AnotherGame is a mod for ToE 3.1.

Well, choose even the most suitable standard map ;) Dwellings are usually placed between mines of common and rare resources. Higher-level dwellings are located further away. That's the first thing.
Secondly, if all players have an equal opportunity to convert, where is the imbalance? (An imbalance is when, for example, there are 2 Elves and one Academic, and one Elf takes dwellings from the other Elf and transports them to his own Castle over long distances (which is also a plus in favor of conversion)).
The only thing that can be done is to make it so that when a dwelling is captured, a non-removable guard accumulates in it over time.

The concept of "balance" is broader than you think. It is completely unbalanced to grab someone else's outpost and convert it into your own for 500 coins, getting your own dwelling for free. This is the same as converting for free; in that case, it would be easier to make auto-conversion so that you don't have to click the mouse mindlessly.

I don't understand at all why G5 should be turned into G6. Apparently, your mod is written exclusively for a narrow circle of people (your clan); otherwise, I wouldn't risk putting the "conversion" label (including cities) on Heroes 5, because it is too controversial. Moreover, this is not one of those cases where "more options - more strategy," because these options are unbalanced and turn into an obligation (especially in the case of dwellings), changing the gameplay and nothing more.

Dwellings are like mines. Most mines, especially in the late game, are practically unnecessary, depending on the situation. And this (the fact that objects play a role depending on the situation) is a completely normal part of the gameplay of Heroes 5.