By Sally Duros
Chicago Sun-Times Real Estate Editor
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 units 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 Rogers 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 neighborhood’s corner. You know, the corner your kids walk by every day on the way to school.
These neighborhood menaces appear when buildings are converted into condominiums – 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 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 looks like something has 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 units, and 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 mortgage collectors to knock on the doors of perplexed renters. The physical state of the building gets really bad. It’s becoming a slum, and the renters move out.
Our real estate boom [during the 2000s] 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 unit 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 unit in an eyesore building, they walk away when they realize they’d have to pay $200,000 for the unit.
And that’s how Maurello and others 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 force 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.
Followup: Fight back against condo fraud
A while back we wrote about something called condo fraud. It’s a way that some crooked “developers” make a lot of cash while creating slums.
It occurred 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.
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.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.
It’s a simplification, but that’s basically what happens.