An East Coast transferee visited Chicago on a house-hunting mission and checked out several properties. He bought a unit in a vintage apartment complex being converted to condominiums. The decision is one he now regrets.
“I found that what you see is not what you get,” says the embittered man, who moved in two years ago and is president of the project’s homeowners association. Because he was from out of town he relied heavily upon signage, brochures and verbal promises from the developer of the North Side project. However, his unit, as well as the common elements, have not been finished accordingly.
His list of complaints goes on: electrical outlets installed without protective metal boxes, clothes dryers without traceable venting, uninsulated plumbing pipes along exterior walls, wiring between walls with no conduit, 14 storage lockers for 20 units, mismatched mailboxes in two of the lobbies and a wooden communal deck built instead of the anticipated bricked-in back yard patio with barbecue grills.
One roof needs immediate replacement. Assessments have already soared about 40 percent and a special assessment will be levied this year.
His situation conjures up images of the bad old days of condominium conversions in the late 1970s and early ’80s, when some developers handed over poorly prepared buildings to novice homeowner associations-and with little or no money to run the building. Projected monthly assessments often turned out to be a fraction of what the owners of the units ended up having to pay.
A condo boom
Today there’s a new boom in condo conversions in Chicago and suburbs. But a lot has happened since the days of condomania. For one thing, developers and buyers have learned from the mistakes of the past-condos were a fairly new phenomenon in the ’70s. We’ve had several years to see how much money it really takes to run a condo association; we’ve seen the pitfalls of deferred maintenance; and there are more laws and regulations to protect consumers.
“I don’t think a buyer should be paranoid but he should be aware,” says Herbert P. Emmerman, president of Equity Marketing Services, a national real estate marketing firm. “Many of the abuses in the late ’70s and early ’80s have been remedied by legislation such as the Illinois Condominium Property Act, which has become more complex. Chicago (and other municipalities) have their own condo acts that provide other protections. . . .
“For the most part the horror stories are pretty much a thing of the past. Most developers are relatively conscientious about their responsibilities.”
Still, shopping for a condo in a new conversion or new development can be riskier than buying in an established building with an established homeowners association. With the former, there is no history of good or bad management, of reasonable or unreasonable assessments, or of systems that have or haven’t held up.
So, we asked a panel of real estate pros for their advice on shopping for a new condo. The first thing, they say, is to understand the difference between the two genres: Conversions often are older buildings with aging mechanical systems that the developer has or has not updated. They typically are located in established communities and construction warranties are few.
New condo developments-those newly built from scratch-will pop up wherever land is available. Warranties are plentiful, but because builders reserve the right to make changes, buyers typically do not preview a finished product.
Which is a better purchase is a matter of opinion and lifestyle.
Another personal decision, based upon your risk tolerance, is whether to be first to buy, when prices are lower, or last, when signs of success of a development are more evident.
There are great advantages to being an early bird, Emmerman says. “Obviously, the earlier the purchase the better the buy and the greater the selection and the greater the risk. That’s something each buyer has to decide for himself.”
A positive experience
What can you do to assure a positive buying experience? Take the following tips from our panel:
1. Check out the nooks and crannies. You might want to hire your own building inspector for this. It will cost you more but ask him to look at the mechanicals and common elements as well as your unit.
“If I were buying I’d want to see every area of converted property I can get in to see,” says William DeMille, executive vice president of J.S. James & Co., a property management and development firm in Chicago and president of the Chicago chapter of the Community Associations Institute, a trade group of homeowners associations and contractors. “I’d want to know what the mechanical systems look like to see if they are well cared for or replaced or if they are the same old stuff that may or may not break down in the near future.”
Emmerman suggests surveying the competition as well. “If you’re going to purchase a two-bedroom apartment in Streeterville, be aware of what other two-bedrooms are selling for and their condition so you understand what you are purchasing.”
2. Scrutinize every document you can lay your hands on. Most municipalities are overseeing condominium development much more closely than they did 10 years ago. The Cities of Chicago and Evanston and the Village of Schaumburg require converters to give the purchaser a copy of a hefty tome known as a property report. This will include names and addresses of all parties involved in the project-including the developer, lender, attorneys and auditors-as well as an engineer’s report, building code violations for the last three years and improvement plans.
In addition, the Illinois Condominium Property Act requires developers to provide buyers with such information as the declaration, bylaws, projected operating budget and past two years’ operating expenses. If the development has more than six units, an engineer’s report must be attached.
Pay attention to the dollar signs, DeMille says. “Make sure there are provisions for reserves, preferably allocated reserves, for items that will be replaced, such as tuckpointing and roofs. If it’s a smaller building you want to see a few dollars set aside for the furnace or boiler.”
One question our panel was unable to give a pat answer to is how to tell if the assessments are reasonable. Your monthly tab can range from a few dollars to several hundred dollars, depending upon the amenities and age of the buildings. What is more easily determined is if the assessments are set too low. Your realty agent and attorney, who should be experienced in condominium sales, can be helpful here.
3. Do your own background check. Read the property report and start dialing, says Caryn S. Gardner, partner in the law firm of Bickley, Hart & Gardner in Schaumburg. “Call everybody and anybody you can think of and tell them you’re a prospective purchaser. See what kind of information they give you. Find out what else the developer has done. Go to the state and federal courthouses to see if any lawsuits have been filed against the developer. Go to the secretary of state’s office to see if the corporation is in good standing.”
“Find out what kind of track record (the developer) has by talking to some of the other buyers in the buildings,” says Richard Robin, president of Robin Construction Corp. “Talk to people you know and ask for referrals. Did they like what they purchased? Would they purchase again?”
Another place to do some sleuthing is within the municipal government. Because small developers in particular tend to work in one geographic area, they will have had dealings with building, planning and zoning commissions. People there should be able to tell you if the developer has been conscientious about conforming to local regulations or late in meeting deadlines. “Most (purchasers) won’t do this,” Gardner adds. “They see something they like, they want it and they buy it.”
Mortgage lenders, too, provide clues. Any institution that lends you money will insist on a title search, which reveals whether liens are attached to the property, and an appraisal, which tells you whether the asking price is fair. If you check with several lenders and none is willing to deal after looking at the project, perhaps you shouldn’t either.
As an aside, the secondary mortgage market does not purchase condominium loans unless the homeowners have had control of the association for at least one year and unless at least 70 percent of the units are owner-occupied, rather than rented out. For this reason many developers pre-arrange financing, sometimes with their own lender. It isn’t a guarantee of a happy ending but you know that someone else has studied the project.
Another positive is when the same lender is financing the developer and the buyers. “I think that is a good sign,” says Kent Evanson, vice president of Midwest Mortgage Services in Oakbrook Terrace, a subsidiary of First Chicago Corp. “It shows he believes in it for a long period of time. He’s not making a six-month construction loan.”
4. Trust your intuition. If the sales office is usually closed or if the same pile of construction debris remains week after week, the project is probably not speeding along. Find out why.
“Short of taking along a structural engineer, there is no way to totally protect yourself,” says Laurel L. Hart, another partner in the Bickley, Hart & Gardner law firm. “But you can take a look at, and get a feel for, how truthful everyone is. If you are told the roof will last 40 years, I’d take a second look at everything this particular developer says.”
“You probably should not rely on advertising or signage, although a court at some later date might hold a developer liable,” Emmerman says. “You might find it prudent to ask for some level of proof” of claims made in ads.
You can also observe the developer’s relationships with early unit owners. By law he is required to turn over control of the association when 75 percent of the units have been sold. Associations that have the least stressful transition are those in which the developer has gotten the owners involved before that time, DeMille says. “If the developer maybe puts together a couple of committees, the associations start out with some knowledge of the property. They can also draw on the developer’s expertise during that time.”
4. Build some leverage into your sales contract. You can make your purchase dependent upon any number of conditions, including an attorney’s review and a building inspection, to help you sleep more soundly.
“It’s always a good idea to get a financing contingency of up to 80 percent,” Evanson says.
“We like to put in an out that if through no fault of the buyer the unit will not be ready within 60 days of the anticipated closing,” the contract is nullified, says Hart. “We also write in the contract that earnest money should be put into an interest-bearing account. You don’t want the developer to use your earnest money” for his expenses.
If major improvements have not been made by the time of closing, it is difficult to back out of your contract. What you can do is insist that monies be escrowed for their completion. Ideally, the lender or title company is already on top of this. For instance, if the developer has promised in writing that the lobby will be extensively remodeled, and that hasn’t been completed by the time of your closing, the lender may require the developer to escrow money to complete the project.
If all else fails, you can always sue, says Hart, who does not recommend this recourse. “In a small association if you don’t have the money to pay your electric bill, how are you going to pay for litigation?”
