Monday, February 01, 2010

BUYING A CONDO IN CHICAGO’S HOT FORECLOSURE MARKET TAKES EXPERTISE

Realtors are happy that existing home sales in Chicago and Illinois are on the rise, but the reality is resale prices are still falling and many of the deals are short sales and foreclosures, experts say.

The Illinois Association of Realtors recently reported that statewide single-family and condominium sales in December rose 20.1 percent when a total of 8,197 homes were sold compared with 6,823 homes sold in December of 2008.

It was the fourth consecutive month of year-over-year sales increases statewide. A total of 107,503 homes were sold Illinois in 2009, down just 1.5 percent from 109,195 homes sold in 2008.

However, median prices slipped 14.6 percent statewide to $157,000 at year’s end from $183,900 at the end of 2008. The median price in Chicago in December was $210,000 down 10.6 percent compared to $235,000 a year ago in December 2008.

With Illinois’ official unemployment rate skyrocketing to 11.1 percent in December, a major slice of the home sales volume in 2009 can be traced to short sales and foreclosures, according to the IAR.

“Chicago’s foreclosure market is hotter than a pistol,” agreed Sars Benson, president of Benson Stanley Realty www.bensonstanley,com, a veteran Realtor and appraiser in Chicago. “However, buyers must perform detailed due diligence. What appears to be a bargain can become a financial albatross.”

In the foreclosure free-for-all, very little consumer protection exists, Benson warned.

“Foreclosures, corporate-owned and estate sale properties are generally sold without any warranties—in ‘as is’ and ‘where is’ condition,” she said. “There are typically no property disclosures and no survey.”

Federal and State mandated disclosures typically cover everything from lead-based paint to mold, asbestos, or any other known property defect including notice of code violations and lot line disputes, Benson explained. But in a foreclosure no disclosures are available because the “owner” often has never occupied the property.

“This is just one of many reasons foreclosure prices are substantially lower than ordinary real estate inventory. The purchaser is buying at their own risk,” Benson said. If the foreclosure is a condominium unit, buyers should focus on the health of the building’s condo association because this is critical in making a profitable investment decision, she advised.

“When purchasing a condominium, the purchaser is also buying into a mini-governmental entity—complete with a president, secretary, treasurer and a board of directors. This government may be as well run as Switzerland, or reminiscent of the worst of Third World countries,” Benson said.

Buyers especially should use caution when purchasing a condo unit in a newer building—especially anything built since 2005, Benson warned. “Due to the recent market downturn, some of these buildings have an extremely low number of owner-occupied units as more and more condos fall into foreclosure. A high ratio of foreclosures will severely affect resale value,” she said.

Also, you should exercise caution when purchasing a unit in a smaller building. For example, if one unit in a three-unit condominium is not paying association fees, the operating income of the association experiences a 33 percent deficit, Benson explained.

“If that same unit becomes a rental, the building will no longer meet Fannie Mae’s 70-percent owner-occupancy ratio for conventional financing,” she said. If the unit goes into foreclosure, the building would then be 33-percent vacant. This will limit the pool of available buyers—and thus the resale potential—for all of the units in the building.

“Buyers should make certain to retain an experienced buyer’s broker who will exclusively represent the purchaser’s best interests, to scour the market, perform complete research and thoroughly analyze data,” Benson advised. “Without representation, a buyer could easily find themselves swimming with sharks.”

NEXT WEEK: Buyers must insist on seller disclosures before writing an offer on a foreclosed property.