If you’re buying a new-construction condominium and plan to make it your home, will you know your neighbors — ever?
Because the ranks of your fellow buyers might include investors, this is only one of the questions you should ask.
Speculators are all over downtown Chicago to the point that some observers, such as Appraisal Research Counselors, place them among their top worries for the market’s health.
Note that “investors” and “speculators” are often the same. Perhaps an investor, though, wants to own a unit for the rental income. Others merely aim to quickly flip the property for a profit without taking possession.
Regardless, would you want to live in a building where the majority of owners are either investors or speculators — meaning their units will remain empty or be rented out?
For years, lenders were reluctant to give mortgages to condo buyers if their prospective building was less than 75 percent owner-occupied. That rule has long flown out the door.
So the empty-nester couple who have sold their suburban home and spent hundreds of thousands of dollars for a downtown condo might be faced with neighbors — and possibly a board of directors — who regard the building as sort of an extended-stay hotel.
Of course, that’s not bad news to everyone. This week’s Real Estate cover story describes how tenants often prefer a condo to an apartment, and that renting condos is a growing trend all over Chicago.
And, speculators are hardly universally disliked. As early buyers, they often help projects get off the ground, and in Chicago’s neighborhoods and many suburbs, they have buoyed the market, real estate agents say.
But, imagine that you’ve moved into your new high-rise unit, intending to live there at least until life events — such as a change in health — make the case for a move. Now consider that one of those events comes sooner than thought. You need to put your condo on the market. Imagine that there are 50 other units for sale at the same time — those owned by speculators and the last few developer-owned condos.
Imagine that you fear the competition from all these other condos, and decide, instead, to rent it out in the meantime. Chances are, you’ll have stiff competition there, too.
It can spell problems for the serious owner — and the developer.
My colleague, Mary Umberger, reported this summer on the move by developers to screen out speculators.
It’s a policy that Belgravia Group has adhered to for more than 16 years, according to the Chicago firm’s president, Alan Lev. “We still are in the minority” on such a stance, but now “we’re not alone.”
Belgravia, which is building 600 N. Lake Shore Drive, is trying to make sure that buyers — many spending more than $1 million — won’t be faced with empty neighboring units or a revolving door of tenants when they move in.
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Self-interest is one motive for blocking speculators. Developers reason that they don’t want flippers — who may have bought at pre-construction prices — selling their units before the building is sold out and undercutting their now-increased prices.
“If a building has 400 units and I’m selling it [over] several years,” Lev said, he doesn’t want the speculators competing against him.
Even in a down market and in smaller projects, it’s “unhealthy for a building, because you get a lot of rentals or a lot of units on the market.”
Screening out speculators isn’t merely limiting the number of units sold to one person or partnership, a practice that is gaining popularity here. An investor may buy multiple units in different names.
At 600 N. Lake Shore, “we had five contracts come in with similar addresses, different names, a couple of checks on the same account,” Lev said. The deals did not go forward.
What Belgravia does, according to Lev, is put into the sales contract a provision that a unit cannot be sold, leased or left unoccupied within one year of the buyer’s closing. If any of those conditions occur, Belgravia has right to buy back the unit at the buyer’s original price — not the current market price.
“The sales force is trained to point out the provision before buyers even see the contract,” Lev said. Further, the same provision is in the deed that’s recorded and becomes a matter of title — meaning a title company would flag a transaction that violated that contract and deed provision.
Belgravia has had no legal challenge to the policy. Lev said it “smokes out those who are trying to be the speculators; scares them away at the sales point or after signing the contract. We won’t strike the clause.”
The first tower of the two-building complex has been marketed for about a year, and more than 60 percent of the first building has been sold, Lev said.
The speculator “problem” is being experienced across the country.
In Idaho, Hubble Homes LLC in June said it would no longer sell to investors, according to published reports.
Hubble is hoping to keep the “for rent” signs from popping up. The buyer must declare an intent to be an owner-occupant by signing a form, Brad Carlson wrote in the Idaho Business Review.
Earlier this year Phoenix real estate agent Carol Dennis told the Tribune that builders in single-family-home subdivisions in that city — where the market was as hot as the weather — were refusing to sell to investors because “for rent” signs were sprouting in those developments and turning off potential buyers who wanted to live there with their families.
So, Chicago buyers, if you’re counting on seeking controls on rentals — or an outright ban — after you move in, do you think any of your investor-owners will agree with you?
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Wayne Faulkner is editor of Real Estate. You can contact him at [email protected] or write him at baiduhai, 435 N. Michigan Ave., Chicago, IL 60611.