Definition
Conversion in real estate involves changing the use, ownership, or financing structure of a property. This term can refer to multiple scenarios including:
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Changing the Use or Form of Ownership:
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Transforming rental properties, such as apartments, into condominiums.
Example: A condominium conversion allows existing tenants to remain until their lease expires. Often, these tenants are given the option to purchase their units at more favorable terms than those offered to the general public.
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Taking Away Property (Involuntary Conversion):
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Refers to the illegal taking of another person’s property, such as when a tenant removes a landlord’s fixture from an apartment.
Example: An illegal conversion occurred when the tenant removed the landlord’s light fixture from the apartment without permission.
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Changing the Ownership Form of Financial Institutions:
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Converts a savings and loan association from one ownership form to another, such as from a mutual savings bank to a stockholder-owned company.
Example: Friendly Savings applies to the Federal Home Loan Bank Board for conversion from a mutual savings bank to a stockholder-owned company.
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Mortgages:
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Provision in some adjustable-rate mortgages (ARMs) allowing the borrower to change the loan to a fixed-rate mortgage, usually at the end of the first adjustment period.
Example: An ARM is originated at a 3% interest rate for the first year, with an option to convert to a fixed-rate mortgage at the then-prevailing interest rate after the first year.
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Examples
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Apartment to Condominium Conversion:
A real estate firm purchases a rental apartment building and decides to convert it into condominiums, selling individual units to buyers. Existing tenants are often given the option to purchase their units.
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Involuntary Conversion:
A tenant unlawfully removes fixtures belonging to the landlord. This illegal action is classified as involuntary conversion of property.
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Ownership Structure Change:
A mutual savings bank converts its structure to become a publicly traded, stockholder-owned company.
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ARM to Fixed-Rate Mortgage Conversion:
A borrower with an ARM at a starter interest rate of 3% decides to convert to a fixed-rate mortgage at the prevailing rates after the first year’s adjustable period.
Frequently Asked Questions (FAQs)
Q1: What is condominium conversion?
Condominium conversion is the process of transforming rental apartments into individual condominium units that can be sold separately.
Q2: What are the risks associated with involuntary conversion?
Involuntary conversion can lead to legal disputes and financial losses for the property owner whose property is taken without permission.
Q3: What is required for a mutual savings bank to convert to a stockholder-owned institution?
The mutual savings bank must apply to the Federal Home Loan Bank Board and adhere to specified regulatory requirements.
Q4: When can a borrower convert an ARM to a fixed-rate mortgage?
Conversion is typically allowed at the end of the first adjustment period under the terms of the mortgage.
Related Terms
Involuntary Conversion:
Taking away of property that belongs to another person without their consent, often leading to legal implications.
Adjustable-Rate Mortgage (ARM):
A type of mortgage in which the interest rate periodically adjusts based on a specified index, allowing for lower initial interest rates.
Fixed-Rate Mortgage:
A mortgage with a fixed interest rate for the entire term of the loan, offering predictable payments.
Mutual Savings Bank:
A financial institution owned by its depositors, which can convert to a stockholder-owned company.
Online Resources
- Federal Home Loan Bank System
- U.S. Department of Housing and Urban Development (HUD)
- IRS: Publication 544 - Sales and Other Dispositions of Assets
- Real Estate Investing Forums
References
- U.S. Department of Housing and Urban Development. “Converting Rental Housing to Condominiums and Cooperatives.”
- Federal Home Loan Bank System. “Conversion Applications and Procedures.”
- Investopedia. “Adjustable-Rate Mortgages (ARMs) vs. Fixed-Rate Mortgages.”
Suggested Books
- Real Estate Investing: Market Analysis, Valuation Techniques, and Risk Management by David M. Geltner, Norman G. Miller
- Tax Implications of Real Estate Transactions by Richard A. Westin
- The Real Estate Math Handbook: Simplified Solutions for the Real Estate Investor by Jon Carswell
