If you've read any newspapers or business journals in formerly hot condo markets across the country, you'll know that condo developers, converters, investors, and the real estate agents selling these properties probably aren't too happy. Sales have slowed and values are stagnant.

But the condo downturn hasn't upset everyone. Renters from the condos that have been converted are now looking for places to live. That puts apartment owners in a great position. Now some apartment managers are also looking at ways to take advantage of the downturn by exploring management opportunities in the fractured condos. "A lot of people are looking at this business niche because there are so many of them [condo units] out there," says Cynthia Lucas, senior vice president in the Jacksonville, Fla., office of WRH Realty Services, a St. Petersburg-based property management firm.

Tom Nick Cocotos

So far, it looks like there are two groups of people who will end up owning these condos. One group, the banks, may hold units–at least briefly–after converters or individual investors defaulted on their loans. The second group comprises individual investors who keep their units and rent them out, though that group comes with problems. And, even if investors take over a large block of condo rentals, it's quite likely these units will be mixed in with owner-occupied units, which could present a challenge for managers.

Large Blocks

In places like South Florida, San Diego, and Washington, D.C., condo converters have been scurrying to scoop up as many apartments as possible over the past couple of years. Their goal: Turn around these units as quickly as possible. But if the units don't sell, banks could be their eventual owners.

"With interest rates and insurance costs rising and slowing sales, some of these guys [converters] will get squeezed," says Dave Woodward, managing partner and CEO of Laramar Communities, an apartment manager and owner based in Chicago. "On a cap rate basis, which is not how they were buying, they were buying at 3 and 4 caps. There's no way they will be able to cover their debt-service obligation [at that level]. You will have a lot of foreclosures."

And, even if these converters (or new condo developers, for that matter) are able to sell, the people who buy them could also see their purchases go back to the bank.

"We're already seeing foreclosures staring to hit," Lucas says. "A lot of people that thought they were the investors of the day and got in on all of this crazy financing with zero principal and interest-only loans that will adjust in a couple of years or balloon aren't renting out their units for what they thought they could. I think a lot of those folks will be left with their pants down in their deal."

That creates an opportunity for managers to go to lenders and market themselves. WRH is already talking to banks about these units. "We're gearing up towards marketing to lending institutions that we think will end up with a lot of these in receivership," Lucas says. "We are just getting ready to do a marketing campaign for them. We haven't done it, but it's something that we're talking heavily about."

Individual Units

Not every condo investor will have to return its units or block of condos to the bank. Some may have bought with a lot of cash upfront. Others may be financially secure enough that they can afford to lose some money on a monthly basis if their mortgage is higher than the rent their unit can garner. "If you have half sold out, sales have turned into a trickle, and your expenses are way up, you're going to need the revenue from the rentals," Woodward says. "Most of these converters are not managers. They are going to have to hire fee managers."

Lucas receives a lot of inquiries from condo investors. "There are a lot of individual units calling to see if we can lease the units or perform maintenance," Lucas says.

The problem is volume. These investors don't own many units. "It makes more economic sense to deal with institutional owners," Lucas says. "In fee management, we're looking at 200 units or more to make the economics work. The little individual investors aren't anybody's dream deal. We turned a lot of it away for the past year because the volume didn't make sense."

But if more individual owners ask Lucas to manage their properties, she may have to reconsider: The number of units that could come back on the market in Florida is enough to make WRH reassess its options. "Here in a concentrated area we're starting to analyze the cost benefit," Lucas says. "Can we set up a small division and deal with [the individual investors' units]? It's not a huge plan, but we realize there's some opportunity we're going to look into."

In the long run, the main factor may be geography. "You can have 50 units in one property and it would be easier than 50 units over the state of Florida," Lucas says. "We have investors buying five units here, five units in Naples, and five in Sarasota. That makes it more difficult logistically."

Split Personality

Once a company like WRH ramps up to take over management of large blocks of rental condos, the challenges don't end, though. In fact, they may get harder. The main problem: managing a mix of renters and owners. "Many of these properties that were built to convert haven't kicked out the residents yet," Woodward says.

If these renters stay or new ones come in, tension could ensue. "There's always been a mindset where condo owners look down on renters," says Jack McCabe, president of McCabe Research and Consulting, a real estate consulting firm in Deerfield, Fla. (For strategies on dealing with this tension, see "Resident Files" below.)

While Edward Thomas, CEO of PMP, a property management company based in Frederick, Md., admits that he has owners he would like to get rid of, large numbers of renters can create problems in condos, too. He thinks managing a full building grows harder the larger the percentage of renters. "Typically, renters don't seem to display the same pride of ownership as an owner does," he says.

The composition of the condo board can also put owners on the defensive. If a developer or a converter rents out a large block of units and the board is incorporated, it could have a large voice in property matters. That might not sit well with the owners. "The developer will have voting rights for the renter," McCabe says.

Thomas sees the possibility for conflict as well. "It does create tension when you have a large voting bloc," he says. "Take any size community and they're typically controlled by a five- to seven-member board of directors. With three or four members, you can control the purse strings."

Taming Tension

A few simple steps can ease a splitting headache.

Having a condominium with both owners and renters can create some tense situations. No one knows this better than Edward Thomas, CEO of PMP, a property management company based in Frederick, Md., who has managed properties like this in the Washington, D.C., area. Here are Thomas' suggestions for maintaining peace in a split condo.

1. Meetings: A condo can also involve renters by inviting them to meetings to explain important issues. Sometimes people may not understand their actions are infringing on everyone else and a meeting can help clear the air, according to Thomas.

2. Lease Add-ons:Thomas says some condo boards created lease addendums where a renter must acknowledge receipt of the condo's rules and regulations. This way they know a building's quiet hours and how to handle things like trash and parking.

3. Newsletters: Management can help keep everyone on the same page by distributing newsletters with recent event updates and new policies. They should be sent to all residents (both owners and renters) and off-site owners, as well.