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A
good time to buy? by Barry Pearce |
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Is now a good time
to buy a new home? During 2004, plenty of buyers in Chicago thought so.
In fact, after a slowdown that hit the market heavily after Sept. 11,
2001 and lasted several years, new housing roared back to life during
2004. Month after month, major new projects came to market, and enough
buyers showed up at sales centers to push sales to record levels. What’s driving
the boom in new homes, at its hottest in downtown neighborhoods? Interest rates, while
rising, remain incredibly low by historical standards and have been a
factor in boosting sales. Low mortgage rates have stretched consumers’
buying power as renters become buyers and homeowners who have built significant
equity during the last decade trade up to bigger and better homes. The growing popularity
of Chicago, especially central neighborhoods from the South Loop to River
North to Old Town has helped to reverse the mass exodus of population
to the suburbs that afflicted the city for more than five decades. Empty
nesters and others both from the suburbs and out of town increasingly
see downtown Chicago as the place to live. These factors were
present in 2002 and 2003, but both buyers and developers were a little
more cautious in those years. After concentrating on selling out the lingering
units at existing developments, builders turned to new projects in 2004
– many of them flashy, large-scale developments – and buyers
got excited about the latest offerings.
Buyers signed contracts
or reserved nearly 6,300 new homes in downtown Chicago during 2004, according
to housing analyst Appraisal Research Counselors, about double a typical
good year based on sales over the last decade. However, a large number
of these “sales” are reservations riding on refundable checks
of $1,000 to $5,000, and many of these units may wind up back on the block. Another sobering figure
comes from a recent study by the National Association of Realtors. Investment
property and vacation homes accounted for more than one-third of residential
transactions in the U.S. during 2004, according to the NAR – a much
greater percentage than in the past. The new study, based on two surveys,
shows that 23 percent of all homes purchased in 2004 were for investment,
while another 13 percent were vacation homes. It’s difficult
to say what percentage of sales in Chicago are to investors, but experts
say it’s significant, accounting for perhaps nearly one-third of
new units sold last year. Consumers wary of the stock market and other
investment vehicles have been turning to real estate across the country,
leading to fears that prices and demand have been artificially inflated,
creating a “housing bubble.” So, is now a good
time to buy a new home? The answer depends
on so many factors, the question is impossible for anyone but an individual
buyer to answer. Given the trends underway in the city, it seems unlikely
that buyers purchasing new homes here will lose money long-term. However,
if you’re buying a home primarily as an investment, the strategy
is not without risk. A sudden oversupply of homes, a steep rise in interest
rates, a shock to the economy or any of a host of things could quickly
cause a price correction in the market. The sorts of stellar returns on
home purchases that buyers have been experiencing in Chicago during the
last decade are not guaranteed. The best reason to buy a new home, though it may sound obvious, is that it’s the place you want to live. Even if that’s the case, the process is fraught with pitfalls and unforeseen headaches. Some problems can be created by mortgage companies, Realtors and developers, but many are simply the result of ignorance or unrealistic expectations. When it comes to the quirks of new construction, an educated buyer is more likely to be a happy buyer. Advice from family and friends – tales from the front – may comprise the best advice. Our own brief list of helpful hints follows. Old vs. new construction Perhaps the most commonly
cited reason for buying new is the lack of maintenance on a new home.
The typical face brick and vinyl siding on today’s new homes is much
easier to care for than older wood siding or old brick that may need tuck-pointing.
The roof on a brand new house should be maintenance-free for years, and
it’s under warranty if problems arise. The furnace, hot water heater,
all of the major appliances – and potential headaches – are
newer and more efficient than what are found in old homes, and they come
with their own manufacturer’s warranties. In some ways, however,
older homes may be the better maintenance bargain. “In general,
the quality of new construction overall is below what I expect,”
says Tom Corbett, a home inspector whose company name is Tomacor. “We
routinely find that contractors and developers skip many of the necessary
details when converting or building new. A lot of new construction is
maintenance-free in design, but so much of it is inadequately put together
that the maintenance fears are eclipsed by the here’s-another-problem
reality.” Stuart Packer of Lincoln
Park Associates says there are advantages to both new and old, but he
agrees that construction standards were generally higher earlier in the
century. “A used house
has withstood the test of time,” Packer says. “Are there going
to be inherent things that go on with a house that’s past half a
century old? Of course. But you won’t find solid masonry construction
today or what was considered solid masonry 40 years ago. Today’s
masonry is cinder block with a course of brick veneer only on the face.
Materials were cheap years ago, and the older homes are solid brick, with
full dimensional lumber, knee walls; sometimes they’re steel reinforced.” One advantage to buying
something built today, however, is that architects and designers have
today’s lifestyles in mind when they shape your home. Newer homes
generally have more electrical outlets and better energy efficiency. They
frequently have more and larger bathrooms and popular design features
such as multiple decks and open kitchen / dining areas.
Shrinking houses The excuse for this
problem used to be that no standards existed for measuring square footage
in new homes. Should builders measure from the outside face of walls,
or the inside face, or the mid-point between faces? Should only finished
basements be included in square footage or all basements or no basements
at all? It’s hard to justify the rationale that spaces outside the
home, such as decks and patios, should be included in square footage but
some developers have done just that. A common standard
was approved by the American National Standards Institute in 1995, but
it has been ignored by many in the industry. One useful exercise in examining
brochures and marketing materials for developments is to do your own rough
calculations. Developers routinely lie about total square footage –
and provide accurate room dimensions. Take the time to multiply room dimensions
and add the totals. Realizing that awkward corners and curves and some
areas legitimately open to debate may skew your calculations, compare
your amount with the developer’s number. If the difference seems
significant (your 2,400-square-foot home has shrunk to 1,500 square feet,
for example) meet with builders or their sales people to determine exactly
what is included in their numbers. Because of vast disparities in measurement, figuring out the price per square foot is often a misleading tool of comparison between developments, but it may be helpful in other ways. Given the costs of land, construction, materials and other items, it’s generally not possible for developers to sell townhouses for $150 a square foot on the North Side. If your calculations produce that sort of number, make sure that the builder has not stretched the square footage. Disappearing views,
buildings This is why the same
two-bedroom 1,200-square-foot condo on the fifth floor with a great view
of the building across the alley sells for so much less than the identical
unit with a lake view on the 18th floor. The problem is that
views are not forever. Some, in fact, are shockingly short-lived. A number
of developments in recent years have sold units, charging premium prices
for great views that disappear a year or two after the building’s
finished. How do they disappear?
Generally, someone puts another building up an arm’s length away.
Some views are protected by things that prevent future building on adjoining
sites. The Chicago River, parks, landmark buildings and tracts of new
low-rise housing are the types of things you want adjacent to your building
in order to protect the views. Beware of parking
lots, vacant sites, storage facilities, warehouses or other old and decrepit
buildings next door. Even railroad tracks are scant protection. Some buyers
at one development assumed nothing could be built between their new home
and the Chicago River because of the railroad tracks in between. Had they
looked immediately south, where a developer built a highrise on the air
rights over those same tracks, they would have realized how tenuous their
great views were. Like views, buildings
also can disappear, or never appear, to be more accurate. Developers who
had projects on the drawing board are sometimes reluctant to let go of
or postpone them when the market slows down. These builders often will
test the waters to see if they can generate enough interest among buyers
to make the project a success. If buyers show up,
they can go ahead with the project. If not, they haven’t started
construction and can scrap the deal without a significant loss. The loss,
however, can be tremendous for buyers who may reserve a unit and stop
shopping only to realize six months later the home they’d banked
is not getting built. Ask developers how many units they’ve sold and how many their lenders require them to “pre-sell” before construction can get underway. Do not settle for the number of “reservations,” which require little commitment on the part of shoppers, but ask instead about the number of actual contracts that have been signed so far. This may give you at least one sign as to the odds a project will be completed. Inspecting the
inspectors Home inspectors will
check everything from crawl space to attic, wiring to windows, and give
you a detailed assessment of your new house or condo. Inspectors generally
want the buyer present when they do the inspection and consider the process
an education for the consumer. The most important part of the inspection
on new construction is coming up with a “punch list,” a series
of items for the developer to fix. These pesky things may range from a
missed spot on the paint job to a serious structural concern. On new construction,
some home inspectors recommend an inspection in two or three stages. This
costs more money but may be worth it. Tom Corbett, of Tomacor, likes to
inspect new construction three times: just after the concrete has been
poured, just before the drywall goes up and for the final punch list.
Each phase of such an inspection might cost $200 to $300 depending on
the inspection company, but Corbett says it results in a much more thorough
evaluation. “You let your
developer know that you’re interested and he knows he’s not
dealing with a fool, but someone who will insist on quality control standards,”
Corbett says. “Shoddy workmanship is almost always covered with a
layer drywall. We get a profile of the developer to give the buyer if
we get in before the drywall. The expense is in the details – whether
the plumbing is insulated against the studs, whether holes drilled in
the framing and floor are insulated against fire, whether the building
is framed in a way that provides enough strength.” Investigating the
reputation of your builder is perhaps the most important element of buying
a new home, but inspecting the inspector can be equally important. Increased
competition has led many inspectors to turn for business to real estate
agents, who have a financial interest in seeing a deal through. In this
scenario, a home inspector who gets referrals from a real estate broker
may go easy on the developer or overlook problems for fear of wrecking
the process – and his next referral. Ask about your home
inspector’s relationship with the brokerage community as well as
his experience and qualifications. Timing and negotiation
key In one way, the presale
period is the best time to buy. Developers generally must rack up a certain
number of presales to show lenders the project is viable so that the cash
can begin flowing. To encourage sales early on and create momentum, developers
tend to offer units at lower price points. If the development is well
conceived and the market healthy, prices will be gradually stepped up
anyway as the project rolls along. It’s quite possible to save 10
percent or more on your home by buying at this juncture. The downside to buying
early is that the risk is greater – the project may be delayed repeatedly,
or never get built – and the delivery time is farther out. It’s
always a little nerve-wracking to be the first one at the party, taking
quick sips of your drink, nibbling a little too self-consciously at the
veggie tray and trying not to look awkward. Still, if other guests soon
arrive, and that seems to happen much more often than not, youhave had
your pick of the prime spots and saved a bundle. Of course, arriving
fashionably late has converse benefits. You have plenty of people to keep
you company, the risk is lower and you may actually be able to see and
touch your unit – no small comfort when you’re plunking down
hundreds of thousands of dollars for it. Odds are that prices have already
been raised, perhaps several times, but if you’re late enough developers
will be anxious to unload those last few units. “(Developers)
tend to be unyielding in terms of price points, but given the timing of
where their project is you may be able to negotiate upgrades, so you negotiate
differently with builders,” says one broker. “We can negotiate things like prepaid assessments or maybe a free basement. One person called me to negotiate her deal, and I had upgrades thrown in, including a free deck and fireplace. We got about 60 percent of what we asked for.”
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New
developments often experience an early burst of sales activity, especially
if they can create a sense of urgency on the part of both conventional
buyers and investors. This was certainly the case at the Enterprise Companies’
Museum Park buildings in Central Station, which saw swift sales as new
phases opened, and at Lakeshore East, where residents moved into the first
condominium highrise and a variety of new homes hit the market. Countless
smaller projects also cropped up and opened with a flurry of sales.
If
you decide to buy in a new development, check out other projects by the
same developer. Ask him or her for references and the names of previous
buyers. The reputations of the architect and general contractor are equally
important. In fact, an inexperienced developer with a top-notch architect
and contractor is probably a better bet than an experienced developer
with a rookie architect and fly-by-night contractor.