Market Conditions: Condo Buyers (and Sellers) Now Facing Blackballed Buildings
How hard is it to get a condo loan in Chicago these days?
In some buildings, it’s impossible, as they appear on mortgage lenders “blackballed list” which means they won’t lend in the building.
Real estate agents and lenders say they are seeing more developers, condo associations and individual owners in economic distress, and, as a result, so are buildings.
“Anybody who can’t hang on anymore, that stuff is starting to come out,” said Eric Rojas, a Prudential Rubloff agent in Chicago. “We have people who want to buy units and sellers who want to sell units, and it’s not going to happen.”
Added Gail Lissner, a vice president at Appraisal Research Counselors: “Someone told me it’s called mortgage jail because you just can’t get out. That’s a scary problem.”
Among the deal killers: too many renters in a building, pending litigation, inadequate association reserves and delinquent assessments.
The health of the building is adding another layer onto an already complex relationship between a condo owner and the other owners in the building.
The situation is slowing any recovery of the condo market, often the housing of choice for first-time buyers. Owners in troubled buildings aren’t able to refinance, and sellers who want or need to sell find thin ranks of buyers. Last year, 42.5 percent of all initial foreclosure filings in the six-county Chicago area were against condos.
Two weeks ago, Mario Donini was ready to trade his Buffalo Grove apartment for a two-bedroom, two-bath unit, with a parking space, in Chicago’s Lincoln Square area, a unit he couldn’t afford when it was first listed last spring. When it came back on the market recently, with a $60,000 price reduction, Donini jumped.
“It was exactly what I was looking for in a place,” he said.
Then he and Rojas, his agent, started asking questions and found that three of the seven units, or 43 percent of the building, are non-owner-occupied rentals.
Donini decided to pass on the condo.
“I wasn’t comfortable moving into a building that’s becoming a rental building,” he said. “This is somewhere I want to live for a few years. I’m just worried if this stays as a rental building, it makes it hard for me to get out of there and make back some money or even break even on my investment.”
Now, Donini is back in the market but asking about a building’s health before he’ll agree to see it.
What happens if you buy in a building that appears healthy now but that later becomes a “zombie building”?
Are condos simply too risky to buy now?
To see a list of blackballed buildings from December 2010, see Gary Lucido’s blog post about it here.
That list is now several months old so I’m sure it has changed somewhat. Check with your lender or get a good agent.
Condo deals die in shadows of financially distressed buildings [Chicago Tribune, Mary Ellen Podmolik, February 28, 2011]
It’s not a “mortgage jail,” it’s a debtor’s prison.
“What happens if you buy in a building that appears healthy now but that later becomes a “zombie building”?”
Buy now and be priced in forever.
“I’m just worried if this stays as a rental building, it makes it hard for me to get out of there and make back some money or even break even on my investment.”
There’s just so much wrong with that thinking
How are some of the south loop condo buildings ever going to get out of their rut if they are mortgaged blackballed? Do they have to lower prices until all cash buyers can afford them and hope they don’t rent out their unit so that the rent % does not exceed 50%?
A building will not be blackballed by every lender. Some lenders will still lend there. There are some really troubled buildings out there on which buyers can still get financed. Case in point: 1000 W Washington.
Also some building associations pass limits on number of rentals to avoid lending problems.
Surely since the buildings have been blackballed we must be at the bottom right? When lending thaw in blackballed buildings the price has no where to go but up, right? with this logic I too can be a real estate land baron! I’m gonna buy me some distressed assets!
“Surely since the buildings have been blackballed we must be at the bottom right? When lending thaw in blackballed buildings the price has no where to go but up, right? with this logic I too can be a real estate land baron! I’m gonna buy me some distressed assets!”
You will never do anything.
“Also some building associations pass limits on number of rentals to avoid lending problems.”
This is more homedelete’s area than mine, but I think that there are significant limitations on the ability of a condominium association’s ability to make these kinds of amendments to the condominium declarations after the fact. I believe that all of the declarations that apply to my buildings required unanimous consent. Less than unanimous consent may be permissible under the law, though, I’ll defer to the experts on this one.
“Are condos simply too risky to buy now?”
Most cases yes. Big and small developments–it is very difficult for the average buyer to gauge the fianancial health of both the building and their neighbors. I would not buy a condo now.
Oh god more condo ownership horror stories…
Its really not that bad if you don’t overextend your budget. I promise! Not any worse than owning a SFH or townhome. Different? Yes? Possibly riskier? Of course, but don’t massively overpay in the first place and you should be ok.
“it is very difficult for the average buyer to gauge the fianancial health of both the building and their neighbors.”
I really encourage people buying condos in smaller buildings (24 units or less) to look at the mortgage history on every single unit. It can be a real eyeopener.
Also- make sure you study those condo minutes thoroughly (if it’s a bigger association.)
“Also some building associations pass limits on number of rentals to avoid lending problems.”
Which then forces an owner who is having trouble making their mortgage to make a decision: do I let my property go into foreclosure or do I illegally rent my unit?
dear lord…
this mentality IS one of a renter. but an incredibly arrogant, moronic renter who thinks that he should be collecting rent while living in a building somebody else takes care of.
I hate these people, they are the ones who ruined the north side for the rest of us.
>“I wasn’t comfortable moving into a building that’s becoming a rental building,” he said. “This is somewhere I want to live for a few years. I’m just worried if this stays as a rental building, it makes it hard for me to get out of there and make back some money or even break even on my investment.”
“do I let my property go into foreclosure or do I illegally rent my unit?”
or do I sell the unit, or apply for hardship exception.
The takeaway from this is that the health of the condo building matters. The reason I sent that list out to Realtors is that it was an easy way for Realtors to figure out if a particular building might have some issues they are unaware of that might make buying in a particular building difficult.
The list typically changes monthly and is specific to individual banks.
Just because a building is on that list DOES NOT mean you can’t get financing. It just the pool of lenders who will lend gets smaller and larger down payments may be required.
Things that banks used to ignore in the past like mechanics liens, ownership concentration (one investor owning more than 10% of the units), reserves, etc all now can kill a deal. All of these things in some ways are correlated with higher foreclosures which ultimately means the value of the unit can be threatened. Since the unit is what is securing the mortgage, banks don’t want to take risks.
There are portfolio lenders who are not beholden to Fannie/Freddie who will often lend in these buildings (particularly the ones with relatively small technicalities).
@Bob 2 (not Bob) That may not work for the person who is underwater on their mortgage as well.
“or do I sell the unit, or apply for hardship exception.”
“That may not work for the person who is underwater on their mortgage as well.”
Yea, I was just pointing out that there are more options but sometimes foreclosure just can’t be avoided.
” Not any worse than owning a SF or a townhome” On the contrary, when you buy a condominium, your investment is dependent not only on your financial behaviour but that of everyone in the building. If more than 15% of owners are late with their assessments, too many rentals, lawsuits etc…the list goes on. Sure, a few banks may do a mortgage now with a low LTV, but most want to be able to sell to Fannie/Freddie. Sabrina gives the best advice…get as much info as possible and not just from the realtor!
“Things that banks used to ignore in the past like mechanics liens, ownership concentration (one investor owning more than 10% of the units), reserves etc all now can kill a deal.”
They only ignored those things during the bubble. No surprise at all that they have returned to historical standards where only portfolio lenders will touch them. Every agent and mort broker worth shyt should have given their bubble clients a warning about this inevitability.
Bob 2 (Not Bob) on March 1st, 2011 at 10:31 am
“That may not work for the person who is underwater on their mortgage as well.”
Yea, I was just pointing out that there are more options but sometimes foreclosure just can’t be avoided.
However, if the owner is underwater and in financial distress, the owner may get the bank to agree to a short sell which is better on the owner’s credit than a foreclosure. If the building has too many rentals, the bank will not agree or the owner may have trouble selling it as no one can get financing. Thus, too many rentals can also cause unecessary foreclosures. Also, people who may want to sell but are locked in to the debtor’s prision (i.e., expnesive units that no one will pay cash for) may just walk away. We talk all time about how the rich (ie high priced units) are the fast growing segment of strategic defaults.
All this stuff about condos has caused me to fear purchasing a condo and instead focus on purchase a townhome instead. Does foreclosure rate in townhome complexes effect lending? Do rental restrictions, assessment delinquency, etc. effect lending in townhome communities as much as condo buildings?
G, I always forget you drive a DeLorean with a flux capacitor.
No one can predict guideline changes. Fannie/Freddie went from 25% to 20% commercial space. A ton of small condo buildings found themselves locked out because of that change.
A $1000 mechanics lien would have been ignored, but now something so simple can sink a deal.
Some buildings with affordable housing units are finding themselves locked out because Fannie/Freddie count the units as being owned by one entity exceeding the 10% threshold whereas in the past they didn’t.
It would be nice to be able to predict the future, but last I checked, no one is capable of doing so. I agree evaluating obvious issues like rental concentration should have been done in the past, but you can’t assume all the issues today are things that could have been seen by even the most diligent buyers.
Kevin,
For the most part, townhomes are treated like single family homes so they don’t have the same issues.
a friend finally found financing and was able to close on his 1bd+den at aqua. I think he paid 590k. they are telling him they can rent it for 3k a mo and 350 for parking. I think he is going to be feeling the pain for a while.
Kevin…There are townhomes which have a condominium association and monthly assessments for trash, snow removal outside painting etc. These would have the same requirements as condos. There are also many townhomes (which may even have common walls) but do not have a condo association and these would be treated like SF. Let’s hope we don’t go back to the dark ages when the lenders may have asked for a “party wall agreement”!!
Not so sure about 3K for 1br+den at aqua…
http://chicago.craigslist.org/chc/apa/2237674265.html
Sorry, not Aqua, but close… still don’t see how they can get 3k+den, but maybe I’m wrong.
“For the most part, townhomes are treated like single family homes so they don’t have the same issues.”
That depends… I’ve seen about an equal # of condo ownership townhomes as fee simple.
Kevin on March 1st, 2011 at 11:10 am
All this stuff about condos has caused me to fear purchasing a condo and instead focus on purchase a townhome instead. Does foreclosure rate in townhome complexes effect lending? Do rental restrictions, assessment delinquency, etc. effect lending in townhome communities as much as condo buildings?
–Not true townhouses can be treated like condos. If they are part of an association then its legally a condo association even if it is a townhouse. Thus, if its a fee simple townhouse then no it is not treated as a condo for lending purposes. If its part of a complex that has an association then it is treated like a condo. Lots of townhomes are part of an association.
“If its part of a complex that has an association then it is treated like a condo. Lots of townhomes are part of an association.”
Then there’s the (less common in Chicago, but still possible) fee simple but part of a HO association. Which *should* be treated like fee simple, but not necessarily.
Most townhomes are treated like single family homes in Chicago. There are a few developments which are in fact condos in legal structure, but townhomes architecturally. In these cases they will be treated like a condo.
The vast majority of what Chicagoans consider town homes are not structured legally as condos. Every now and then someone (even the Realtors) will say someone is buying a townhome (garage, 2 or three levels, only sharing side walls, yard…) but we find out that it is in fact a condo. This is typically seen in older developments though in my experience. It isn’t common enough to worry about it.
Townhomes will still have HOAs, etc. The presence of a HOA does not make a condominium. In fact, you can actually have a SINGLE FAMILY home that is legally a condominium. These are common in states like MI and WI where there is some legal issue where it makes developers of standard single family subdivisions structure as a “detached condo” even though the property is clearly a single family McMansion with a yard.
In a related vein, I was recently touring a well-maintained vintage condo building, which had the upscale “feel” (and assessments) of a co-op. I commented on it and the agent assured me that “condo was SO much better.” Assuming the non-tax portion of the assessments are comparable, which they often are for vintage condos and co-ops, I’m not so sure the agent’s statement still holds true today. So thoughts — Condo or co-op in today’s market?
Abbdf – depends on the building. Nothing exempts condos from being poorly managed and being unsaleable .
The South Loop accounts to about 3.3% of the Blackballed condos on that list.
We always talk about the Case Shiller SFH index but the condo index is equally telling: currently at December 2001 levels. The person interviewed seems eager to buy a falling knife. I think a lot of lenders know something the knife catchers don’t.
I wish there was a way to PRINT Gary’s list from my desktop computer but there doesn’t seem to be “an app for that.” Help!?
Also, what’s the scoop on Plaza 440 at 440 N. Wabash? I have a client who’s fallen in love with one of the condos and is thinking of making a very heavy down payment with a small mortgage so FHA, etc. isn’t an issue. Is this a blackballed building too?
ChitownGal, 440 is definitely blackballed my guess is the seller will only accept cash. But if they are willing to do financing your buyer is going to need a non-warrantable condo loan.
Requirements of this loan are 700 fico and 25% downpayment.
If owner occupancy isnt under 51% you may also be able to do limited review with a lender. So there wouldnt be the FICO requirement, but you would still need 25% down.
Another option would be if the property is a fannie mae foreclosure
The additional plus of the limited review would be that your rate wouldnt be as high as with the non-warrantable condo loan.
Thanx – please define “non-warrantable” and “limited review.”
ChiTownGal, A building can be non-warrantable for a variety of reasons. Low reserves, open litigation involving building, low owner occupancy, high % used for commercial space, condo hotel in building.
Limited review just means the lender doesnt request a condo questionaire.
I am new to Chicago real estate and so I recently looked at R&D building on Randolph which has several units and it is a conveniently located close to work. I am single and my work may require me to relocate, so being able to rent the condo in that case is a hard requirement.
The rules at R&D require that one live in the building for a year before being able to rent, cannot rent to more than 3 persons in any 2 year period, and 20 percent rental rule, etc.
I understand that these rules exist for a reason and I am not in the position to judge but for me this is a deal breaker. Unfortunate because I liked the building.
Is the situation similar in all other buildings in Chicago? I need to get some opinions and perhaps revisit my intentions to buy as being too risky a proposition.