A re-post of something I wrote back in 2005, sometimes the oldies just don't get old.
Family editor tip: When you have a Type parameter that you can’t change to Instance in the Family Types dialog box because the modify button is inactive...(meaning it is a stock "factory" parameter)
Don’t fret! Close the dialog box, select a dimension that is assigned to the parameter and take a look at the Options Bar.
Notice the check box next to Instance Parameter? There you go! Thanks to Steven Campbell for the wake up call! Sometimes the answer is as plain as the nose on your face!