Deals that might be too good to be true?

Your guide is helping an overseas investor pick out a nice studio or one bedroom to purchase from far away, and hopefully move into in a few years when they come to Chicago.  They are inspired to act at this time, rather than waiting until they arrive by the temptation of some very good prices for condos in some very swanky neighborhoods. 

These buyers have been scouring the websites and sent me a list of some seemingly good deals.  Including a list of buildings that all seem to have one common characteristic.  I’ll refrain from publishing my laundry list here on the blog as I don’t want to alienate a whole bunch of other clients, other happy homeowners, or tarnish any reputations.  But I’m happy to share the same advice with my readers.


What all of these buildings have in common: they were all converted to condos around the year 2005 – give or take a couple years. Though these buildings are all different ages (some old, some middle age, some relatively new), all were apartment buildings first, then a developer decided to convert to condominium.

What happened to these buildings was a two-fold WHACK:

1. They sold a LOT of units to INVESTORS. During the late 1990’s and early 2000’s, it became normal for nearly anyone, and their grandmother, to put money down on a condo. And nearly as soon as the condo was ready, or a year or 2 later, you could "FLIP" it for a profit. And most of the time, you could rent the unit out and make money on it while you owned it.

2. Everyone who bought around that time is upside down. Starting in 2008, continuing through 2009, and up to today, real estate values dropped like a rock. This doesn’t matter much if you bought your home, condo, or other real estate a LONG TIME ago. Like 2002 or earlier. If you did, you probably still have some equity. For example, I bought my home in 2001. My price was $434,000. Prices in my townhouse complex went UP, UP, UP and at the high point it was worth $625,000. Then in late 2007, prices started falling. And now my next door neighbor has his unit for sale – exactly the same as mine – for $499,000. But I’m okay because I didn’t LOSE $125,000, I just won’t MAKE as much if I had to sell right now.

The problem: buildings like the ones these delightful overseas shoppers asked me about are filled with two types of people: (A) Investors and (B) young home buyers. Both categories of owner are currently upside down.

(A) Investors – they are having a hard time making payments because RENT doesn’t cover EXPENSES anymore. Because they can’t afford these units anymore, they are walking away from their units in great numbers. Hence the high number of foreclosures and short sales.

An interesting twist in this story: One big developer had a "Special Program" for investors to generate more sales. They would GUARANTEE the payments for investors. What they would do – sell to investors, and guarantee that the rent payments would cover the mortgage, assessments and taxes. So if a person bought a 1 bedroom at The Sterling, and the payment of mortgage + tax + assessment was $1,700, but a renter was only paying $1,500, the developer would make up the $200 per month shortfall. And the guarantee went for two years. Of course, everyone believed that rents would continue to rise at 10% per year, just like it always had. Instead, rents plummeted. And ALL those investors got stuck with condos that cost $300, $400, $500 and more, every month, than the rent paid for. That one big developer offered that same program at several buildings. This resulted in THOUSANDS of units being sold to investors who couldn’t make payments on them in the last 5 years.

(B) Young Owners – they bought a condo thinking they would make a ton of money from appreciation. But instead have seen their down-payments vanish, and their payments skyrocket as their adjustable mortgages rise.The double-whammy for Young Owners is the economy. Unemployment in Illinois is still close to 12%. Lots of these poor young buyers have lost jobs, or been forced to take pay cuts. Hence the high number of foreclosures and short sales.

What to do for my buyers?

I’m going to try a three-prong approach. 

1.  Choose carefully for some better examples from their suggestions.  A couple of the buildings they asked about really are quite lovely.  And some of my research shows that the buildings are slowly recovering from the glut of foreclosed units in the building.

2.  Recommend some alternatives.  For a building that they loved, I might suggest another more established building around the corner.  The Gold Coast and River North are filled with mature buildings whose financial outlook is rosy, yet values are down because values are down throughout the rest of the neighborhood.

3.  Search out other great deals.  There are plenty of ways to search for units that have had massive price reductions.  And even some established buildings have an occasional short sale or foreclosure.  All these criteria can be searched for in our MLS.