SHORELINE TOWERS, CHICAGO CONDO ASSOCIATION, Considers Novel Approach To Deal With Foreclosed Condos in Their Building!
PLAN WOULD PURCHASE BANK-OWNED, OTHER DISTRESSED UNITS, RENT THEM OUT! BUT PLAN HAS A DOWNSIDE!
The board of the condominium association of one Chicago Condo Building, Shoreline Towers, located along Sheridan Road and the Lake in the Edgewater Neighborhood on the North Side of Chicago, is considering a proactive approach of dealing with the problem of foreclosures in their 378-unit building.
As reported in last Sunday's Chicago Tribune by Mary Ellen Podmolik, rather than letting these units sell to strangers at a deep discount, they are trying to gain owner approval to purchase these low-priced units, for the board to hold and manage, and rent them out to tenants until the Chicago Real Estate Market improves, and prices once again start to rise.
Of course, foreclosed units, and the resulting lost Condo Assessment Income, not to mention unit maintenance concerns and their potential to drive down the values of other units in the building, is not unique to Shoreline Towers. Other condo building facing the same issue often delay capital improvement projects, pare budgeted expenses, or raise the assessments in the entire building.
The plan of the Shoreline Board, pending approval from 2/3 of the Unit Owners, would borrow enough money to pay cash for up to eight foreclosed or near-foreclosure condos over the next two years. It would then rent out the units temporarily, and later resell them - hopefully, at a profit.
Given the glut of condos for sale in the Chicago Market, including many distressed units at bargain-basement prices, such a turnaround could take several years - no one knows for sure! However, if Shoreline is successful, it could create a model for other condo associations, in Chicago and elsewhere, facing this all-too-common situation.
Such a plan would not serve every condo association, however, and it does pose risks.
First of all, the condo association would need to have deep pockets - sizable reserves from which to build adequate collateral in order to finance unit purchases. Shoreline does have strong reserves - roughly $600,000 - down from the boom market of several years ago, but still strong for today. It has already been approved for a $2.5 Million Line of Credit to make the condo purchases.
Rental vacancies would add a drag to condo finances, as would the headache of property management, unit maintenance, and, if necessary, eviction of deadbeat tenants. Higher-than-anticipated vacancies and maintenance issues could also lead to increased assessments for everyone in the building.
Such a plan could also negatively impact the ability of other unit owners to sell their units. It would require the building have a Right of First Refusal to purchase units for sale in the building in order to step in stop a low-priced sale to an outside investor. The plan can also drive up the building's non-owner occupancy percentage.
Both moves could prevent the option of FHA Financing for those homebuyers lacking strong down payments and FICO Credit Scores. Today, FHA Financing is the only option for those with low money down. (Although the FHA is removing its prohibition on funding in condo buildings with Right of First Refusal effective October 1, 2009, tinkering with the owner-occupancy percentages and indebtedness in the building could result in FHA loan denial).
The Shoreline plan could also drive down the potential prices for other units in the building, as MLS-listed homes sold at a discount would be used by appraisers to justify lower values for similar-sized units. That, in turn, could slash these other owners' equity return, stall their sales, and, at the extreme, create even more distressed properties.
Despite the risks, however, owner proxies supporting the board acquisition of several distressed units are running 9 to 1 in favor.
Time will tell if such a move will become a broader trend.
DEAN MOSS & DEAN'S TEAM CHICAGO
