Monthly Archives: January 2013

Cook County Evictions Part 2: Yes, Virginia, there is a bias.

OK that was mean of me. I gave you a teaser at the end of Monday’s article, indicating that there was definitely a bias in the Cook County courts when it came to evictions. I even gave you a pie chart with the numbers intact but the categories redacted.

When I did my small-scale analysis in May 2012, I came to the conclusion that the system was biased when it came to money judgments but basically fair when it came to getting possession of apartments back from deadbeat tenants. Landlords stood to win their cases about 50% of the time, which is exactly what you’d expect to see in an unbiased system. However, once I obtained the large-scale data from 8 years of eviction history and crunched the numbers, a different picture emerged. This picture will allow us to temporarily put to bed the pervasive urban legend that the courts are biased against landlords.

That’s right. 222,323 cases were found in favor of the landlord. 131,423 cases were found in favor of the tenant. The division is consistent across all six districts and consistent regardless of if you filed for possession only, or for possession and money. So if you’re a landlord, you’ve got just about a 2 out of 3 chance of winning your case. So there. Ha.

Maybe Not. (more…)

Cook County Evictions Revisit Part 1: Intro

Returning to the Scene of the Crime

In May of 2012 I did a three part series that tried to debunk the urban legend that Chicago’s government entities are biased against landlords. I investigated the CRLTO and found it to be weighted heavily in favor of the tenant. I also investigated eviction proceedings using the Cook County Clerk’s website. Based on the information I used, I came to the conclusion that the courts were also biased in favor of the tenant. However, I didn’t feel too confident with those results.

I'm not doing so well in disproving the rumor that I count beans as a hobby, am I?

I’m not doing so well in disproving the rumor that I count beans as a hobby, am I?

(more…)

Are You Ready To Start Apartment Hunting? (A Quiz)

Are you ready to start apartment hunting?

Renters, the apartment market in Chicago has gotten very competitive over the past few years. While developers are finishing up new apartments that will help ease some of the frantic pace, most of the new buildings are very close to downtown. If you're going to be looking for an apartment this year you cannot afford to go into the market unprepared. This quiz will hopefully help you to avoid some of the major pitfalls so that you can get the apartment you want on the first try.
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Dear Piggy: Should My Condo Association Raise Assessments Every Year?

I’m involved with a local support group for board members of self-managed condo associations, since I am one myself. I generally try to participate from a civilian perspective and only put on the Realtor hat when it’s absolutely necessary. However, one of the members specifically asked me to provide some objective information about best practices for raising assessments on an annual basis. I think she was hoping that I’d dig up an article written by someone else, but I figured I could do a blog about it myself.

What Does an Assessment Pay For?

In Chicago, monthly assessments can cover any number of expenses for the publicly shared parts of a condo development. According to the Illinois Condominium Property Act, they must pay the repair and replacement cost for at least the following items:

  • Structural components
  • Mechanical components
  • Surfaces of the building
  • Common areas
  • Energy systems

… In other words, pretty much all of the areas of the property outside of the individual condos and the other sections of the building assigned to specific owner, such as parking spaces and storage lockers.

Additionally, Chicago assessments tend to cover water and sewer costs, building insurance, maintenance costs for the grounds, and electricity for the common areas. We’ll call these the “basic condo package.”

Other common add-ons for a “deluxe condo package” could include heat, doormen, cable, wifi, trash collection, elevator maintenance, and community benefits like business centers, pools and health clubs. Co-ops will also often include property taxes in the monthly dues. But for today we’ll just look at the “basic” package, since it will apply pretty much citywide.

Why should we increase our assessments?

Costs are rising.

Looking at the “basic condo package,” the cost of every item has increase substantially over the past ten years.

A recent article on NPR stated that homeowner’s insurance premiums were projected to increase by 10% in 2012 due to increased severe weather nationwide.[1] The price of water in Chicago has increased from $9.02 per 1000 ft3 in 2002 to $18.75 per 1000 ft3 in 2012, and costs have been approved to increase further to be $28.52 per 1000 ft3 by 2015. Sewer costs are increasing to match.[2] The cost of electricity increased from $0.1026 per kW/h in 2001 to $0.1599 per kW/h in 2011, an increase that would have been far greater had rates not been frozen from 1995 to 2009.[3]

The cost of something like landscaping or repair services is tougher to determine, but for most services of that nature the primary cost to a company is labor. The Department of Labor can give us the income history for most professions. For landscapers and groundskeepers in Chicago, the average hourly wage has gone from $10.68 in 2001 to $12.73 in 2011.[4] The cost for highly skilled and/or licensed labor, such as electrical work or tuckpointing, is certainly higher. The cost of the materials they use has not lowered, nor is it likely to. One can only presume due to the wailing and gnashing of teeth seen from the small business owners due to rising employee costs that these numbers will only go up in the foreseeable future. There is no doubt that maintenance costs will increase across the board.

While savvy condo associations can negotiate lower costs for bulk electricity, cable or trash pickup, they won’t be able to stem the tide of rising costs forever. Like it or not, you will need more money in 5 years to do the same things you’re doing now.

The IRS says you should.

You have to go to the doctor more as you get older. Your building will need more frequent "checkups" too.

You have to go to the doctor more as you get older. Your building will need more frequent “checkups” too.

It’s commonly accepted that the value of a property decreases as it gets older. The costs required to maintain an old building are far higher than those required in a new one. In fact, when it comes to commercial property, the IRS gives you a number you can use to calculate how much more you’re going to have to spend on your property as it ages. It’s called depreciation.

According to the IRS, a multi-unit apartment building will fully depreciate over 27.5 years. Most condo buildings in Chicago started their lives as apartment buildings, so we can go on the same scale. This means that just to cover the increased demands of aging, you should be increasing your reserves by at least 3.6% each year.

Cutting amenities may lower property values.

Of course, an association can remove services in order to keep assessments at a consistent rate. Many condo residents have voted to scale back on things like doormen and pools in order to keep their monthly bills low. However, the IL Condo Property Act specifically states that assessment costs should take into account both the impact on owners and the impact on market value.

Downgrading your association from a deluxe condo package to a basic one does have an effect on the value of the home. The cost per square foot difference between a full-amenity condo vs a basic one is not just due to location. Besides, these are the common areas we’re talking about. Cutting costs too far can reduce curb appeal and increase the chances that a home inspector will find major structural issues that prevent a new buyer from purchasing in your development.

Everybody Else is Doing It.

The most popular condos have no fear of raising assessments. How do we know they’re popular? Because people bought them. No article of this nature on StrawStickStone would be complete without a trip to the MLS for some sales stats. True to form, I went and checked on the monthly assessments for 2 and 3 bedroom condos in smaller associations that sold successfully in the past 10 years. Since the question in this case came from a Lincoln Square property owner, I based my search in Lincoln Square.

The chart below shows the median monthly condo assessments.

The chart shows the median, which went from $133 at its lowest to $203.5 in 2012. The maximum went from $300 to $470 in the same timeframe.

They went up! In fact, they went up by quite a bit. And I should note, the sample size for each year was anywhere from 175 to 430 units, so this is not a small bit of fluky data.

Increases are built into the Illinois Condo Property Act

While the ILCPA doesn’t give a condo board totally free rein over the monthly costs, annual increases up to 14.99% are permitted without allowing the owners at large any means of fighting it. If you increase more than 15% the owners can petition the board for a vote on the hike, but anything below that and you’ve got clear sailing as far as the state law is concerned.

Other sources of income have gotten scarce.

The ILCPA also suggests that associations consider bank account interest and the ability to borrow money as considerations when setting monthly costs. Both of these alternate source of income have seen decreasing yields over the past 10 years.

It used to be that an association could reliably make a decent buck from interest payments on their reserves. Back in 2000 an association could get over 6% interest by stowing their funds in a 6 month CD. However, with rates currently at 0.32% on that same 6 month CD, this source of alternate income is not an option that will keep pace with rising costs.

As for obtaining loans, any home buyer or developer will tell you that the money for large scale property matters is not plentiful these days. While the interest rates for payback are as low as they’ll ever be right now, the hurdles required to get a lender to work with you have multiplied since the housing crash.

If you were living anywhere else, your costs would increase too.

The monthly payment on a 30 year fixed rate mortgage doesn’t increase over the life of the loan. That’s a real nice, but it’s the only part of your monthly expenses that stays consistent. If you were living in a single family home your costs would increase regularly. If you were renting an apartment, your rent would most likely increase every year. There is no reason why you should be exempt just because you’re living in a condo association.

Is there a limit to how high we can go?

Yes. There is a limit. Not a firm one set by law, but a limit of credibility and viability for the owners of the property. Of course the ILCPA has that 15% break point after which the owners can officially challenge an increase, but even below that there’s issues to consider.

A board who raises assessments too high will risk more than dirty looks from their neighbors. An owner who cannot afford rising monthly payments is likely to stop paying altogether. If a condo development has over 15% delinquency on assessments, no lender will touch it with a 10 foot pole. If the association has to evict someone for non-payment, that means court costs and time spent, not to mention the risks and higher insurance premiums that come with having renters in the building. Oh, and recent eviction lawsuits may have the same effect as delinquency when it comes to how lenders look at your HOA.

When I was doing the MLS study above, I took a look at maximum assessment costs as well. None of the sold condos in the area have gone above $471 in the past 10 years. Now, this is a far cry from some of the lakefront full-amenity high rises, where the monthly dues for a 2 bed condo exceed $600 on a regular basis. The point is, you need to scale your increases to fit the income brackets in your building.

Yes, people notice high condo assessments. (via Curbed Chicago x2 plus Redfin forums)

Cutting amenities may hurt your property values, but people also notice when assessments get too high. (via Curbed Chicago x2 plus Redfin forums)

Recommendations

It’s tempting to set a consistent amount to increase assessments each year. However, associations are incorporated as not-for-profit entities. A big surplus means refunds at the end of the year, which makes it tough to turn around and ask for more money later. The better approach is to increase annually so that people get used to the idea, but for only the amount that you need.

Here’s how I do it. Two months before your annual meeting, I contact our vendors and obtain estimates for the coming year. This lets me run the actual numbers and still get the new budget into the hands of the association the requisite 30 days ahead of time. I also take into consideration how expenses have increased from year to year historically, but there’s nothing like actual estimates to prove your point. When presenting your increase to the board, make sure you can back up all of your numbers with evidence. This will make it a lot easier to swallow.

Oh, and no matter how much you cut corners, make sure you’re allotting at least 10% of your budget to reserves each year, and make sure it’s a line item in the budget. A reserve study performed by experienced engineers will let you know exactly how much you should be saving, but regardless of the outcome of the study, at least 10% is required so that new owners can get mortgages when they buy into your building.

So yes, increase every year, but not by an arbitrary amount. As is the case with every article here, a little research and a little math will tell you how to proceed.

  1. [1]Homeowners Insurance Rates Rising in 2012, NPR.org
  2. [2]Know My Water and Sewer Rates, CityofChicago.org
  3. [3]ComEd Historical Residential Rate Monthly Averages, Info-Trex
  4. [4]Department of Occupational Employment Statistics, US Bureau of Labor Statistics

PSA for the Accidental Landlord: Profit is Not Guaranteed

The alternative of renting your home in a slow market has become increasingly viable in the past few years. I’ve worked with a number of buyers lately who have mandated that their new home be viable as a rental further down the road. Even though the market is improving, there are also still sellers out there who don’t want to short sell and turn to rental as an option. I call it “accidental landlording.” As one of the few Realtors in my office specializing in rentals I pick up several of these each year as referrals from my peers. With at least a quarter of the accidental landlords I meet, I have to have the following conversation:

Me: “Based on the current market, I’m thinking we could get $X per month for renting this property.”

Client: “But my monthly expenses are $X+500!!! We have to ask at least $X+600 so that I can turn a profit on this rental.”

Me: “I wish I could say it worked that way.”

Me, internally:

Logo from an indie film that failed to get funding. So Sad,Analogy Time!

So let’s say you’re 25 and you are living in Rogers Park without assigned parking. Poor you. You need a car, though, so you buy a little 5 year old Jetta second or third hand. You can parallel park anywhere and not pay too much. It serves your purposes. You have your brother paint it purple so you can pick it out in the mall parking lot. You cover it in bumper stickers. It’s unmistakeably your car, through and through.

10 years pass. You’re still driving that Jetta, but now you’re working for a catering business in Elk Grove Village, and you have two kids. You finally have to bite the bullet and give up your beloved compact. The folks in town don’t look kindly on your old John Kerry ’04 bumper stickers and there just isn’t room for your life in your car anymore. Back when you were 25 you never thought you’d be in this situation. You didn’t consider if the Jetta would suffice if you wound up in a situation where you had to haul a lot of stuff and small people around.

I had a lot of trouble finding pictures of VWs covered in bumper stickers. Lots of Toyotas, but not a lot of stickered VWs with an acceptable reuse license. VW owners don't like to share their pics.

I had a lot of trouble finding pictures of VWs covered in bumper stickers. Lots of Toyotas, but not a lot of stickered VWs with an acceptable reuse license. VW owners don’t like to share their pics.

A single-purpose purchase will not necessarily serve well when faced with new tasks. The more something is customized, the harder it is to make it change gears (pun intended).

The same thing goes for your home.

Why did you buy your home?

If you’re currently a homeowner, chances are that you didn’t give much though to the rental value of your home when you bought it. You might have thought a bit about resale value, but not about whether or not it would make a good apartment. Likewise, if you took out secondary loans on the property you probably didn’t think about having some poor renter cover that cost on your behalf further down the road.

You probably considered how you could customize the house, the caliber of the kitchen appliances, the color of the wood floors and the size of the yard. You ensured it would suit your particular needs for light, space, and storage. You thought about whether it fit within your monthly budget. You probably didn’t consider whether or not it would generate positive cash flow 8 years later.

There’s a lot of investors out there who won’t purchase a property until they’ve analyzed whether or not it will generate positive net cash flow. They think about what will appeal to the largest number of renters. How long those renters will stay. The cost of gas to drive back and forth to the property. The breakdown rate of the appliances. The value of parking spaces. The depreciation. And when it comes to apartments, there are more owned by investors than by “accidental” landlords. Investors set the market rent rates.

A purchased home should be like the cast of "Star Trek" - very good at playing their specific roles.

A purchased home should be like the cast of “Star Trek” – very good at playing their specific roles.

Meanwhile, a good apartment needs to be like the Saturday Night Live cast: able to do a decent impersonation of any type of home for a short period of time.

Meanwhile, a good apartment needs to be like the Saturday Night Live cast: able to do a decent impersonation of any type of home for a short period of time.

Going back to the car analogy, let’s suppose you tried to lease your 10+ year old Jetta for $180 per month when you were done with it. Laughable, right? Who on earth is going to sign a fourth hand lease on a heavily customized car? And who on earth is going to pay the same for it as they would for a new 2013 Jetta at the dealer?

Why should you expect that your home, bought for and customized to suit your needs, will work well when repurposed as a means of generating ongoing income?

Agents Can’t Force the Market.

If I’m trying to list your home as a rental, I want to list it for as high a rent as I can possibly get. I’m working on straight commission here. Your profit is my profit. However, “possibly” is the real operative word in that first sentence. If it’s priced too high, your home will not rent. Nobody will even see the ads.

Most renters don’t care about your monthly expenses. The general opinion of a landlord is that they’ve got bottomless pockets full of money, especially if they own a fancy condo with granite counters and stainless steel appliances. After all, you have two homes and they have none.

If I deliver a number that’s lower than your cost of ownership, the question should not be “can I find some idiot renter who’s willing to pay $500 over market rates.” After all, that type of renter is not likely to remain financially solvent for long in any respect, and an insolvent renter is a renter headed for eviction court. Rather, the question should be, “which will cause less damage to me in the long run?”

Short selling your home has its problems. It affects your credit, your tax returns, your buying power, and your self esteem. You may face long market times. You’re at the mercy of the banks. Renting frees you from all of that. For some it may be easier to write off a $500 loss each month than a $300k loss all at once. The market times will probably be shorter. The banks don’t have to get involved.

However, renting doesn’t free you from the property itself, and you may find that dealing with tenants and the Chicago rental laws for a year is far worse than dealing with a bank for 60 days on a short sale.

The better approach is to expect both the sale price and the rental price quoted by your agent to be below what you paid for the property, especially if you bought in during the 2000’s. Rather than weighing just the money values, think first as to the benefits of the entire scenario before making your decision.

Three Little Pigs Get a Windfall (Or, Mortgage Discount Points FTW)

Once upon a time there were three little pigs. (I’m surprised I haven’t done this in the past year.) The pigs have a grand adventure in store for them involving building supplies and poached wolf, but for today we’re starting at the beginning of their story, and that means it’s math time.

Yay math time!

Yay math time!

They were each sent out into the world to make their fortunes. When it came time to buy housing, their mother gave each of them a surprise gift of $5000 in addition to the money they’d already saved.

Now, let’s say that they’d each saved up the same amount of cash, had similar credit scores, and all bought $300k townhouses in the same development using FHA loans with 3.5% down. (I know that isn’t how the story goes, but I’m not talking about construction materials today.) However, each one chooses to do something different with their $5000 gift from their mother.

Pig #1: $5000 on new appliances.

The youngest pig spent the extra $5000 on new appliances for his kitchen. He got a new Fridge ($1300), a new stove ($1300), and a new washer and dryer ($1200 each). Ten years later when he sells the property he’ll have spent $154837 in debt service on his mortgage. His appliances would be close to the end of their useful lifespans, so they won’t contribute much to the value of his home. In fact, he might have to replace them all again in order to sell the property.

Maybe he got something awesome like this modular stacking refrigerator.

Maybe he got something awesome like this modular stacking refrigerator.

Pig #2: $5000 towards the down payment.

The middle pig was quite content with the appliances that the developer provided, so he chose to add $5000 to his down payment. This lowered the amount that he had to borrow from the bank. When he sells his property ten years later, he’ll have paid $152163 in debt service. This means he’ll have saved $2674 over his younger brother. He’ll still have to replace the appliances before he moves out, but he’ll at least have saved a nice bit towards the cost.

I should note here that given the same 3.44% interest rates on their loans (which happens to be the current national average), it doesn’t matter what the down payment was nor what the cost of the property was. Over 10 years, the savings will always be $2674 if you add $5000 to the down payment.

Ok, so it's a pug, not a pig. Still, if you saved $2674 you'd be saying "neener neener" to your brother too.

Ok, so it’s a pug, not a pig. Still, if you saved $2674 you’d be saying “neener neener” to your brother too.

Pig #3: $5000 towards 1.5 Discount points.

We’ve talked about mortgage discount points before. Basically, for a fee equal to 1% (one “point”) of your loan paid up front, your interest rate lowers by a specific amount, usually 0.25%.

The eldest pig used the $5000 to purchase 1.5 discount points on his mortgage, lowering his rate by 0.375%. His brothers got loans at 3.44%, but he came in at a cushy 3.065%. Over the next ten years he will spend $147686 on his loan, saving $7151 compared to his youngest brother. This means he’ll actually make a profit on his mother’s gift! (Thanks, Mom.) He’ll also have accrued $3055 more in equity on his townhome than his younger brother, meaning he can replace the appliances and still walk away with a nice $5000 in savings.

Needless to say, the eldest pig made the smart move here.

You bet it feels good, little piggy.

You bet it feels good, little piggy.

The moral of the story is that cash at closing can be spent in many different ways, and that bulking up your down payment is not always the best way to go. First time buyers rarely think about mortgage discount points. In fact, residential buyers often don’t consider points at all, unless they are required to pay them in order to get a loan in the first place. However, if you have the cash to spare and today’s already ridiculously low rates aren’t good enough for you, spending some extra dough to push the rate down even further can have a very good effect on your bottom line. Of course, your mileage may vary and you should always run the numbers yourself after a hearty conversation with your lender.

We also learn that an extra $5000 can go a very long way. When saving cash to purchase a home, every bit helps.

See you Monday.

Could the scenario from ‘Rent’ really happen in Chicago?

The musical “Rent” was a seminal piece of theatre for me and a lot of my peers when we were in college in the 90’s. For many of us, it colored our perspective of landlord-tenant issues for years to come. The actual plot of the musical doesn’t really depend on the apartment issues – the characters could have the same conflicts and growth without the framing device of the rent scenario that gives the show its name. However, as a framing device to drive urgency and establish the setting, the choice to focus all of the action around a particular apartment building in New York serves as effective shorthand for establishing a villain and the low-income, counter-culture status of the main players.

Today I want to take a look at the various problems in the landlord-tenant relationship and living situation portrayed in “Rent” from a perspective of the Chicago market. Is there any way that this could come to pass in Chicago? How can it be avoided? What parts of the assorted conflicts do we take for granted as likely to occur in a renting situation, and how can a landlord structure their business to keep it from arising?

Before we get started, though, I want to see how far we’ve come since you started reading this blog. If you’re familiar with the plot of “Rent,” see how many potential problems you can identify if those people were renting in Chicago. If you’re unfamiliar with the show, I’ve included a video of the final Broadway cast performing the first 7 minutes, which should give you a good idea of what’s happening. Then come on back and we’ll go through them together.

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Apartments: Is Bigger Really Better? (Tenant Version)

I used to work for a theatre company that did most of its work in a very large performance hall. It had 25 rows and stadium seating, and the stage was 25 feet wide and three stories tall. (That’s the width of a standard Chicago lot – pretty substantial for a city perfoming space.) It would have been a fantastic hall for big musicals, operas, and large scale events. The problem was, this company was a tiny one. They were not doing big shows, but in order to fill that huge space they had to spend tons on scenery and sound amplification in order to make it work for them. In this case, the bigger space was definitely a detriment.

When it comes to apartments, you can have one or the other but not both.

When it comes to apartments, you can have one or the other but not both.

So let’s say you and your roommate have $1600 to spend between yourselves for an apartment. You have the choice between a 1000 square foot high-end, loft style condo in Lakeview with two bedrooms, and a 2000 square foot vintage unit with a basic set of appliances and four bedrooms in Irving Park. There are a large number of renters out there who would automatically say that the four bedroom unit is the better deal, even if they don’t pick up extra roommates to fill the additional rooms. Bigger = better, right? I have five reasons here to help you explain to your roommate why this is not necessarily the case.
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Rental Site Review: SearchChicago.com

There’s a ton of sites you can use to look for apartments in Chicago. Not all of them are fabulous. Most have a mash-up of private landlords, locator services, realtor listings and fake/scam rental listings. The inimitable Joe Zekas of YoChicago is taking on some of the more problematic listings in his own way this year through his Craigslist Apartment Cleanup effort, which I applaud even though it may make my job tougher if any of my legit exclusive listings accidentally get caught up in his dragnet.

However, I thought it would be worthwhile to go through some of the sites that I’ve experienced to let you know how they stack up. I’ll be rating each site I review based on the diversity of listings, the legitimacy of those listings, ease of use, and the freshness of the listings, since the apartment market moves pretty fast. A site can score up to 40 points. Today we’ll be starting with SearchChicago.com, the online classifieds section of the Chicago Sun-Times.

SearchChicago.com logo property of Sun-Times Media.

SearchChicago.com logo property of Sun-Times Media.

SearchChicago Scored 14 out of 40 points. Find out Why. (more…)

Can You Avoid a Landlord-Tenant Lawsuit? (A Quiz)

Can You Avoid the Lawsuit?

So you're thinking of becoming a landlord, or maybe you are one already. Are you ready to avoid the pitfalls of owning rental property in Chicago? This is one in a series of quizzes for landlord that will test your ability to avoid potential lawsuits and fines.
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Anatomy of a Showing: Is Same-Day OK?

The matter of booking showings with very short notice has come up several times with my clients lately, so I thought I should address it for everyone. With the recent holidays the time required for booking a showing has been longer than normal, but even in normal circumstances there is a fine balance required to get you in to view a home or apartment.

Requesting a showing with very short notice is like springing a pop quiz on the current residents.

Requesting a showing with very short notice is like springing a pop quiz on the current residents.

The Process of Booking a Showing (more…)