Picking up the pieces of the shattered real estate industry is accelerating in the Chicago area.
Survivors of the drastic downturn have devised new ways to sell the massive inventory of foreclosures and unsold new homes in the city and suburbs.
Call them workout kings, because they are striving to work out the backlog of failed real estate deals from the boom years.
Their strategies vary widely:
They create online listings to sell nationally.
They work for banks to make condo buildings more salable.
They specialize in auctions.
They buy distressed properties and fix them up for resale.
About half of all housing sales in the Chicago area are distressed properties. That is the potential gold the workout kings are mining. Workouts benefit many in real estate: buyers, sellers, municipalities, banks and, of course, the workout kings.
“Everybody wants a workout, but everybody wants to keep it a secret,” said Keith Lord, president and managing partner of Lord Financial Advisors in Chicago.
The secrecy, in part, is dictated by banks that don’t want to reveal the extent of their distressed real estate assets, Lord explained.
His firm operates a database focused on helping small- and medium-size banks market distressed properties. Some 200 Chicago-area properties are listed on the database, ranging from a 397-acre horse farm and estate in Barrington Hills (loan balance, $14.5 million) to two spacious units on the 14th floor of a Chicago condo (loan balance, $3.2 million).
“It’s a high-tech way to sell, and we average 75 percent of the asking price for residential properties,” said Lord, whose firm has been nicknamed the “Lords of the Workouts.”
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He estimates it will take three to five years to complete workouts in the real estate industry. “Right now we’re just at the 30-yard line nationally,” he said.
“Banks are desperate to get rid of their failed real estate assets,” said real estate analyst Steve Hovany, president of Strategy Planning Associates in Schaumburg.
He predicts a massive workout will be required to fix the suburban housing market.
“Any of the projects approved between 2004 and 2007 will have to be revised,” he said. “Houses during that period were too big and too expensive. Today’s market requires homes that sell for 25 to 30 percent less.”
Helping banks prepare distressed multifamily projects for sale is the focus of Catapult Real Estate Solutions, based in Chicago.
“We are surrogate builders who inspect properties and offer workout strategies,” said Paul Dincin, principal of Catapult. “That may include resolving such issues as unfulfilled promises made by the previous developer, fixing structural defects and completing punch-list repairs.”
Relying on 15 years of residential development experience, Dincin and his partner, Brian Columbus, “look under every rock, and then correct the deficiencies to add value,” he said.
Dincin said new residences sitting vacant for an extended period can deteriorate.
“We check for seals that may dry up in dishwashers, ice-makers and other systems. Potential buyers will walk away from a building if there are too many problems,” he said.
Auctions are another way of dealing with the oversupply of distressed real estate.
“We evaluate properties to determine the best strategy: a conventional sale, short sale, bulk sale or auction,” said Kenneth Goldberg, president of Federal Auctions & Brokerage in Chicago.
John DeMato, Federal Auction’s executive managing director for auctions, said auctions always attract attention. “Banks think that’s a good way to sell, but they don’t like to discount,” he said.
“Everybody thinks auctions mean bargains, maybe getting 50 percent off or more. But when people start bidding against each other, the price rises, sometimes higher than the broker’s price,” Goldberg said.
Average home prices have sunk some 30 percent, and McMansions haven’t been left untouched.
One prime candidate for a workout is the Villa Taj, a 30,000-square-foot palace with a 20-car garage in Burr Ridge. Goldberg said it cost $12 million to build, but now may sell for only $5 million, making it one of today’s biggest bargains.
The dramatic price drop was the result of extensive water damage, the No. 1 problem for residences remaining vacant for long periods, waiting to be sold.
How large is the workout problem in Chicago?
Gail Lissner, vice president of Appraisal Research Counselors in Chicago, estimates there are 3,000 unsold condo units downtown. She said eight buildings have 50 to 99 unsold units, five buildings have 100 to 149 units, and seven buildings have more than 150 units.
“It should take two to three years to absorb this inventory,” Lissner said.
In the suburbs, “there is potentially an infinite supply of homes that can be worked out because 30 to 40 percent of the housing developments started in the boom years should never have been built. The price was wrong, the product was wrong, and there was no demand for them,” said real estate analyst Tracy Cross, president of Tracy Cross & Associates in Schaumburg.
He added that some national builders, including Pulte Homes, Ryland Homes and M/I Homes, have been aggressive in buying and completing failed subdivisions.
Pulte’s workout projects are: Arlington Crossings, 66 town houses in Arlington Heights; Gateway Estates, 20 vacant lots in Park Ridge; and the Villas at the Oaks, 66 lots in Burr Ridge.
“We are offering a discount of 30 to 40 percent over the prices of the original product at these locations,” said Steve Atchison, president of Pulte’s Illinois division.
Cambridge Homes, a division of national builder D.R. Horton, is completing Buckingham Court, an 18-unit development in Des Plaines, said Chris Naatz, vice president of sales.
Completion of failed projects creates “new excitement with existing residents, because vacant lots are no longer just weeds,” said Deborah Beaver, vice president of William Ryan Homes in Schaumburg.
Her firm will build on lots at Lakewood Prairie in Joliet and at Rockwell Place in Lakemoor. The new homes will be $50,000 less than the original development at Rockwell Place and $30,000 less at Lakewood Prairie, Beaver said.
While national builders are backed by financial clout, some local firms also are busy doing workouts. One of them is Red Seal Development, based in Northbrook.
“We reinvented ourselves when Neumann Homes failed in October 2007. We called the banks and got the job to build 21 homes at Neumann’s Clublands of Antioch and 27 homes at Neuhaven, also in Antioch,” said Brian Hoffman, vice chairman and chief financial officer of Red Seal.
The firm’s latest job is to build on 27 lots at Coventry Creek Estates in Lake Zurich.
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“We’ve designed a new line of homes scaled to today’s marketplace and what people really need. Elevations are no longer from ‘Hansel and Gretel,’ and no one is asking for 15-seat home theaters,” he said.
Hoffman noted that workouts can create uncertainty among existing residents. “They want to know what will be built next door. They don’t want their property values to be destroyed,” he said.
Another workout strategy is offered by Lakewood Real Estate Solutions in Hoffman Estates.
“People think foreclosures and short sales offer good values, but usually these homes are in awful shape,” said Chris Shaxted, executive vice president of Lakewood.
“After looking at hundreds of properties in the Chicago area, we buy the best ones and fix them for a quick sale. It takes from $6,000 to $40,000 to repaint, put in new flooring and appliances and make other repairs. Then we price the house 10 percent less than the average resale price in the neighborhood in order to sell in less than 30 days.”
In the end, though, banks may provide the ultimate workout.
“There’s a lot of unsold inventory out there, and selling by individuals with various workout strategies helps,” said Rob Block, a certified public accountant in Lincolnshire and former chief executive of a real estate investment and development company. “But, ultimately, the banks will have to come up with reasonable financing, and the market will have to shake out the properties the banks are holding.”