Condo Conversion Gone Wrong

About a year ago I received a call from an out of state investor who had purchased a few units at the Fairways at South Shore. This individual had found my website and wanted some advice. The Fairways at South Shore is located on Marina Bay in League City, it is a condo conversion, meaning it was converted from apartments to condominiums. I guess a more accurate description would be a condo conversion gone wrong.  The investors units were now in foreclosure and they were unable to get any information from the management company as to if the units were rented out or there status in general. I referred him to an agent who specialized in residential who later told me they got no information from the management company and they were being extremely difficult. This week when I read an article by Laura Elder with GalvNews.com that details the legal trouble the development is in and it answered a lot of questions I had. :

“LEAGUE CITY — More than 50 investors, most from Israel, went to court last week in attempt to save condominium units from foreclosure as they sue a group of companies and people they say defrauded them in a real estate venture.

The lawsuit claims the defendants kept revenue generated by the venture that should have gone to pay debt and used property owned by the plaintiffs as collateral in obtaining a loan of almost $23 million that benefited the defendants. The investors together own 114 units in Fairways at South Shore, 3045 Marina Bay Drive, in League City. The former 432-unit apartment complex was converted into condominiums about three years ago.

The investors never intended to live in the units but instead were seeking to generate income by renting them to others, according to the lawsuit. Through agreements, the units owned by the investors were put in a rental pool managed by the defendants, according to the lawsuit. But while Westcorp Management Group, of which Roni Amid is vice chairman, had been collecting rent from tenants, it failed to pay proceeds to the mortgage company or the investors for some units, according to the lawsuit.
Without rental income, some of the investors are unable to pay their mortgages, leading lenders to begin foreclosure proceedings on at least 30 units in the complex, said Danny Sheena, a Houston attorney representing investors.

Investors filed a lawsuit Feb. 9 in the 122nd State District Court in Galveston against Roam Development and seven other entities and individuals, claiming, among other things, fraud, theft, conspiracy, breach of fiduciary duty and violation of the Texas Securities Act….

According to the lawsuit, defendants enlisted the aid of an Israeli company, Founders Israel, to recruit Israeli investors. The sole manager of Founders Israel is Tanya Amid, a defendant in the lawsuit, who is the wife of Roni Amid, according to court documents. “ Click here for the full article.

There are some lessons  to learn from the condo conversion gone wrong.

- Don’t buy anything you haven’t personally seen and seeing by Google Earth doesn’t count.

- Never have the investment company management the property you just purchased. They normally charge extremely high management fees and there is conflict of interest.

- For investors looking to convert apartments, the key is the price you will sell units for.  It sounds so simple but unfortunately many overlook that basic step. The conversion is only profitable if there is enough demand at your price point to move units, to repay your debt.

- If you happen upon an apartment complex who is advertising it as a possible conversion, be leery. More than likely if its was a great property to convert the current owner would have already done it.

- For investors wanting to buy property for rental income, regardless of property type (industrial, office, single family, multi family) the first test is looking at the demand for that property. Again this sounds basic but before looking at anything else if its not profitable move on.