Fight back against condo fraud
This week we wrote about something called condo fraud in The Right Place. It's a suspected way that some crooked "developers" make a lot of cash while creating slums.
It occurred to us to us that some of you might not know what a legitimate real estate developer's expenses look like so we've done a little run down here, It was news to us too.
Most developers expect a profit margin of about 20% on their investment, which is pretty modest compared with what our suspected "crooked" developers hope to make.
There are other elements to these suspected schemes. Mary Jane Haggerty at the Rogers Park Community Council, who dealt with a number of these buildings in the late 90s and early 2000s, said they can artificially inflate prices in a neighborhood too, which stands to reason, and this can have unexpected side effects. You can learn more about this by contacting the
Rogers Park Community Council.
To understand how an abandoned building is created, it helps to understand how a typical condo conversion is done. So here's a hypothetical...
A legitimate developer buys a property in a neighborhood where the market for condos is already established. For simplicity’s sake, let’s say the building has 6 nice-sized units, and the developer buys it for $300,000. That’s $50,000 per unit, which the developer rehabs to the tune of, say, $70,000 per unit, or an investment of an additional $420,000 for the units, as well as an added $100,000 for the roof, furnace, electrical, plumbing — all the common elements.It’s a simplification, but that’s basically what happens.So we can see our legitimate developer is investing $820,000 into the building to convert it to condos. This is a sizeable chunk of money, and it is needed upfront. The developer usually borrows it from a bank or other lender.
Before the developer can make his vision of condominiums a reality, he has to file a number of legal documents. These include a condominium declaration with the Cook County Recorder of Deeds, and other filings with the City of Chicago’s Department of Buildings and with the Office of Consumer Affairs.
A very important legal action our legitimate developer takes is to create a condo association to manage the building. This converts the single-tax ID attached to his building on purchase into six individual tax-IDs, one for each unit. He finds a willing buyer for his first unit, which he has now priced at the market rate of, say, $250,000. The buyer goes to the bank and gets a mortgage. The home sale closes and the developer is paid his $250,000. As the developer sells his units he pays off his initial loan from the bank.
Usually after 51 percent of the units have been sold, he turns the association over to the new condominium owners. Generally our legitimate developer is happy with a 20 percent profit on a condo conversion.
