A construction worker tears out and puts in new drywall in a nine-unit building on 80th Street and St. Lawrence Avenue on Chicago’s South Side. Dust blankets the hard wood floors as rehab is underway. New windows gleam in the summer sun.
This once was a condo development.
The city of Chicago de-converted the building in August 2011, and later this summer, the apartments will be ready for rent.
Dewayne Sandifer owns the building.
“The price of the building was a good deal. The location is nice. I’m going to be renting them for market value, around $700, $800,” Sandifer said.
Chicago’s condo market may be rebounding, but many neighborhoods still have empty buildings as a result of fraud and a tanked economy. An Illinois state law is allowing the city to de-convert condos and turn the units back to apartment rentals. It’s the only such law in the nation. And it’s beginning to make a difference.
Fifty buildings have been de-converted since 2010 in Chicago. And there’s no sign of the program ebbing.
The court receiver for most of those buildings was the Community Investment Corporation, a multi-family rehab lender.
CIC President Jack Markowski said the distressed condo program deals squarely with fraud from shady developers.
“They created the image, the impression of markets and condo development where it really didn’t exist,” Markowski said.
For instance, someone pretends to convert a six-flat building. Markowski explained how a developer could get away with this.
“Managing to find financing, finding I guess straw buyers for the six units, selling them for $300,000 a piece, managing to get appraisals and financing. And walking away with $1.8 million dollars on a building where you look at it today, the building’s been de-converted. nobody’s living there, it’s been trashed,” he said.
According to CIC, that condo building on St. Lawrence Avenue sold units to elderly buyers from the South, an indication of straw buyers.
The de-conversion process is different than condo owners banding together in a vote to collectively sell their building.
This distressed condo program has criteria before the process begins: serious code violations, utility termination, 60 percent of units in foreclosure, recording of more condo units than physically exist. In most cases, the buildings have been empty, with no one paying mortgages.
Markowski estimates there are roughly 250 examples of fraudulent condo buildings in the city. That’s more than two thousand units, he says.
“You would think, ‘Wow, look at Washington Park, look at all these condos that are being sold there. That’s amazing. And turns out well yeah, a significant portion weren’t real, it was phony. So it was driving the market in that sense, confusing, I think, legitimate buyers,” Markowski said.
That’s the other piece of the condo bust: inflated property values in the early 2000s, loose underwriting on loans and lower down payments. These factors have created instability in traditionally strong rental markets like Rogers Park, Albany Park and Grand Boulevard. Each of these areas lag in the condo market because of foreclosures and vacancies.
“When the market collapsed, those projects, there wasn’t the demand to really occupy those projects fully and those projects obviously became highly distressed and the demand hasn’t recovered yet,” said Geoff Smith, executive director of the Institute for Housing Studies at DePaul University.
Markowski sayid condo owners who owe more than what their units are worth simply have to wait for the market to reset. The distressed condo program hasn’t actively tackled that population.
But City of Chicago officials say the second wave of cases they are getting across their desks are condo failures - too many people not paying assessments and developers not selling enough units.