Sara Benson Real Estate Expert and Consumer Advocate Delivers Advice

Surviving Financial Ruin When Buying A Distressed Condominium

Posted in Chicago Real Estate by sarabensonexpert on January 20, 2010

January 20, 2010

Chicago’s Hot Foreclosure Market: Part One

By Sara Benson, CRB, ABR

Chicago’s foreclosure market is hotter than a pistol. Ultra-low priced inventory is briskly percolating—and evaporating–as bargain hunters scoop up deals. But among the hundreds of lustrous pearls, are tens of thousands of unsavory swine in inventory. Aside from the visible signs, how does a buyer know the difference?

Without doing Mensa-level homework and performing detailed due diligence, what may appear to be a bargain, can turn into a huge financial albatross. This monster can haunt a buyer for years to come—representing not only a loss of all invested capital, but a future financial drain in the form of special assessments, as well.

The ancient Latin expression “caveat emptor” or “let the buyer beware,” still pertains in today’s real estate market more than ever. Generally, it is the accepted doctrine that controls the sale of real estate after the closing. In the past 3,000 years, times have not changed much.

In the foreclosure free-for-all, very little consumer protection exists. Despite scanty disclosures and government regulations, major risks remain—especially in purchasing a condominium. Many of these hidden risks are overlooked by even savvy investors.

Foreclosures, corporate-owned and estate sale properties are generally sold without any warranties–in “AS IS” and “WHERE IS” condition. There are typically no property disclosures and no survey. Federal and State mandated disclosures cover everything from lead-based paint to mold, asbestos, or any other known property defect including notice of code violations and lot line disputes.

But in a foreclosure no disclosures are available because the “owner” 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.”

Forget about the condition of the walls and airspace within the condominium unit. Focus on the health of the building’s condo association. This is critical in making a profitable investment decision. 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 similar to the Legislature. This government may be as well run as Switzerland, or reminiscent of the worst of Third World countries. So how does a buyer know the difference?

Use caution when purchasing a unit in a newer building—especially anything built since 2005. 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. With rare exception, conventional Fannie Mae (FNMA) financing prohibits making loans in buildings with less than a 70 percent owner-occupancy ratio (up from 51 percent.) The Federal Housing Authority (FHA) loan threshold, effective December 7, 2009, for owner-occupied units is a minimum of 50 percent

Also 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. If that same unit becomes a rental, the building will no longer meet FNMA’s 70 percent owner-occupancy ratio for conventional financing. (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. Without representation, a buyer could easily find themselves swimming with sharks.


A veteran real estate broker and appraiser, published author and national speaker on real estate issues, Sara Benson, CRB, ABR, is president of Benson Stanley Realty in Chicago. Email:  Web Address: Telephone: 312-337-4600


One Response

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  1. Keshto Arya said, on October 9, 2012 at 6:33 am

    Always good to find a new website this good I’ll be back for certain.

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