Gut rehabs the next wave in Chicago Real Estate?

New construction condos in Chicago are few and far between. Large scale new developments were mostly halted in 2008 and even though demand for new construction is high in Chicago banks are not willing to take the risk and offer developers construction loans on a 300 or 400 unit condo project. With the majority of new buildings in Chicago at least 5 years old the question is “What is next for Chicago condos?”

Gut Rehabs

With no new construction condos in the downtown neighborhoods many are turning to older buildings and buying “dated” units with the plans of gutting and rehabbing the units with all of today’s modern finishes and conveniences. Newer construction buildings (built between 2003 and 2008) are still selling at a premium as the finishes are “nice” and still acceptable. However, over the past decade tastes in finishes have changed a great deal. Those wanting the most updated and modern look in the downtown neighborhoods are really left with only one option: Do It Yourself….well hire it out but still “rehab your unit.”

Many older buildings have also started modernizing their hallways, amenity floors, lobbies and elevators. These capital improvements along with a cheaper price point, which allows buyers to customize their own units, are allowing old buildings to give new ones a run for their money.

If I am thinking of buying in an older building and customizing a condo; what should I look for? What should I watch out for?

 

Buy in a building that is not afraid to spend money:

It is important to buy into a building that is constantly modernizing itself. Buildings that haven’t completed any capital improvements in over 20 or 30 years are not and will not be able to compete in the market place. Updated hallways, lobbies and amenities are key. While these updates do cost money and may mean higher assessments, you will see a greater return on your investment in such buildings. Buildings that choose not to update will eventually have to (at some point new elevators and new fitness equipment will be a must) and that cost may come as a special assessment anyway. In the meantime however those buildings start to develop a reputation of “old and tired.”

Structural obsolescence caused functional obsolescence!

Consult the building engineer, an architect and a great contractor on exactly what you are able to do with your unit before buying. Many older buildings may have large living spaces but small bathrooms and small kitchens. Current trends are open, expansive kitchen spaces, large closets and well sized bathrooms. Make sure plumbing, electrical and structural walls are able to be modified to allow the reconstruction you so desire. You can update a unit all you want, but if the floor plan is poor then you will not see a good return on your investment. Many times a small change in the floor plan will earn you your greatest return.

Take advantage of what old buildings have to offer!

Location, Location, Location. Many times older buildings have some of the absolute BEST locations and BEST views in the city. Take advantage of this! If you are interested in a building on Lake Shore Drive then make sure you have a great view of the lake. If you are interested in a building in the heart of the Gold Coast then get a south view so you can see the entire skyline and the lake. This may seem like a no-brainer but you’d be amazed at how many people look at only the price tag when they’re rehabbing a unit versus looking at the entire package of what a unit has to offer.

Wider is better!

One of the biggest downside to some of the newer construction buildings are the long and narrow floor plans. Many times this is done to maximize the number of units in a building. Many older buildings have wide floor plans. Wide floor plans are almost always preferred as they offer much more window space. In addition, newer buildings have taller ceilings (9 or 10ft) whereas many older buildings only have 8ft ceilings. A wider floor plan, which allows for much more light will make ceiling height feel taller versus a long narrow floor plan which will make a unit feel “closed in.”

Assessments

Older buildings typically have higher assessments simply because they are less efficient and more costly to maintain. It is very important to see how an association is spending their money. High assessments are not necessarily bad so long as you are getting something in return such as a building that is constantly updating and modernizing itself. A building that has high assessments because they are always “fixing things” versus “improving things” is a building that you will likely want to stay away from.

 

Paul Blackburn is a licensed Illinois Realtor and Broker with @ Properties in Chicago. He can always be reached via phone or e-mail at Paul@PKBlackburn.com

The New Reality of Real Estate in Chicago

The housing market in Chicago has taken a dramatic turn from where it was a couple years ago. Condos and Single Family Homes in Chicago’s hottest neighborhoods are moving fast in all price ranges. Where is the sweet spot? The hottest section of the market is currently between$300,000 and $500,000 but we are also seeing higher end properties sell in only a matter of days.

Over the weekend I put a 2/2 loft under contract. My clients had to pay more than $7,000 above list price. We put an offer in after the property was only on the market for a day. Our goal was to get the property under contract by the weekend. We were up against one other buyer but we knew if it dragged into the weekend we could easily be up against multiple buyers. This property was in Bucktown.

Another property down the street in Bucktown had 22 showings in a 2 hour period last weekend. My buyers looked at this property on Sunday (the first day of showings for this new listing). On Wednesday they e-mailed me saying they wanted to make an offer. Unfortunately it already sold. Of the 22 showings the property received 3 offers from buyers. More than likely it sold for above list price as well.

A colleague of mine was showing a home in the $600,000 to $700,000 range in Old Town. She was one of 6 agents with buyers submitting offers. Her clients went $30,000 above list price….guess what? They didn’t get it. While we don’t know the exact sale price it has been eluded that it likely sold for almost $50,000 above list.

The most obvious question people may have is “What the h*ll is going on?!” Is this sustainable? Well here are my thoughts on the subject.

Currently in Chicago, in the more desirable neighborhoods, we have an inventory problem. Inventory has decreased to all time lows and buyer demand has increased dramatically. Lets start with demand, however. Why has demand increased?

The Hangover Effect: After 2008 everyone had a hangover in the real estate market. Just like in real life, when you wake up with a hangover the last thing you want is another shot of tequila that you had the night before. This hangover lasted in the market for several years. People simply wanted nothing to do with the market. Granted, many people did not have the finances to buy and many were worried about their jobs and lending (the bars) were not very open.

Now the “hangover effect” has mostly lifted. The economy is rebounding and consumer confidence in the housing market is back. During this hangover period many people rented and saved cash. Now, as they have seen the market stabilize we are seeing a rush of buyers into the market. With increased confidence we are also seeing record low interest rates and property values are back to normalized levels.

It is important to note that in distressed areas most of the demand is made up of investors. However, in prime “Class A” areas the majority of demand are first time, Second time and second home buyers who plan to use the property.

Where is all the supply? There are a couple reasons for low supply. First, we haven’t seen any new construction for condos or single family homes in almost 5 years. Only now is construction starting to pick up again and it is doing so at a slow pace.

The largest reason supply is low is due to many homeowners still underwater on their values. Many “would be” sellers simply cannot afford to sell their homes. Many homeowners are still refinancing using HARP and similar programs and some are still completing mortgage modifications. These homeowners are not selling anytime soon.

Who is selling now? I’ve noticed that many current sellers were buyers back in the early 2000’s before prices ran up. Some were buyers at the peak in 06 but put more than 5% down so they can at least walk away from the sale with some cash.

What is most interesting are tenant occupied properties selling. Many of the condos I have been showing in Lakeview, Lincoln Park, Near North, etc. have tenants in them. These are not standard “investment” condos for the owners but instead were their primary residences they could not sell back in 08, 09 so they rented them. They are now able to unload them for what they feel is a “decent” price.

What does the future hold? The inability for developers to obtain financing on large buildings is a good thing. This will help supply remain low. Interest rates will likely stay low for a while. The FED is talking about slowing or limiting their purchase of MBS however they will likely continue for a short while. The MBS market is in recovery mode especially with treasuries at record prices (low yields).

At the end of the day interest rates should remain low through 2015 and supply will likely remain low. This will start to push up pricing in your better markets which will slowly allow those who could not sell before to start to sell. The hope is that supply will be introduced slowly into the market.

SHOULD I BUY OR RENT A CONDO IN CHICAGO?

Has the market bottomed in Chicago? Is the real estate market in Chicago on a rebound? Where do I see the condo market in Chicago? These are questions asked to Realtors on a day to day basis. Unfortunately we are not fortune tellers but we do know the market quite well and understand its pulse. I am happy to say it does have a pulse, a good one! Here are my thoughts on the market and whether or not you should be a buyer right now or a renter!

My overall feeling of the condo market in Chicago is positive. When I am speaking of the condo market I am speaking of the most popular areas to purchase a condo. Everything from South Loop up north to Edgewater and as far west as Wicker Park and Bucktown and everything in between.

If you are a renter right now you will see that inventory is scarce. More people are renting now than buying and this has pushed prices up. Over the past 10 years we did not see any new construction for apartments. We saw the opposite; condo conversions. This lessened the supply of rental property. Now that the economy has rebounded and those out of college have employment again we are seeing increased demand for renters. We then add into the fact that much of the public were afraid to buy over recent years, or could not obtain financing, and we have a perfect storm for increasing rental prices.

However, since the economy has stabilized so has consumer confidence. We couple this with increasing rent prices and BAM! People want to start buying again! Investors and first time buyers started entering the market (on a more consistent basis) about 2 years ago. Most notably, in the past 6 to 9 months buyers have been coming out of the wood work and eating up all the excess inventory. Renters have finally become fed up with paying high rents and also having the lack of places to choose from. It is one thing to pay high rent prices but it is another to pay high prices but not have any GREAT options. This has forced many to BUY.

Inventory levels of condos in Chicago have dropped to record lows (record since the crash). The challenge is that quality inventory for purchase is actually scarce, at least condos priced properly. If a condo is priced right it will easily sell with in 30 days in today’s market. Versus 3 years ago when exceptionally priced properties still took months to sell.

So what does this mean? Is it a good time to buy? Yes and no! If you know where you want to live and plan to be there for at least 3 full years before you need to put the property on the market, then yes I would say it is a good time to buy. I also recommend to all my buyers to look at their property as a true investment. Instead of asking the question “What can I sell this for in 3 to 5 years” ask the question “What can I rent it for?”  Why do I say rent it?

Prices won’t be skyrocketing anytime soon! While prices have stabilized they won’t be increasing at “normal levels (3 to 5% a year)” for a while. Sure, you may snag a great deal and your return may be great, but the overall market is going to recover slowly. Here is why:

Remember how I said inventory levels were low right now? The reason inventory is low is not because people LOVE their homes and refuse to sell. Inventory is low because many people still don’t want to take a hit on their homes. Many people may be under water or near the edge of the water. What we will see happen is the market start to tick up and then some sellers unload their property because they finally can cover their mortgage or put enough in their pocket where it is worth them selling. This doesn’t mean the market is unhealthy nor does it mean that it is not the right time to buy. It simply means the market is walking slowly in the right direction.

Lets say the market just had leg surgery and is in physical therapy. It is walking again and moving forward…just at a very slow pace and every one in a while it will need to rest for a few minutes. Eventually, however, the market will return to normal. We are on the right path and I’m happy to say we can finally breath again!!

Paul Blackburn is a licensed Illinois Realtor and associate Broker with @ Properties in Chicago. He can be reached via e-mail at Paul@PKBlackburn.com  For more information about purchasing a home in Chicago please visit www.BuyingInChicago.com

WHY ARE SOME CONDOS SO CHEAP IN CHICAGO?

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

First Time Home (Condo) Buyers in Chicago!

It is great to see so many renters turn into buyers in this market. Right now many tenants are deciding to become home owners in Chicago for the first time due to the increase in rent prices. Buying in Chicago is very different than buying in any other market as not only the product is different but the laws and even the weather is different than many other cities. With all this being said I have put together a website to help everyone from first time buyers to those buying their second and third homes understand some of the very basics in today’s market.

BUYING IN CHICAGO

www.BuyingInChicago.com