Your guide has been involved in some challenging real estate transactions in his career. But this deal that my young apprentice is trying to put together takes the cake.
To protect the innocent as well as reduce embarrassment, let’s refer to my apprentice as Luke (as in Skywalker.) Which of course conjures up the obvious other reference, but let’s leave that one alone for the time being.
Luke met a motivated buyer while on “floor duty” a few weeks ago. Our buyer seems to be a great client – cash and a good credit score. Motivated to get out the suburbs. Nice all the way around.
Too good to be true?
They located two nice condos in Wicker Park in a nice newer building. Both units are stylish, seem well constructed, and beautifully finished. One is a second floor unit with two beds, and two baths. The other is a third floor unit – just like the second floor unit but with an additional bedroom on the rooftop making the unit 500 square feet larger.
In the Multiple Listing Service, both condos seem to be priced extremely aggressively. Super cheap, it seems. Hundreds of thousands less than other units in the neighborhood. Hundreds of thousands less than when the building was new – only back in 2006. Is this too good to be true?
Then it gets ugly
Both condos are on lock-box, so no one comes to do the showings. And therefore no one gives Luke the scoop on why these units are so well priced. Phone calls to the listing agents after the showing reveal only half of the story.
The two bedroom condo is already REO. That means it’s already been foreclosed on by the lender. (1)
The duplex condo is pre-foreclosure. That means the owner still lives in the unit, but the bank is in the process of foreclosing on the unit. (2)
Luke’s buyer likes the duplex condo better. But by the time he gets the agent on the phone for some follow up questions, the unit is under contract.
So Luke focuses his efforts on the two bedroom. The MLS listing sheet indicates that the taxes have not been assessed yet and do not list a figure for annual taxes. So your guide coached Luke on how to snoop public records to see how much the property sold for, and if the tax figures are out. (3)
The PIN numbers HAVE, in fact, been issued. And the taxes on the two bedroom condo are $7,000 a year. (4)
The MLS figures indicate that the assessments are “around” $160 per month.
After we get the figures from the management company, we learn that the assessments are really closer to $300 per month, and that they haven’t been paid in a year. (5)
Then the duplex condo comes back on the market. Luke shows it to the buyer a couple more times. And we start the diligence process all over again.
On this unit, of course, the agent has not listed the correct tax number or correct tax amount. Despite her assurances that when the tax bill comes out, they should “be around 1 & 1/2 percent” of the purchase price, we find that the taxes are really more like $10,500 a year! (6)
And a follow up call to the manager reveals that on this condo, the assessments are close to $400 a month. And they have NEVER been paid by the current owner. She’s three years in arrears in her assessments! That’s pretty close to $10,000. (7)
Early in the process, the manager was kind enough to send the declarations. The commercial space on the first floor is excluded from the association, and there’s a reciprocal easement and declaration that dictates how the two entities interact with each other. So I get to explain that to Luke, too. (8)
Normally, I like to employ the “Three Strikes” rule to situations such as this. Any time you come across more than two red flags (or “strikes”) then it’s an indication that this particular deal isn’t the right one to pursue. But based of the feedback from the buyer, and that the price seemed too good to be true, we kept after it a while longer. But even with a few practice balls, when you hit 8 strikes, it’s time to call “out.”