Condos going rental amid housing downturn

Real estate sales in the suburbs are so bad that developers of condominium buildings - as well as owners of existing units - are renting apartments to avoid foreclosure.

In Des Plaines, a developer whose for-sale building is almost finished is negotiating to restructure his construction loan and switch the units to rentals.

"We expect to see quite a bit of this," said Steve Hovany, president of Strategy Planning Associations Inc. of Schaumburg, comparing the situation to the condominium boom and bust of the 1970s. "It shows what the housing bust really means for condominium buildings."

The 60-unit building at 595 S. River Road in Des Plaines owned by Sphinx Chicago Properties is 90 percent finished, said Kymn Harp of the Chicago law firm Robbins, Salomon & Patt Ltd., which represents the developer. Fifth Third Bank has filed a foreclosure suit in Cook County Circuit Court, and the developer is negotiating to extend the loan so the building can be finished as rental apartments.

"It's not unusual," said Harp. "The market is terrible. There are so many condominiums on the market. The building got started in the heyday."

Any pending sales will have to be canceled for the building to be rental, he said, but the attorney thinks most of the early buyers were investors who are anxious to get out of the deal.

Construction started early in 2006, but before that a previous owner started sales, said Harp. Dr. Rashmi Patel is the managing partner of Sphinx.

Another example is marketing announcements from Residential Homes of America. Fifteen new townhouses are available for rental at Alleghany Trail at Village Station in Grayslake, the builder said. Rent-to-purchase options are also available there as well as at the Residences of Fountain Square condominiums in Lombard.

Condominiums are a particular problem in a housing downturn because they are all finished and go on sale the same day. And they often have a large construction loan, Hovany said.

But he also said current rents usually will not be high enough to cover the loan payments.

If construction has not started on condominium projects, developers' options include walking away from a site, waiting until things get better or even rezoning the property for townhouses, Hovany said.

He said no one knows the number of vacant condominiums in the suburbs, but he guesses it is at 10 to 20 percent of the total.

The problems seem more dramatic in Chicago because the unsold condominiums are in larger buildings and in a much smaller geographic area. However, Hovany believes the actual number of unsold units is the same in the suburbs.

Published reports estimate that number totaled about 6,000 in downtown Chicago neighborhoods in the second quarter of the year. The Illinois Association of Realtors reported that condominium prices in the metropolitan area actually rose 4 percent in the same time period while the number of sales dropped by one-third.

If the 1970s scenario continues, banks will avoid financing condominium construction for a decade, Hovany said.

And it's clear that mortgages are difficult to get no matter what type home is being purchased - an overcorrection from the recent past when loans were not regulated enough.

Buyers' credit scores are critical. And Marve Stockert, executive director of the Lombard-based Illinois Association of Mortgage Professionals, said lenders will look at the percentage of owner-occupied units before granting a mortgage in a condominium building.

The easiest loans to obtain for condominiums are those insured by the Federal Housing Administration. These require about 3 percent down payments. The maximum amount of an FHA loan for a single-family or condominium is $417,000. That limit is supposed to drop dramatically in January unless Congress extends the emergency provision that raised it. Unless the building has been approved, an FHA mortgage on an apartment requires extra paperwork.

So-called conventional mortgages are available, but they require at least 10 percent down payments, and when condominiums are involved more paperwork, said Frank May, senior loan consultant with Green Valley Mortgage, based in Bloomingdale. Many of the requirements are financial such as adequate association reserves, and sometimes an architect or engineer report is demanded.