanship," he said.

Of course, problems don't always arise. "Converters by and large do a great job," said Richard Horton, president of the Builders Association of South Florida. "They do their due diligence before converting and end up with a building that is code-compliant and meets the needs of the buyers almost as good as a new building."

Still, reports of converted buildings with code violations have attracted the attention of some state legislators.

State Rep. Julio Robaina, R-Miami, supports tougher laws for condo converters. He's heard of situations in Miami-Dade County where developers converted hotel units into residential condominiums without upgrading the electrical systems.

"A hotel room might not have had a kitchen, and it has low-voltage wiring," he said. "Then a developer gets ready to put in major appliances, and all the wiring should be ripped out and upgraded. But they missed it."

Robaina thinks converters should be held to the same building code standards as developers of new construction. "There are things behind walls that the naked eye can't get to unless the building is a brand new building," he said.

Settling arguments

Robaina was key in creating the office of condominium ombudsman, a position added by the Legislature last year to help mediate disputes between condominium owners and their boards. That position was filled by Virgil Rizzo, a retired physician and lawyer who owns a Fort Lauderdale condo.

Rizzo recommends that all condominium buyers consult an attorney before they sign a contract. Although he doesn't get involved in disputes between buyers and developers because those involve private contractual issues, he has heard of numerous problems in converted buildings. "These developers are trying to make a buck as quick as they can," he said.

Purchasers of converted condos aren't helpless, though, if a key component of the building fails. State law requires the developer to either set up a reserve fund or warrant certain parts of the building, such as the roof. If repairs on those items need to be done, the unit owners can look to the reserve fund, or the warranty.

But many times the reserve funds are not enough to cover needed work. In that case, unit owners could be forced to come up with extra funds. Rizzo, the ombudsman, said developers often have insulated themselves if condo owners want to recover the outlay because the converted building belongs to a separate legal entity.

"There are no assets, so even if you have a case against the developer, you can't collect," he said.

Robyn A. Friedman is a freelance writer. She can be reached at rafriedman@att.net.