Robert Darrow, @properties

Posts Tagged ‘Advice’

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.

What to do now

So the Housing Tax Credit has come and gone. The Treasury Department estimates that 1.8 million people took advantage of the credit at a cost to the government of about $13 billion. For those who missed out on the credit, there may be a tinge of disappointment. But in the days following the deadline we at @properties have been reassured by healthy market activity in showings, listings and contracts. Still, with the tax credit in the history books, it’s a good time to ask, "What should I do now?"

If you’re a buyer who was in the market prior to April 30, you’ve answered an important question. It’s not just about finding the right deal. It’s about finding the right home. The fact is buying a home today is a longer-term proposition than it was a few years ago, and a home has to work for you not only as a place to invest but as a place to live. From that point of view, $8,000 probably isn’t a make or break. Of course that doesn’t mean the right deal isn’t out there – especially with today’s low mortgage rates and plentiful inventory.

If you’re a seller now is a good time to step back and evaluate pricing and positioning. With the increase in recent transaction volume, there are more comparable sales today than six months ago. If your home has been on the market for a while, it’s a good idea to revisit the comparative market analysis. But it’s also important to point out that we at @properties do not subscribe to the notion – as some brokers do – that sellers need to fill the government’s role as a provider of homebuyer subsidies by automatically dropping asking prices or offering cash credits. The market needs to stand on its own, and we believe it can and will.

If you have questions about the real estate market, post tax credit, please contact me.

Celebrating 10 years and a new office

Finally, last month brought two important milestones for @properties. First, we announced that we will be opening a new North Shore office in Winnetka. We are set to begin construction on the office on Green Bay Road this month and should be open by late summer 2010. We are excited about serving the North Shore from this new location.

April also marked @properties’ 10th anniversary. We opened our doors back in spring 2000 with one goal: to provide the best real estate brokerage service in Chicago. Today, we’re the #1 broker in the city and the fastest-growing firm on the North Shore. Most importantly, our goal remains the same, and we’re working harder than ever to see it through. Thank you to all of our clients, associates, partners, family and friends for making @properties a success.

One of our regular readers wrote to ask:

Do you have any advice (guidelines) for me when you have 2 tenants that are always complaining on each other?  The biggest problem I have is that it is usually hear-say with no supporting proof.  How do I handle?  How do I get this to stop?

Ahhh, feuding tenants.

If you feel like it, watch a couple episodes of “Super Nanny” to bone up on your parenting skills.  Sometimes keeping tenants is like having two-year-olds.  Don’t you wish you could have a “time out?”

Try to keep it simple, and try to stay out of it.  You are not a referee.

1. Tell your tenants that their first recourse if there is a disturbance that is serious is to call 9-1-1.  The police should break up a loud party, a domestic argument, super-loud stereo blasting.
2. Tell the tenants that they need to work it out amongst themselves.  Tell them you are not their parent.  And tell them to get it straightened out soon before you start receiving complaints from other tenants.
3. Finally if the two steps above don’t work, tell the tenants that if the complaint is serious, to write you a letter.  With specific details.  The day, the date, the time, and a very accurate description of what the other tenant did to disturb them.    With a detailed written complaint, you can issue a “10 Day Notice.”  You will write a “10-Day Notice” and deliver it to the offending tenant.

A “10-Day Notice” is a scary looking notification that basically tells the offending tenant that they have 10 days to “knock it off.”  If there is another disturbance within the 10 day time period from when you give the 10-day notice, then you can cancel their lease and tell them to move at the end of the month.  But if the offending tenant doesn’t cause any disturbance in the 10 day period, then the notice expires.  And then you start all over again.

The “10 Day Notice” is a specific form. (Email me if you need your own copy of a 5-day/10-day notice.) Some highlights on the form for you to pay attention to:

• you will check box #2,
• date it approximately midway down
• Sign where it says “Lessor.”

On the “Proof of Service section:

• Fill in your name (or the name of the person you hire to deliver the notice)
• Date the next line
• Check the box for “By delivering a true copy…”
• And EVERY TIME you visit the property to try to give this “10 Day”, you will write in the date and time under “Attempts at Service” including the time you actually deliver the notice.
• Sign the blank line at the bottom.

You will bring TWO COPIES to the building each time.  1 copy in case the tenant is home.  Leave 1 copy with the tenant.  Take one copy with you.  They need to be the same. 

And if it turns out you will want to terminate one of the leases, you will need your copy to bring to court and show the judge to prove that you gave the notice to the tenants.

A regular reader wrote with a great question, so I thought it would be a great post on what to do when you wish to convert Month-to-Month leases into standard 12 month agreements.

My father owned a 2 story house with an attic and  basement. He lived in the attic area and rented the basement, 1st and 2nd story. He recently passed away late 2008 and I have been managing his estate since that time. The middle of last month (March) the estate was finalized and I am now the new owner of the building.

There are currently 3 renters in the apartments however my Dad did not have a lease agreement with the tenants. They have been renting month-to-month. Another fact is that 2 of the renters have dogs.

Now that I am the owner of the building I want to ensure that I am in complete compliance with all the rules and regulations (thanks for all your material) required in the Chicago area.

The first think I want to do is establish lease agreement with each one of the tenants.

Questions:

1. Since they are currently month-to-month do you foresee any issue with me issuing lease agreements since now I am the new owner? How much time to I need to give them to review?
2. I would like to indicate in the agreement that pets are no longer allowed. How long do I have to allow them to comply with this new requirement? Or would I have to grandfather the existing ones?
3. Do you have any other advise that I may need to consider?

Month to month leases run from the beginning of the month to the end.  And the terms can be changed at any time before the next term ends.  For example, today is April 8.  You could send your tenants new written leases right now, and the terms would apply on May first.  You are not required to give any more notice to change the terms of the month-to-month lease than the beginning of the month.

But if you wished to demand that the tenants move, you might be required to give 30 days notice, and you can’t cut a lease term in half.  So if you wanted the tenants to move out, you could give notice any time between now and the end of April that the tenants are required to move at the end of May.

Yes, you can tell your tenants that you don’t allow dogs.  And you could tell them that the dogs are not allowed effective May 1.  In reality, your tenants are probably not going to get rid of their dogs.  And if they did, it would take longer than the next three weeks to do so.  So you may try one of two options.

1. Notify the tenants that you don’t allow pets anymore.  Their current pet is "grandfathered" in the lease.  But they are NOT permitted to get another pet, or any more pets.
2. Notify the tenants that you don’t allow pets anymore, and you want them to get rid of their pet in 30/60/90 days.  But there’s a chance the tenant won’t want to give up their pet, and they might move out.  That’s a risk.

You should deliver the new written leases as soon as you can.  Do so whether the new lease is a month-to-month or a 1-year lease.  And include a letter that tells the tenants that their current leases are terminated.  And that if they do not return the new written leases, their current leases either (a) terminate at the end of May or (2) the rent goes up by some ridiculous amount of money.  You choose one or the other. It doesn’t matter which.

Your Guide has been fortunate to sell a lot of investment real estate over the years.  And even pick up a little condo or house here and there himself.  A couple conversations with clients has inspired me to compose a little pep talk about the fundamentals in investment real estate.

This is not intended to diminish the pain that some of you, and some of my clients are feeling.  It can be quite scary as one watches rents decline, vacancies rise and the prospect of making some mortgage payments on empty condos or apartments looms.

Three out of four fundamentals still apply

The first fundamental of investment real estate is leverage.  In most circumstances, investors buy real estate with a mortgage.  Not as large a mortgage as a home buyer.  But normally, it makes sense to borrow 50% to 75% of the cost of the property.  The reason is simple:  You’re buying something that your renters will help pay for.  This is still true in the current real estate environment.

There really aren’t many other avenues where you can buy more investment than you have cash on hand.  In the stocks and bonds universe, they call it “Buying on Margin.”  But just look at your stock broker’s face if you ask him to purchase $250,000 in stocks with only $25,000 down.  He’d say you were crazy.  And you would be to try.

The second fundamental of investment real estate is someone else pays your mortgage.  Notwithstanding the vagaries of how much you put down, your interest rate, and other expenses; generally the goal is to cover all the payments by having a renter pay more than those expenses.  And if you hold on long enough, the rent should increase while expenses stay stable.  Mostly.  And if you are truly in the game for the long term, you’ll have an investment that’s paid off.  Then starts the gravy train.  Nearly every dollar that comes in as rent is cash in your pocket.

The third fundamental of investment is the passive income and depreciation.  No where else in the tax code can you take expenses, and deduct them from income.  With investment real estate if you bring in $1,500, but spend $1,000 on your mortgage, plus $200 in expenses and another $200 in taxes, you earn $100.  That’s it.

In the real world, if you earn $30,000 in salary, but spend nearly all of it on your home, your utilities, your car, your family, your clothes, and everything else, you still get taxed on your income.  Of course it’s not quite that simple, but the comparison to investment real estate is nearly that stark.  Every dollar you spend can offset income.  Heck, if you spend MORE, you can even start making reductions in your personal income!

And real estate is depreciable.  The tax code even allows investors to rapidly depreciate investment property during the first few years of ownership affording some extremely dramatic tax benefits.

The missing fundamental in the current market is the appreciation.  In any ten-year period from around 1850 to today, you could point to a spot on the timeline and see values in Chicago double.  Sometimes more, sometimes less.  But roughly – you could count on your real estate to double every ten years.  Another way of looking at it:  every time you made a mortgage payment, you’d get another of equal value in appreciation for free.

It seems those days are over.  With the recent tumble in property values, there hasn’t been significant property appreciation in Chicago since 2005 – and we’re already at 2010.  I think this will be the “lost decade” in property appreciation.  I predict that it will take several more years before we get steady appreciation again as the recovery from the financial mess is going to take a few more years.  That takes us close to 2015 – truly a decade of lost appreciation.

Three out of four aren’t bad.  Investors have been spoiled with all the benefits to investment property ownership.  But even if you take the appreciation out of the equation, investing in real estate is still a great way to build equity and guarantee income for later years. 

To quote one of the founding fathers of Chicago, Marshall Field, “Real estate is not only the best and quickest way to make you wealthy, for the average person, it truly is the only way.”

The past 18 months have taught us many things, not the least of which is that we don’t have control over a number of variables that affect the real estate market. However, we do have control over the actions we take to prepare for and react to these variables. During the next 60 to 90 days, some significant housing-related changes are imminent. We can’t control those changes, but to a certain degree we can control how they affect us.

Can’t Control: Expiration of Federal Housing Tax Credit
Can Control: Purchase Date / Closing Date

While we can’t control how the expiration of the Federal Housing Tax Credit will affect the real estate market, it is an absolute certainty that qualified first-time buyers will receive up to $8,000 and qualified repeat buyers will receive up to $6,500 if they enter into a purchase contract by April 30 and close by June 30. With less than 90 days until the expiration of the Federal Housing Tax Credit, buyers need to be in the market now.

Can’t Control: Mortgage Interest Rates
Can Control: Locking in Today’s Rates

No one knows what will happen to mortgage interest rates when the Fed ends its $1.25 trillion purchase of mortgage backed securities in a few weeks. But one thing is for sure. Home buyers who lock in their interest rate today will benefit from some of the best mortgage financing conditions in history.

Can’t Control: Selling Price
Can Control: Asking Price

If you’re a seller, the price you paid for your home or the amount you owe on your mortgage has no bearing on your home’s ultimate selling price. What does determine that price is the market. And today sellers must show consideration for the market with correct pricing right out of the gate. The chart below shows just how important Original List Price (OLP) is to selling your home for the highest possible price in the shortest amount of time.
2009 Sales Data

Source: Agent Metrics, MRED LLC data, 2009, Selling Price to Original Listing Price, City of Chicago.

One more thing you can control is your choice of real estate agent. Thank you for allowing me to serve you, and please contact me if you or anyone you know needs help navigating today’s real estate market.

Your Guide received this email this morning from @properties founder Thad Wong:

The worry price is the price at  which a home is offered where a potential buyer will say, " I am worried that someone else may buy this!"

This is very real, and where your listings need to be priced if the goal is to sell them. Buyers today are setting the pricing for which homes will sell.  They will also pass on a home because, in most of our neighborhoods,  there are more than a few homes available in that same price range with similar amenities.  Your listing needs to be the best priced home within the category it is competing against, or, if the home has a defect similar to backing up to the El or expressway, it needs to be priced where the competing homes are smaller and in much worse condition giving the buyer a valid reason to buy a home with a defect in today’s market.

Today’s market, by the way, is at the 35 year average with 5% of families actively in the market.  So, here we are:  in an average market with above average financing challenges that are gradually becoming easier; ever so slowly I will admit.

Great advice.  You can bet that if you invite me over for a listing presentation in the next few weeks, you’ll hear this in some form or another.

Your Guide accompanied an appraisal at a Bucktown Three Flat this morning.  During the course of giving notice to the current residents of the building the question was raised whether the building was for sale?  And what might happen to the leases?

I almost dismissed the topic without giving it much thought since the topic has been covered before and we thought it was thoroughly explained.  But with the anxious undertones in the voice of the tenant that posed the question, it seems that the subject is worth visiting again.

Leases stay in place

Tenants, if you are in the middle of a lease, your lease stays in place.

Even if the building sells and a new landlord takes over, the current lease terms transfer to the new owner.  Your lease is simply signed over to the new owner, and the terms all stay the same.  The original landlord will customarily write you a letter telling you of the sale and giving you the information for the new landlord.  This is so that you know where to send off your rent checks after the sale.

The sale does not give the new owner the opportunity to “kick out” all the current tenants.  You may remain in your apartment for the rest of your lease.  The sale does not give the new landlord the opportunity to raise the rents, either.  You make the same payment amount – simply to the new owner.

Top Ten Tips for Tenants during a sale

1. Yes, you have to let your landlord show your apartment to prospective buyers.
2. You can ask for proper notice – typically 48 hours in Chicago.
3. You can’t demand that showings only take place when you are home.  Most of the time showings will occur during the day, during the week.
4. Typical showings will only take a few minutes in your apartment.
5. But when the building sells, there will be appraisals and inspections.  These appointments will take longer – as long as 45 minutes in your apartment.
6. The expiration date of your lease stays the same.  You can’t get kicked out.
7. The amount of your rent stays the same.  The new owner can’t raise your rent during the current lease.
8. Your security deposit gets transferred to the new owner.
9. Your old landlord should send you a letter notifying you when the building sells so you know that you should send your rent to a new landlord.
10.   Tenants can read the Chicago Landlord Tenant Ordinance at http://www.chicityclerk.com/tenantsVRSlandlords.php

It’s budget season for condo and Home Owner Associations.  And it’s nearly snow season as well.  One of the great conundrums facing condo and Home Owner Associations is how to budget for snow removal.

Some companies offer snow removal services for a fixed cost.  But Your Guide’s advice is that those fixed cost contracts usually cost more than their worth.

But how does an association know how much to budget for snow removal costs?  Here’s a handy guide courtesy of Tom Skilling at the Chicago Tribune and WGN TV.

On average, Chicago receives at least a half-inch of snow 17 times per snow season.  Snow storms in the range of 1 to 3 inches occur about 7 times;  4 to 6 inches, once; more than 10 inches, about once every other year.

A note of caution:  The number of storms that might occur in any given snow season varies greatly from year to year.  The extreme winter of 1978-1979 put down 10 snows in excess of 4 inches and a season total of about 89.7 inches.

At the association where Your Guide lives, we tell our snow removal contractor not to come out until snow reaches 2 inches.  Over 1/2 inch but less than 2 inches, the contractor puts down salt.  The salt application costs our community around $850.  A snowfall from 2 inches to 5 inches costs about $2,300.  Bigger snowfalls cost more.

In reality, our snow costs should come in at $25,000.  We have a budget for $35,000.  That’s $10,000 in extra play in case the weather is exceptionally bad in a given year.  Last year was insane, and we even blew the budget.  But there’s no way you can adequately prepare for a wild winter like last year’s.  In the case of a crazy storm season, you simply have to ask the residents if they’d like the Association to cut back a bit?  Or pay to cover the extra expenses?  Either way works depending on the desires of the residents.

Now you can do the math:

• How much will your contractor charge for a light snow or a salt application?
• How much for a snow removal in the 2 to 5 inch range?
• How much for a snow removal in the 5 to 11 inch range?
• How much for more than a foot of snow?

Multiplied by:

• 17 x the low cost (or zero if you can live without pushing this snowfall)
• 7 x the price for 2-5 inches
• 2 x the price for 6-11 inches (for good measure)
• 2 x the price for a foot or more (for good measure)
• Add 30% so you have a fudge factor.

Piece of cake!

Other snow related articles:

http://www.yourwindycityguide.com/?p=1816

http://www.yourwindycityguide.com/?p=1759

Sellers have been hearing for years that there’s a danger to overpricing.  Namely that after a few price reductions and a long time on the market that the eventual sale price will be lower than if the property was priced right from the start.  New tools allow us to examine the list price vs. sale price ratio for properties that have had no price changes against properties that have had one or more price changes.  Follow along as we look at Uptown and the entire City of Chicago.