Many first time buyers in Chicago start their search on the internet and come across some “great deals” that beg the question: Why are these condos so cheap? What is wrong with them? Well, first the buyer must know that each neighborhood in Chicago is different. However, if we narrow down into some of the most popular neighborhoods, such as those surrounding downtown, there may be instances where units in a particular building are much much cheaper than a neighboring building. Why is this? Why is one building 50% less than a building next door when features and amenities are almost identical?
One of the largest negative factors in today’s market are poorly managed or run condo associations or associations that have special assessments or litigation. The association manages the common space of the building. It also controls the daily duties of maintenance staff, door staff, etc. Most times the associations hire a professional management company but all the costs or issues pertaining to the building still fall on the association.
We’ve seen several common problems with some associations over the past few years. Some of these problems can adversely affect the ability of buyers to obtain financing and thus make it difficult for sellers to sell.
Here are some of the common problems:
Special Assessments due to poor construction: While this problem can manifest itself all over Chicago it has been most prevalent in the South Loop. The South Loop saw buildings fly up over night and such quick building can often lead to construction defects. Most buildings in the South Loop DO NOT have problems, but some do. When a building has a major issue…lets say the facade is cracking throughout the structure or water is leaking in off each balcony into the unit…the problem must be corrected. If the building is newer the association will typically sue the developer in order to have the developer correct the problem or pay to correct the problem. In the case of some buildings that have these issues the developers have either filed for Bankruptcy or are well protected enough that such lawsuits would take forever to bring money to the table.
With all this being said how does it effect values? Some buildings have had to levy massive special assessments in the ranges of $14 to $20 Million. Huge special assessments such as these are typically paid over time. The association gets a loan to fix the problem and then increases the monthly assessments on each unit in order to pay back the loan. The assessments are essentially what is used as collateral for the loan. In some cases assessments can jump from $300 to $800/mo. These high assessments will scare away buyers and the special assessment still on the books for the association may make it more difficult for someone to obtain financing. This can drastically decrease values.
Timing: The timing of construction of some buildings can be integral in whether or not values have sustained or fallen in recent years. Buildings that were completed in 2007 and 2008 have an unusually high foreclosure and short sale rate due to the fact that many buyers bought at the height of the market. The more buyers that “overpaid” for their units the more chances there are of owners walking away from their properties or short selling. Since short sales take much longer than traditional sales the pricing on shorts are typically less than a traditional sale of the same type of property since less buyers want to wait around for a short sale.
Litigation: Banks never like to see associations involved in litigation. Some litigation is not a big deal. If an association has completed work on the building and is simply suing a developer or a contractor to RECOVER costs then it isn’t that big of a deal. However, if the association has NOT completed the work and is suing a developer or contractor for money then this basically means that the work is CONTINGENT upon the outcome of a lawsuit. Either the developer/contractor pays if the association wins or the association loses and then is not only on the hook for attorney fees but also for the work which must be completed which means a special assessments. Banks just as much as buyers do not like “NOT KNOWING” the future. This means that not only is financing more difficult but less buyers are interested in these types of properties.
I HOPE THIS HELPS ANSWER SOME OF YOUR QUESTIONS! FOR MORE INFORMATION REGARDING BUYING IN CHICAGO PLEASE VISIT MY WEBSITE WWW.BUYINGINCHICAGO.COM TO LEARN MORE ABOUT THE BASIC PITFALLS YOU NEED TO AVOID WHEN PURCHASING A CONDO IN CHICAGO.
PAUL BLACKBURN IS AN ILLINOIS LICENSED REALTOR AND BROKER WITH @ PROPERTIES IN CHICAGO. HE CAN BE REACHED AT PAUL@PKBLACKBURN.COM