The deal of a lifetime? Featured

8:00pm EDT October 26, 2009

The downturn in the housing market and the glut of condominiums in Chicago have combined to drive down prices and entice interest from potential buyers, as investors and disgruntled commuters alike are thinking about getting a place in the city.

“What we are seeing is a lot of people trying to take advantage of the slump in the condo market and purchase investment properties or weekend homes,” says Patricia A. O’Connor, a partner with Levenfeld Pearlstein, LLC. “If they have the cash or the ability to finance, there’s no doubt it’s a great opportunity to buy now. But you really have to think twice about the short-term benefit and the long-term commitment you’re making.”

Smart Business spoke with O’Connor about how to avoid common mistakes when purchasing a condo and how to make sound decisions.

What major issues should potential buyers be aware of when looking at condominiums?

If you are going from a single-family, freestanding home and moving into a condominium or town home, there are going to be issues, and the two biggest are economic commitment and lifestyle.

You have to understand that what you are buying into is membership in the organization. You are going to be bound by restrictive covenants, and if it’s a condo, you are also going to be bound by the terms of the Illinois Condominium Property Act.

Many purchasers want to buy a condo because they think they won’t have to take care of much, but that’s not the case. You’re not a renter. You are a joint owner of the common elements with every other owner in that association.

There are also rules of the association. People don’t necessarily realize that they can’t always do the construction they want to do. You have to go to the board for approval on anything that impacts the common elements.

Many issues can be avoided simply by doing due diligence. Take that extra step, because purchasing a condo is not like purchasing a single-family home, where you recognize that you are going to be able to make changes and will be responsible for the cost. People who buy condos don’t necessarily give a lot of thought to what they will and will not be responsible for cost-wise and what they can and cannot do.

What common mistakes do prospective buyers make?

You really need to think ahead. If you are looking at a foreclosure or short sale, it can be a great investment opportunity, but if there are a multitude of short sales and foreclosures in that building, that means there are a lot of condo units that aren’t paying their assessment. Who pays those assessments if they’re not paying? It falls on the other owners.

Also, if you have a personal economic crisis and you can’t pay your assessment, the association can evict you. You could end up out on the street.

What else should purchasers be aware of?

Someone who is looking into an older building where there hasn’t been a recent influx of purchasers is going to be dealing with owners who have been there for a long time.

Generally speaking, an older, more established condominium is a safer purchase, but you have to balance the risks and rewards of an older condo. The real deals are in the associations and condominium developments that came online in the last five or six years, in which the initial purchasers are ‘under water’ on their mortgages.

Find out what the level of assessment increases has been over the last few years, and compare the assessment amounts to similar buildings in the area with like amenities. Your broker can help you with that.

The comparison is important, because if there is one building that has similar amenities to every other building in the immediate neighborhood and the assessments on it are disproportionately lower, it should be a red flag to any potential buyer. That tells you that the association is not funding its reserves as much as it should. It also tells you that the association isn’t addressing any deferred maintenance.

Although the low assessment may look more attractive on a monthly basis, if a big project like a roof replacement comes up, you may be hit with a special assessment when the association doesn’t have the money to otherwise pay for it from its reserves.

What can prospective purchasers do to protect themselves?

The law requires that you be provided with certain information regarding the financial situation of the association and whether the association anticipates any special assessments in the next couple of years.

You are entitled to see the declaration, the bylaws, and all the rules and regulations. There may be something in there that may be a red flag and make you decide this condo would not be a good fit for you for one reason or another.

Take it a step further and ask for information that the condo board is not required to disclose. Ask for minutes from the board’s meetings from the last year so you are aware of what’s going on in the building and to see if there are any design defects or claims against the developer.

Prospective purchasers simply need to do their due diligence to ensure that the association they’re looking at buying into really meets their needs. Work with brokers and real estate agents, and use their knowledge of the industry and the area to make a sound decision, as those professionals have the ability to explain the complex details to prospective purchasers.

Patricia A. O’Connor is a partner with Levenfeld Pearlstein, LLC. Reach her at (312) 476-7523 or poconnor@lplegal.com.