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Investors scouring Chicago for foreclosures

Published: Monday, May 14, 2012 10:29 a.m. CST

(MCT) — Pulling up to a distressed home for sale in Oak Lawn last month, Carl Courtright saw that two other potential buyers were looking at the property. He returned a while later to find a third competitor.

After getting 10 minutes to look at it himself, he saw a fourth would-be buyer waiting for his own quick showing of the home.

"There's a ton of competition," Courtright said later. "If you're careful with your money, it lends itself to being a very solid opportunity."

Home prices are falling, and homeowners are nervous. But in this one corner of the real estate market — the market for distressed properties — local and out-of-town investors are bumping into each other at the doorstep as they snap up homes for rehab, resale or, increasingly, to convert them into rental properties.

It's a noteworthy development. Despite low mortgage rates and a variety of government-fueled incentives, the residential real estate market has been stalled for several years. A newfound interest by investors could signal that the market is at, or near, its bottom.

In the short term, the rush of investors looking for bargains will continue to act as a weight on home prices. Eventually though, as the supply of vacant properties shrinks, home prices will first stabilize and then start rising. Neighborhoods hit hard by foreclosures should start looking better too.

While sales prices of foreclosed properties continue to decline locally, the declines are not as steep as those for traditionally sold homes. On a per-square-foot basis, prices of foreclosed homes declined 3.9 percent in April year over year. That compares with a 10.4 percent decline for traditionally sold homes, according to Clear Capital, a real estate valuation firm. Almost 38 percent of the local homes sold in April were foreclosures.

Foreclosures are going to be a big factor in most markets, including Chicago, for several years, and that creates an opportunity for mom and pop investors as well as institutional purchasers, said Zillow chief economist Stan Humphries.

"I view that as a good thing," Humphries said. "We have a need for less owner-occupied homes and a need for more rental homes."

The additional supply also will eventually help temper rents. Here, like elsewhere, rising demand for rentals is causing rents to escalate as people either steer clear of homeownership, can't qualify for a mortgage or need to rent because they've lost their home to foreclosure. Rents in the Chicago area have risen by 9 percent during the past year, according to Zillow.

The trends are attracting all sorts of players. Chicagoans Dzevad and Zumreta Hadzic are on the hunt for at least two more foreclosed condos in Chicago to add to their growing base of rental properties: They have four in Chicago and five in Daytona Beach, Fla. On a recent morning, the couple set out to visit four distressed condos on the North Side that, on paper, seemed to fit their criteria as cash buyers.

At the first property, the entry key was missing from the lockbox, sometimes a sign that a realty agent is trying to save the listing for his own client. At the second condo, listed for $35,000, Dzevad liked the unit's financials, while Zumreta noted that it was near public transportation. The unit, they quickly concluded, would need $5,000 to $7,000 of work. A garden unit in another building, also selling for near $35,000, had some water damage and a few inches of mold along a baseboard that worried Zumreta Hadzic.

At the final unit, Zumreta figured it would take $2,000 to replace the windows. Sizing up the large living room, Dzevad concluded they turn half of it into a third bedroom and charge more rent.

The couple was in and out of each of the units in 10 minutes.

"There's so much temptation out there," said Dzevad Hadzic, a machinist. "We have to be careful not to extend ourselves. You have to be careful not to jump too far. Where else can you get 25 percent return on your investment?"

The real estate agent working with them, Laura Meier of @properties, said not every potential client is as savvy and patient as the Hadzics.

"It's one of those markets where it's still a buyer-beware market," she said. "There are a lot of properties out there that are in trouble financially. It's extremely important for these homeowners to do their homework before they go out."

Housing analytics firm CoreLogic recently cast a national spotlight on the Chicago area, identifying it as one of the more attractive markets for a foreclosure-to-rental investment strategy.

That's not news to some outsiders, including some heavy hitters.

Waypoint Real Estate Group, an Oakland, Calif.-based company, has purchased almost 1,000 foreclosures since 2008 in California and turned them into rentals. With a substantial private equity infusion in January, Waypoint is launching an aggressive national expansion this year, and that may include Chicago.

"Chicago is one of the markets we're looking very seriously at," said spokeswoman Beth Haiken.

Sergey Bitelman already has come to Chicago. The 36-year-old rents an apartment in Brooklyn and had never been to Chicago until October. Now he owns two homes in the south suburbs and receives rent checks every month.

Why the Chicago market? "There's obviously a million homes in the five boroughs of New York City, but there haven't been so many foreclosed homes to be able to capture below-market prices," Bitelman said. "This is pure capital preservation."

Rather than deal with trying to be an absent landlord halfway across the country, Bitelman partnered with Mack Cos., a Tinley Park company that for many years has purchased south suburban foreclosed homes and renovated them into rental properties it then managed. A year ago, the company changed its business model: After rehabbing the homes and securing tenants, it began offering the homes to investors. Mack manages the properties for investors for a flat fee.

Investors range in age from 29 to 83 and include firemen, millionaires and professional athletes, said Eric Workman, vice president of sales and marketing. It has 600 properties under management, including about 200 that are owned by outside investors.

"People got killed by speculation on appreciation on residential real estate," Workman said. "That's not what our investors are looking for. What they're looking for is long-term appreciation and positive income that's being generated in the interim."

As investors watch their competition grow, they worry about the long-term supply of quality properties. They also warn newcomers that the strategy isn't as easy to execute as it may look.

Courtright, for example, is part of two investor groups that have been purchased 25 properties with cash in the past two years. They prefer to resell the homes within 120 days once rehabbed to generate cash for additional purchases, and they've netted as much as $25,000 in some deals. But Courtright also acts as landlord for several properties.

"I have some wonderful renters and I love them dearly, and I have some that are a monthly headache," Courtright said. "I'd rather deal with (flipping houses) three times a year than deal with someone who doesn't know how to plunge a toilet."

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