Who would pay a high price for a Chicago two-flat with rents essentially unchanged here for the last five years?
Well, a whole lot of folks, it seems.
The market is hot on the North Side, says John Friedmann, broker-owner of Virtual Realty. And it may be the confluence of three seemingly negative factors that are contributing to the two-flat’s popularity, he said:
The sky-high cost of housing — especially single-family homes — in the most desirable city neighborhoods;
Hefty increases in property tax assessments; and
A continuing rise in the cost of natural gas and, therefore, heating costs for landlords.
These factors are “changing the purpose, the mentality” of why people are attracted to such buildings, he said.
These are logical reasons to sell a two-flat: Take your profits and leave the expense and hassle behind. But reasons to buy one?
The two-flat “has transitioned beyond what it used to be. A lot of properties are on the market that were not owner-occupied,” Friedmann explained. “Owners got zapped by taxes.” And those 7 percent caps apply only to owner-occupied buildings, he said.
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Investors are moving out of small buildings, especially two-flats and many three-flats, he said, as the buildings are just not working as rentals — a view shared by other real estate agents we spoke with.
If investors and longtime two-flat owners are selling, who’s buying?
The answer may depend on which area of the city you’re talking about.
Those seeking extended-family living are still a force on the Northwest Side, Friedmann said, but a non-traditional buyer shops in his territory, which runs roughly from Kedzie Avenue to Lake Michigan and from Belmont Avenue north.
Yes, there are the people who buy a two-flat with the intention of renting out a unit to help pay their mortgage. But Friedmann is seeing two separate families or couples or individuals buying the buildings to share.
It’s their ticket into a desirable neighborhood where single-family homes are well beyond the reach of most families, he said. It’s also an alternative to increasingly expensive condominiums, Friedmann and other agents said.
A young person looking for a two-bedroom condo may have to fork out, say, $350,000, while sharing the purchase of a $500,000 two-flat gets him or her into a good, quieter neighborhood with arguably more privacy than a condo and without the monthly assessments, Friedmann said.
Even affluent couples are buying two-flats, especially those of masonry construction, to gut and turn into single-family homes. This way they can have their custom home and generally spend less than the price of existing houses in the area.
Take the Northwest Side’s Independence Park and Irving Park. It’s true, especially with frame two-flats, said Tom Brandt of Keller Williams in Chicago and Oak Park. Add Lakeview and Lincoln Park to that, said Bette Bleeker of Baird & Warner’s Lincoln Park office.
“Last year I sold a red brick single-family that originally was a two-flat for $910,000 in North Center, but not in the Bell school district,” Brandt said.
Bleeker says “two-flats are selling really quickly and at very close to the asking price.”
To illustrate the point, Bleeker gave recent market statistics. In the area from Armitage Avenue to the city’s northern border and east of Western Avenue, the average market time for two-flats was 44 days. The average list price was $612,567 with the average selling price at $596,778. The largest number sold between $500,000 and $600,000, she said.
“I think that [a two-flat] is a very good purchase for a first-time buyer who might be thinking they can only afford a condo. But with the additional income, they can afford a two-flat,” Bleeker said. “Many times clients can keep the two-flats and use the equity to go to single-family. With the price of condos escalating, the two-flat is an investment opportunity.”
These people are single, men and women, in their late 20s and early 30s who have been renting in Lincoln Park or Lakeview and then buy in Lincoln Square, Ravenswood and Albany Park, Bleeker said.
“A couple of times we have had brothers or sisters buying together. And, somewhat interestingly, three instances in last five years, where couples who are separating and have children sell their single-family and buy a two-flat and live on separate floors.”
But two-flats have seen “pretty grand price escalation. Not so long ago two-flats were in the $400,000s and now they are $550,000 and above,” Bleeker said, pointing out, though, that prices of other kinds of property also have soared.
In Lincoln Square and Ravenswood, two-flat graystones start in the $800,000s, she said.
Where, then, should buyers go for more upside potential? Bleeker suggests Albany Park, Mayfair, some parts of Rogers Park, Avondale and Jefferson and Portage Parks.
Friedmann said that though unrelated people often are buying the two-flats, they are getting mortgages of up to 95 to 97 percent of the sales price, he said, as well as 100 percent financing using two mortgages for 80 and 20 percent of the purchase price.
So, they not only are sharing the expense of upkeep and taxes on the two-flat, they are also sharing the costs of buying it. If each party can come up with 2.5 percent of the purchase price, their combined earnings can support a sizable mortgage that still will be less than that for many condos.
From 2000 through 2004, the average sales price of multi-unit properties (two, three and four units) rose 63 percent in North Center, to $538,514 from $366,210, according to data from the Chicago Association of Realtors. Single-family prices there rose 76 percent, to $658,579 from $442,869, in the same five years.
The moral of the story?
Half of $538,515 is less than $658,579.
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Wayne Faulkner is editor of Real Estate. You can reach him at [email protected] or by mail at baiduhai, 435 N. Michigan Ave., Chicago, IL 60611.