The Right Place

Originally published Jan. 12, 2007

The crooked deals that are destroying neighborhoods

By Sally Duros

There's something rotten in Chicago neighborhoods, and it looks a lot like condo
fraud.

Condo fraud is a scam where a developer, mortgage broker and an appraiser
work together to inflate value and steal mortgages from legitimate institutions.

"In the past two to three years, we've been looking at 97 buildings with 770 unites
where we feel the sales prices exceed the value, based on the condition of the
units," said Angela Maurello, vice president of Community Investment Corp., a
pooled-risked lender that has worked to turn around abandoned apartment buildings in
Roger Park and other neighborhoods.

Here's a typical problem: A nice-sized, classic Chicago-style brick apartment building sits abandoned, unsecured, filled with trash, occupied by squatters or simply serving as a lurking place for ne'er-do-wells, and it sits on your neighborhoods corner. You know, the corner you kids walk by every
day on the way to school.

These neighborhoods menaces appear when building are converted into condominium - but not really. The deals themselves aren't actually that complex. It's taking them apart once they are done that is.
Maurello says that although the deals appear to happen every quickly, and the "converted" units are
sold fast, it it takes three to four years to bring back a building that has been destroyed by a condo fraud deal.

Here's what the deal might look like done by a crooked developer for a six-flat on Chicago's South Side in a developing neighborhood. Our crooked developer doesn't need a loan of any kind. He buys a 6-flat for $300,000 and he pays cash. He doesn't bother with a construction loan because he's not going to replace the plumbing, roof or mechanical, or make any structural changes to the building. Instead he'll spend maybe $5,000 per unit skim-coating the building, putting in cheap new windows or redoing the process so from the outside, the building, putting in cheap new windows or redoing the process
so from the outside, the building looks like somethings been done.

It's all eyewash.

Our crooked developer is now ready to sell each condo at the market rate of $280,000, but he's invested only $55,000, the purchase price, plus rehab-in each unit "conversion."

Who's going to buy a condo for $280,000 that from the inside looks like an unimproved Chicago apartment unit?

And who is going to arrange for a mortgage for this phony buyer? You guessed it - a crooked mortgage broker. And who is going to see a $280,000 condo where there is really an an improved Chicago
apartment - an appraiser tending toward criminal overstatement.

The deal goes through, fattening up the crooked food chain. Let's see, $280,000 per unit, minus
$55,000 equals $225,000. Multiply that by 6 unites, an you have $1.35 million, or a
profit of about 300 percent!

The most surreal aspect of this crooked deal is that these new "condos" actually are occupied by existing renters during the entire periods of their "conversion." The renters are clueless about what happened. They think their building has a new owner - until about a year after their building's been "crooked." The developer and his crooked colleagues have pocketed their money and disappeared, leaving a building that is legally an association of condominiums with no real owners and no management.
Renters keep paying their rent, but nobody is maintaining the building, the water bill isn't paid, and repairs don't get done.

Then as the mortgages taken out by the phony buyers head into foreclosure, the lender sends mortgages collectors to know on the doors of perplexed renters. The physical state of the building get really bad. It's becoming a slum, and the renters move out
.
Our real estate boom has complicated this matter even more. These days it's quite usual for the mortgage lenders to be in other states, and it's quite usual for each unite to be attached to a different lender. These non-locals are unfamiliar with the neighborhood, the building or the condo. As the mortgages foreclose, the lenders look at the state of things from a remote location. Assessing
the worth of condos online and through databases, they figure they will sell the
foreclosed properties at a loss, for say $200,000 each at the Sheriff's fire sale.

That's the minimum bid accepted. When neighborhood people show up to bid and get a deal on what they know to be an unimproved unite in an eyesore building, they walk away when they realized they'd have to pay $200,000 for the unite.

Nothing sells.

And that's how Maurello and other involved in the Troubled Buildings Initiative suspect we get an abandoned, umimprovable slum on the corner of our block. The Troubled Building Initiative is a task for of city agencies including the City of Chicago Department of Housing and Community
Investment Corp.
"
The initiative looks at buildings and why they've been in Chicago's housing court," Maurello said. They are usually referred by community groups and by the police department. We research who the owner is and what the real problem is. We look at the whole picture. Does the owner have a problem at this one
building or is it among ten buildings?

"Because multiple lenders are involved and the are often out of the state, it's difficult to bring these buildings to fruition," she said. " The bottom line is getting these buildings back on the rent
rolls."

If you live on a block or near a building where you think this might be happening, you can report it to the city through the 311 number or contact the Community Investment Corp. at (312) 258-0070.

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