Upside to the downturn
Quick delivery, big perks are available in buyers market
by Barry Pearce

Interest rates are rising, the economy remains sluggish, sales have slowed and Chicago has a glut of new homes.

Not the most cheerful set of facts for the local real estate industry, but for buyers who can see beyond them, now is in many ways a great time to shop for a new home.

At press time, mortgage rates stood at 6.37 percent for the average 30-year fixed-rate loan, a major increase over the 5.87 percent recorded a week earlier. Despite the rise in rates, however, mortgage applications rose more than 1 percent during the same week, according to the Mortgage Bankers Associations of America.

Both buyers and homeowners looking to refinance perhaps realized that mortgage rates are by historical standards still low, perhaps lower than they’ll be for years to come now that rates have started to rise. Money is still comparatively cheap, and buyers who lock in rates soon may see significant savings.

Another, less obvious source of savings currently takes the form of incentives and upgrade packages that developers have rolled out to spur sales in a highly competitive market. Highrise condo construction reached a fevered pitch during the last few years, and developers have found it increasingly difficult to close out projects even as units are ready for delivery.

This is in some ways an ideal state of affairs for buyers, who a few years ago were more likely to purchase a new condo based on a vague drawing and the promise that something resembling it would be built in anywhere from one to three years. Now, those condos have been built, and shoppers can see and touch prospective units, eliminating the guesswork.

Delivery times at many downtown projects are virtually immediate – 30 to 90 days – which means serious buyers can make concrete arrangements without worrying about construction delays and the exigencies that can derail a purchase more than a year away.

Prices have stabilized in this atmosphere, and many developers are offering incentives to create momentum. At press time, Enterprise Development was offering free indoor parking at its 2 River Place development, and American Invsco was giving away $60,000 in new upgrades on select two-bedrooms at its conversion of the New York. Dubin Residential was promoting $2,000 in free upgrades as a grand opening incentive at its Kilbourn Court townhouse development and $7,500 in free upgrades as a closeout incentive at its Emerson Point townhouse project.

Many builders aren’t advertising such specials but use them as deal clinchers once interested buyers are in the sales center.

But while there may be plenty of perks to buying now, purchasing a new home is never without its share of headaches. Buyers, especially first-timers but also move-up buyers who might not be experts in new construction, should be on the lookout for a host of potential problems and issues that can arise.

Advice from family and friends – tales from the front – may comprise the most helpful advice. Our own brief list of helpful hints follows.

Old vs. new construction
Whether buying new construction is better than buying an older property depends on the buyer. Some buyers insist on a brand new home while others believe the older the better. Still others have definite criteria in mind – a certain style, various amenities – and whether or not they buy new or old is immaterial.

Perhaps the most commonly cited reason for buying new is the lack of maintenance on a new home. The typical face brick and vinyl siding on today’s new homes is much easier to care for than older wood siding or old brick that may need tuck-pointing. The roof on a brand new house should be maintenance-free for years, and it’s under warranty if problems arise. The furnace, hot water heater, all of the major appliances – and potential headaches – are newer and more efficient than what are typically found in old homes, and they come with their own manufacturer’s warranties.

In some ways, however, older homes may be the better maintenance bargain.

“In general, the quality of new construction overall is below what I expect,” says Tom Corbett, a home inspector whose company name is Tomacor. “We routinely find that contractors and developers skip many of the necessary details when converting or building new. A lot of new construction is maintenance-free in design, but so much of it is inadequately put together that the maintenance fears are eclipsed by the here’s-another-problem reality.”

Stuart Packer of Lincoln Park Associates says there are advantages to both new and old, but he agrees that construction standards were generally higher earlier in the century.

“A used house has withstood the test of time,” Packer says. “Are there going to be inherent things that go on with a house that’s past half a century old? Of course. But you won’t find solid masonry construction today or what was considered solid masonry 40 years ago. Today’s masonry is cinder block with a course of brick veneer only on the face. Materials were cheap years ago, and the older homes are solid brick, with full dimensional lumber, knee walls; sometimes they’re steel reinforced.”

One advantage to buying something built today, however, is that architects and designers have today’s lifestyles in mind when they shape your home. Newer homes generally have more electrical outlets and better energy efficiency. They frequently have more and larger bathrooms and popular design features such as multiple decks and open kitchen / dining areas.

If you decide to buy in a new development, check out other projects by the same developer. Ask him or her for references and the names of previous buyers. The reputations of the architect and general contractor are equally important. In fact, an inexperienced developer with a top-notch architect and contractor is probably a better bet than an experienced developer with a rookie architect and fly-by-night contractor.

Incredible shrinking houses
A funny thing happens between the time a new home is reserved and when it’s built. It often shrinks substantially. No one is sure where all those square feet developers advertise during the sales pitch disappear to when the studs go up, but one guess is in builders’ pockets.

The excuse for this problem used to be that no standards existed for measuring square footage in new homes. Should builders measure from the outside face of walls, or the inside face, or the mid-point between faces? Should only finished basements be included in square footage or all basements or no basements at all? It’s hard to justify the rationale that spaces outside the home, such as decks and patios, should be included in square footage but some developers have done just that.

A common standard was approved by the American National Standards Institute in 1995, but it has been largely ignored by the industry. One useful exercise in examining brochures and marketing materials for developments is to do your own rough calculations. Developers routinely lie about total square footage – and provide accurate room dimensions. Take the time to multiply room dimensions and add the totals. Realizing that awkward corners and curves and some areas legitimately open to debate may skew your calculations, compare your amount with the developer’s number. If the difference seems significant (your 2,400-square-foot home has shrunk to 1,500 square feet, for example) meet with builders or their sales people to determine exactly what is included in their numbers.

Because of vast disparities in measurement, figuring out the price per square foot is often a misleading tool of comparison, but it may be helpful in other ways. Construction costs alone on new townhomes, for example, are more than $80 a square foot. Add in acquisition and carrying costs, profit and other miscellanies, and it’s generally not possible to sell non-subsidized townhomes for $140 a square foot unless the labor or land are exceedingly cheap. If either of the last two items are true, you might question what you’re investing in. If land and labor costs aren’t especially low and your unit comes out to less than $150 a square foot, make sure that the builder has not stretched the square footage.

Disappearing views, buildings
In many buildings, a major portion of a particular condo’s price can be ascribed to the view, or potential view. Developers understand that buyers are willing to pay more for good views, which are essentially assigned dollar values when builders price their product.

This is why the same two-bedroom 1,200-square-foot condo on the fifth floor with a great view of the building across the alley sells for so much less than the identical unit with a lake view on the 18th floor.
The problem is that views are not forever. Some, in fact, are shockingly short-lived. A number of developments in recent years have sold units, charging premium prices for great views that disappear a year after the building’s finished.

How do they disappear? Generally, someone puts another building up an arm’s length away. Some views are largely protected by things that prevent future building on adjoining sites. The Chicago River, parks, landmark buildings and tracts of new low-rise housing are the types of things you want adjacent to your building in order to protect the views.

Beware of parking lots, vacant sites, storage facilities, warehouses or other old and decrepit buildings next door. Even railroad tracks are scant protection. Some buyers at one recent development assumed nothing could be built between their new home and the Chicago River because of the railroad tracks in between. Had they looked immediately south, where a developer built a highrise on the air rights over those same tracks, they would have realized how tenuous their great views were.

Like views, buildings also can disappear, or never appear, to be more accurate. Developers who had projects on the drawing board are sometimes reluctant to let go of or postpone them when the market slows down. These builders often will test the waters to see if they can generate enough interest among buyers to make the project a success.

If buyers show up, they can go ahead with the project. If not, they haven’t started construction and can scrap the deal without a significant loss. The loss, however, can be tremendous for buyers who may reserve a unit and stop shopping only to realize six months later the home they’d banked is not getting built.

Ask developers how many units they’ve sold and how many their lenders require them to “pre-sell” before construction can get underway. Do not settle for the number of “reservations,” which require little commitment on the part of shoppers, but ask instead about the number of actual contracts that have been signed so far. This may give you at least one sign in an uncertain market as to the odds a project will be completed.

Inspecting homes – and the inspectors
The first advice of home inspectors is, understandably, hire a home inspector. Granting that this might not be the most objective tip, it’s also a fairly smart one. The average home inspection costs less than $500, a bargain considering the cost of new homes today. The investment often pays for itself in problems that are avoided or discovered, saving headaches and major expense later, and sometimes resulting in a renegotiation of price.

Home inspectors will check everything from crawl space to attic, wiring to windows, and give you a detailed assessment of your new house or condo.

Home inspectors generally want the buyer present when they do the inspection and consider the process an education for the consumer. The most important part of the inspection on new construction is coming up with a “punch list,” a series of items for the developer to fix. These pesky things may range from a missed spot on the paint job to a serious structural concern.

On new construction, some home inspectors recommend an inspection in two or three stages. This costs more money but may be worth it. Tom Corbett, of Tomacor, likes to inspect new construction three times: just after the concrete has been poured, just before the drywall goes up and for the final punch list. Each phase of such an inspection might cost more than $200 depending on the inspection company, but Corbett says it results in a much more thorough evaluation.

“You let your developer know that you’re interested and he knows he’s not dealing with a fool, but someone who will insist on quality control standards,” Corbett says. “Shoddy workmanship is almost always covered with a layer drywall. We get a profile of the developer to give the buyer if we get in before the drywall. The expense is in the details – whether the plumbing is insulated against the studs, whether holes drilled in the framing and floor are insulated against fire, whether the building is framed in a way that provides enough strength.”

Investigating the reputation of your builder is perhaps the most important element of buying a new home, but inspecting the inspector can be equally important. Increased competition has led many inspectors to turn for business to real estate agents, who have a financial interest in seeing a deal through. In this scenario, a home inspector who gets referrals from a real estate broker may go easy on the developer or overlook problems for fear of wrecking the process – and his next referral.

Ask about your home inspector’s relationship with the brokerage community as well as his experience and qualifications.

Timing and negotiation key
In buying new construction, it’s often best to be early or late. The two times developers tend to offer deals are during “presales,” before construction has started and during “closeouts,” when only a few units remain.

In one way, the presale period is the best time to buy. In today’s financing climate, developers generally must rack up a certain number of presales to show lenders the project is viable so that the cash can begin flowing. To encourage sales early on and create momentum, developers tend to offer units at lower price points. If the development is well conceived and the market healthy, prices will be gradually stepped up anyway as the project rolls along. It’s quite possible to save 10 percent or more on your home by buying at this juncture.

The downside to buying early is that the risk is greater – the project may never get built – and the delivery time is farther out. It’s always a little nerve-wracking to be the first one at the party, taking quick sips of your drink, nibbling a little too self-consciously at the veggie tray and trying not to look awkward. Still, if other guests soon arrive, and that seems to happen more often than not, you have had your pick of the prime spots and saved a bundle.

Of course, arriving fashionably late has converse benefits. You have plenty of people to keep you company, the risk is considerably lower and you may actually be able to see and touch your unit – no small comfort when you’re plunking down hundreds of thousands for it. Odds are that prices have already been raised, perhaps several times, but if you’re late enough developers will be anxious to unload those last few units.

“(Developers) tend to be unyielding in terms of price points, but given the timing of where their project is you may be able to negotiate upgrades, so you negotiate differently with builders,” says one broker.

“We can negotiate things like prepaid assessments or maybe a free basement. One person called me to negotiate her deal, and I had upgrades thrown in, including a free deck and fireplace. We got about 60 percent of what we asked for.”

Ten key questions every condo buyer should ask
by Bob Horner

Given the profusion of new condominiums in today’s real estate market, selecting a new home is a daunting task. Buyers can significantly narrow their universe of options by answering the basic questions of where, how much and how big, but this does not mean that coming to a final decision will be simple.

No two developments are alike, and visiting sales centers and touring models can’t reveal all the answers that lead to a truly informed decision. I advise buyers at all of my projects to make sure they ask their sales agents the following 10 key questions.

What is the cost per square foot?
Similar condominiums are often compared by their “cost per square foot.” The standard calculation divides the total cost (including upgrades) by the total interior square footage. When a seller quotes a square-foot figure, be perfectly clear what is included in that calculation. For instance, a $250,000 unit with 1,000 square feet of interior space costs $250 per square foot, but if the 100-square-foot deck is included in the calculation, the cost drops to $227.

What features are included as standard?
Standard packages can vary dramatically, so when considering two similar homes, make sure you are making an apples-to-apples comparison. The base price of one condominium could include desirable features that will need to be purchased as upgrades at another development. Upgrades can add significantly to the final cost. For instance, commonly requested finishes such as hardwood floors, granite countertops, fireplaces and custom cabinets can add more than $20,000 to a home’s cost when purchased as upgrades.

When will my unit be delivered?
Once construction starts, stated completion dates are generally dependable, but if construction hasn’t started, then the true delivery date is harder to predict. Banks require developers to have as many as 40 percent to 50 percent of a building’s units under contract before extending the financing to commence construction. By ascertaining how close your developer is to meeting this requirement, you will have a better understanding of the true delivery date of your home.

How much earnest money is required?
The standard earnest money requirement is 10 percent of the purchase price, however, an opportunity to execute a contract by posting a smaller percentage provides buyers with added financial flexibility. Ask your sales representative if the developer offers any programs that allow you to post a lower-than-normal amount in earnest money and as a down payment.

Is the earnest money held in a dedicated escrow account regulated by the Illinois Office of Banks and Real Estate?
Most developers deposit earnest money into segregated escrow accounts. This is preferable to developers holding your earnest money in their own discretionary accounts.

Does the estimated condo budget include a monthly reserve contribution equal to at least 10 percent of the building’s monthly operating budget?
Even the highest quality building will require repairs within 10 to 15 years. If your condo association has not built up a capital reserve to cover these costs, residents will face special assessments to cover the shortfall. Also if your association has inadequate reserves, it can negatively affect your resale value.

Do the estimated real estate taxes reflect what buyers may be assessed later?
Initial real estate taxes for a new condo are often assessed based on the value of the land prior to development, while subsequent taxes take into account the value of the improved land. Some developers estimate real estate taxes based on the former value, though using the higher assessed value reveals a more accurate picture.

How much experience do the developer and contractor have?
The tremendous growth in the Chicago housing market has attracted many new developers. You owe it to yourself to make sure your developer has the experience to do the job right. Ask about this experience and for references from previous buyers.

Was the estimated condo budget prepared by an experienced property manager?
An important component of the cost of condominium ownership is the monthly assessment. When comparing two condos, it is important to ensure that the budgets for both homeowners associations have been accurately prepared. The most accurate budgets are those prepared by a professional building manager.

Will a professional management company manage the condo association?
A professional independent property manager is a condo owner’s best defense in resolving conflicts with a developer. The role of the property manager is to act as a buffer between the homeowners and the developer. A good property manager can save residents thousands of dollars in monthly assessments and future property value.

Bob Horner, co-principal of Winthrop Properties, has overseen the development of more than 5,000 condominiums and homes in Chicago, including his current projects, One One One Morgan and Printers Row Lofts