JOEL ALTMAN SAW the other shoe before it dropped. Though sales seemed to be holding strong at his 220-unit Grove East workforce project in Plantation, Fla., he knew he was in trouble when the real estate market started to crash in 2006.

“We suspected that it was going to be a lot of defaults because the single-family builders, like Lennar and Centex , were selling two-bedroom, two-and-a-halfbathroom, 1,400-square-foot townhomes for $179,900,” says the CEO of Boca Raton, Fla.-based developer The Altman Cos . “We knew that if our one-bedroom units were $179,900, then there was no way we were going to back fill with 50 percent or 60 percent defaults.”

Altman was right. Buyers fled the project. But fortunately, in this case, Altman's costs were low enough that he could go to Plan B—reworking his loan and turning Grove East into a rental community . In this case, the gambit succeeded. By May of 2009, the $33 million, mixed-use project exceeded 90 percent occupancy.

Altman is one of the lucky ones. He has turned his for-sale units into rentals and even collected some that he had originally sold. “We bought the closed units and converted [the building] to a rental,” he says. “Whatever inventory we didn't have sold, we rented.”

Grove East isn't alone. Jack McCabe, CEO of Deerfield Beach, Fla.-based Mc- Cabe Research and Consulting, says about 62,000 units were converted to condos in Florida (a whopping 37 percent of the inventory in the Sunshine State). Now, about 16,000 units, or more than a quarter of those units, have been forced to reenter the rental pool. That doesn't include a host of other rental units, including a smaller block of individual units and rental agency programs, which are virtually impossible to track.

Unfortunately, most developers and converters are so far underwater that they can't rent out their unsold inventory, much less buy back sold inventory and rent it. That leaves behind investors who see opportunity but still have doubts about buying units with a large number of owner-occupants. For that reason, right now, when it comes to condo reversions, smaller deals hold the most promise.

A Difficult Path

Whether you're a converter or investor, trying to make an opportunistic play by turning a for-sale deal into a rental isn't easy. “Everyone talks about doing reversions, but you really have to have some guts [to do it],” says Alan Kaye , multifamily director of Coldwell Banker Commercial in Boca Raton.

First, developers, who have underwritten the land or building at for-sale prices, make a cost basis that is too high to make the deal work as a rental. Often, that deal then ends up with the bank.

“The developers have put more energy and focus into marketing, renting, and finishing their developer units,” says Andres Lemos , principal of Miami-based multifamily marketing and investment firm Miami Waterview Properties . “A lot of these units were decorator-ready. They're working on making the places inhabitable so they can actually rent them.”

For people who bought apartments to upgrade them to condos, the process is different. But there are still challenges. “A lot of them bought the occupancy so they could do improvements to get them in a for-sale-like condition with new appliances, carpets, and floor covering,” says Marc deBaptiste , a principal in the Boca Raton office of multifamily brokerage firm Apartment Realty Advisors . “Now, they are forced to get back into the rental business.”

In many cases, the distressed rental units owned by the converters and builders—and even the building's investors—end up with the bank, which gives vultures an opportunity to swoop in and do the reversion. But some of those buyers are concerned about potential trouble ahead.

“A lot of people aren't really interested in buying up the blocks of inventory unless they can get control in a large percentage of the building,” says Adam Cappel , president of Miami-based market intelligence firm . “If it sold 150 units and you can buy the other 150 in block, you have to assemble the rest of the units. It's kind of a nightmare.”

But they may look at deals where a smaller percentage of the units have sold. “It's happening in select deals where a smaller percentage [of units] was sold to individuals,” Cappel says. “You have to buy the block of units that are under bulk ownership. It's hard to make that work.”

The Opportunity

In smaller doses, however, investors are interested in doing reversions , says Peter Zalewski , a principal with Condo Vultures , a Bal Harbour, Fla.-based consultancy. “We've been approached by groups where no more than 10 percent of the project has been sold,” he says. “Then they want to buy the note and do what they need to do. They ultimately try to buy these individual units on a case-bycase basis.”

Kaye has a similar story with one buyer he works with. Again, patience is the key. “He's buying a minority of the units. Over time, he'll acquire one-off and small blocks of other units,” Kaye says. “He will try to build a critical mass [of units] in that complex.”

Zalewski has generally seen one group approach him for broken condos. “It will be the private equity-type buyer, rather than the institutional-type buyer,” he says. “Institutional buyers will not do all of that stuff. The private equity is saying they can move in there, and if they get $20 million or $15 million, they buy it, put in some sweat equity, and in three to five years, they may look like rock stars.”

The potential for stardom is there. Kaye is seeing some late '80s deals sold for $30 a foot. With that kind of pricing, he sees some investors dealing with the hassle of individual unit owners. “I believe some people will make a ton of money in the next couple of years by buying these units, dealing with the failed HOA [home owners' association], and bringing it back. And they're going to have a phenomenal product at a very low cost-per-foot,” Kaye says. “You can't beat the replacement costs that are available today, but you need to have the temperament to deal with the problems with units.”

And there are ways to do this. For instance, in many of the investor-soaked markets, units will end up with banks. If you know the bank, you can then start accumulating rentals. “Let's say that up to 50 percent of those buyers might have been investors anyhow; they're going through short sales right now with their lenders,” Kaye says.

Another place to look is at the HOAs. If it's in trouble, the condos could come a lot cheaper. “A lot of those investorowned units sold may not be paying HOA dues or real estate taxes,” Kaye says. “It's causing a burden on the property. A lot of people are selling off these units at fairly deep discounts.”