Real Estate Investors Beware!

While the number of investors in the marketplace is vastly reduced from years past, there are still many willing to take a bite at the apple. Right now, with the exchange rate being what it is, Europeans are finding the real estate market in Chicago a potential good bet. In fact, investors from across the pond are being agressively marketed to by many high profile developments, including the proposed Spire, which will be the tallest and potentially the most expensive condo building to be built in Chicago.

While the Spire and other developers are catering to overseas investors, the day of purchasing and then immediately flipping appear to be over. There seems to be a tacit understanding that any investor will need to hold onto his property in order to build equity, it will not happen over night. According to a recent Crains article (June 28, 2008) the developer of the Spire is proposing quite a deal to investors by presenting a guaranteed 7.5% return via renters for two years. This investor deal is rare for such a high-profile project because buyers typically don't stand for paying luxury prices to live in a complex filled with short-term residents. The investor package is of sufficient level to cover mortgage payments, annual real estate taxes and apartment service charges, ensuring the investor does not incur any costs in the first two years, according to a recent press release.

Today more than ever a real estate investor must do his homework, something many did not do in the past several years. Many real estate investors forgot that old adage from childhood: if it sounds too good to be true it probably is. This is particularly true for investors in many condo conversions marketed in downtown Chicago. According to a recent Crain's article (June 16, 2008), eight downtown buildings converted by a single company since 2001 account for over 55% of the foreclosure cases in all of the downtown condo projects on buildings with 175 units or more developed at the same time. That equates to an 8% foreclosure rate for this company's eight buildings. One of the reasons there are so many foreclosures is that this company heavily marketed to investors, often the novice real estate investor. The hook was to guarantee for the first couple of years a tenant for the unit at a rental price that would cover, or come close to covering, the monthly expenses. In the high-flying times of rapid price appreciation many investors believed they could purchase a unit, rent it out for a couple of years, then flip it at the end of the guaranteed return period for a profit. Unfortunately, the prices paid for the units were vastly inflated. These investors are now in the unenviable position of owing far more than the units are worth, and many are walking away from their investments and mortgage obligations.

Jim Kinney, Managing Broker and President of Rubloff Residential Properties, said that investors are more likely (than owner occupants) to say, Hey, this was a bad business decision. I'm going to mail the keys back. As one investor stated, it was way too good to be true. I should have detected this miles away. For more information contact me by visiting my website or call 312-264-5864 or e-mail cengel@rubloff.com.