In cooler market, buyers demand – and builders deliver – perks aplentyÂ
Story by Alison Soltau
Lisa and Miguel Cabrales wanted to buy a vacation home in downtown Chicago so that they could enjoy weekend trips to museums and strolls through Millennium Park. But the couple from northwest suburban Carpentersville was determined to get a deal. They decided to sit out the frenzied market for new construction in 2005, when developers sold a record number of new condos in Chicago.
“We thought people were paying high prices,” Lisa Cabrales says. Last September, friends in the mortgage business told her that the market was cooling, so she and her husband began looking at high-rise developments in the South Loop. Cabrales is glad that they bided their time. In December, they took advantage of a $10,000 discount offered at South Loop high-rise Library Tower and bought a one-bedroom condo for $253,000.
“The discount kept us within our price range, and I thought it was a good opportunity to get in when the market was at a low point and there was an opportunity for the value of the unit to grow,” Cabrales says.
The experts have declared this a buyer’s market, and many developers are responding to tough competition and demanding consumers by making deals.
Free upgrades or appliances are the most common incentives, and special financing programs or cash credits for closing costs or other expenses are popular too. Free or discounted parking spots, which can mean savings of several thousand dollars to more than $50,000, also have cropped up.
Sweeteners are nothing new in real estate, but the pervasiveness and, well, sweetness, of the current offers exceed anything the Chicago market has seen in years. That’s a reflection of simple supply and demand. Developers sold 6,125 new condos and townhouses in city projects of 10 or more units during 2006, according to Erik Doersching, vice president of real estate consulting firm Tracy Cross & Associates. That’s a high number by historical standards but still 16 percent below the frenzied pace of sales in 2005.
By one measure, a “buyer’s market” is defined as more than six months’ supply of inventory for sale, according to Rubloff Residential Properties‘ President James Kinney. Based on Kinney’s analysis of Multiple Listing Service of Northern Illinois figures, Chicago had more than eight months’ supply of single-family homes and more than seven months’ supply of condos and townhouses on the market in late January. His calculation includes both new and resale units and is based on last year’s sales pace.
Given the slowdown in sales and the large amount of new residential construction on market or in the pipeline, it’s no surprise that condo prices haven’t risen significantly of late. “Base prices are the same as they were in September,” Doersching said in mid-January.
And it’s no surprise that builders at many projects have further reduced the price of owning a home in the current market, whether through an actual price cut or through perks.
Some developers tout their incentives in advertisements, but others prefer to seal the deal with a handshake in the back room of a sales center. “Free appliances, free back rubs, a month’s assessments – if the market rebounds, it’s harder to take it away if it’s advertised out there,” Kinney says.
The lesson: if a development you’re seriously considering isn’t advertising a deal, it never hurts to ask. And if a perk is advertised, make sure the “deal” isn’t simply smoke and mirrors. A reduction that a builder pays for by inflating prices elsewhere is no deal.
Price cuts, which can save buyers thousands of dollars and result in more profit when the time arrives to sell a home, are among the most popular and attention-getting perks for homebuyers.
Buyers of high-end single-family houses, both new and resale, scored significant price reductions in 2006, according to Charles Huzenis, president of Jameson Realty Group. About 20 percent of homes that sold for $1.5 million or more in Chicago last year closed after a discount of around 10 percent, says Huzenis, who based his findings on MLSNI data.
Price cuts and incentives are not as common in the market for new-construction single-families priced under $1 million because of the city’s high demand for and short supply of detached houses in that price range, Huzenis says.
Straight price discounts are even less common at condo developments because in projects with multiple phases, early buyers expect prices to increase as the development progresses. This creates appreciation for their homes because many of the “comparable” units used for appraising purposes will have prices higher than the ones they paid. If prices freeze or fall in later phases, builders can earn the ire of their early customers, not to mention less money.
Builders also count on prices rising as a development grows. Stringent “pre-sale requirements” imposed by lenders force developers to sell a large number of units before a project can break ground, so builders tend to price aggressively in a first phase, making up for the price breaks on later sales. Lenders too keep a wary eye on price breaks as a project proceeds.
Despite the unpopularity of price discounts among developers and their lenders, who are concerned about the value of the projects they finance, more than half a dozen condo or townhouse developments at press time were offering price discounts of $10,000 to $25,000, valid at least through March. Remember, discounts are popular with buyers, at least the ones who are getting them, and this is a buyer’s market.
Take $10,000 off
Dubin Residential is hoping to close out the remaining three townhomes for sale at The Wabash Club, 2390 S. Wabash Ave., by offering discounts of up to $25,000 or financing that’s up to 1 percent lower than prevailing interest rates. The homes, which offer immediate occupancy, have two bedrooms, dens, media rooms, attached two-car garages and balconies. Without the discounts, the townhomes are priced from $429,900 to $584,788. Dubin is offering similar deals – price cuts of up to $10,000 or special financing – on remaining homes at its Monroe Place, Welbourn Row and Kilbourn Court developments.
RDM Development also is offering a $10,000 price cut to the first 10 people to buy high-rise units at Trio, 650 W. Wayman St., in 2007. The discounted condos, which have one or two bedrooms, are priced from the $230s to the $450s.
The fact that price cuts have become common is a recognition of what Britta Rivera, vice president of sales for Lennar Chicago – Urban, calls the “nonexistent” fall market. In response to that market and competition from other high-rise developers in the South Loop, Lennar is offering a $10,000 discount on all units at Library Tower, 511 S. Plymouth Court.
Library Tower condos have one to three bedrooms and are priced from the $340s to the $880s. The builder is insulated from negative fallout from the price cut, according to Rivera, because previous buyers at Library Tower “purchased at pre-construction pricing, so they’re fine.” The Library Tower deal was still available in mid-February, but Rivera said that the development could sell out sometime in spring. Lennar also is offering discounts of $10,000 to $20,000, as well as free parking, on certain two-bedroom units at its Parc Chestnut condo mid-rise, 849 N. Franklin St.
These sorts of deals reflect serious competition among developers, but they don’t signal a market in trouble, according to Gail Lissner, of housing analyst Appraisal Research Counselors. Price reductions and other perks are present during “every economic cycle,” Lissner says. “Now if we started seeing $50,000 price cuts, that would be important. But that’s not the case.”
Lennar’s discounts at Library Tower and Parc Chestnut are contingent on buyers securing mortgages with a lender that is a subsidiary of the developer’s parent company, Lennar Corporation. That sort of reward for using a preferred lender is not unusual in the current market. But Doersching says that when developers offer loan programs, buyers generally should “weigh the pros of the incentive against what you might get from somebody else in an interest rate.”
Many developer financing programs are structured to lower interest rates in the short-term and then adjust them to higher fixed rates after a specified period. Buyers seeking 30-year fixed-rate loans can take advantage of this sort of program, called a “buy-down,” at Anchor General’s Cornelia Court townhomes, 3002 W. Cornelia Ave. The buy-down lets purchasers lock into a rate 1 percent below market for two years, then bumps the loan up 1 percent to a fixed rate for the remainder of the loan’s life.
In January, the program offered an initial rate of 5.25 percent, which steps up to 6.25 percent in two years (as with many of the deals mentioned here, those numbers may have fluctuated since the date of publication).Â Gale Goldstick, of marketing agent Coldwell Banker Residential Brokerage, says that the deal is valued at about $6,000 over two years. At press time, the program was being offered through April 1.
Both Catalpa Gardens in Edgewater and Lincoln Center in Lincoln Square are offering condo buyers similar 2-1 mortgage buy-downs. The terms vary, but homeowners who opt for the programs at these projects pay interest rates below market rates for two years.
Instead of, or in addition to, mortgage programs, some developers are offering financial help with everything from closing costs to assessments to upgrades. These can take the form of a break from payments – six months to a year of no monthly assessments – or they can be given as credits to be used in the design center, or toward attorneys’ fees and other costs.
Sutherland Pearsall Development Corporation is giving cash for closing costs in the amount of 1 percent of the home’s price for buyers who purchase before March 31 at eight South Side developments, including Drexel Place Condominiums, 4127 S. Drexel Blvd., and Boulevard Townhomes, 3993 S. Drexel Blvd. Buyers also receive free 50-inch plasma TVs.
The developer of Van Buren Lofts, 1224 W. Van Buren St., also is offering to pay closing costs as part of two incentive packages. In addition to having these fees picked up, buyers can choose either a year without assessments, $3,500 in upgrades and a new washer and dryer, or financing with no down payment and eight months of no mortgage payments (purchasers must have good credit to qualify).
Deals on closing costs and assessments might not seem significant compared to the price cuts and free parking spaces at some projects, but they can nudge buyers, especially first-timers who have struggled to amass a down payment or are hoping to purchase without one. Having the developer pick up monthly payments that might have cost buyers $2,000 to more than $4,000 during that difficult first year of furnishing the new pad can be attractive.
Projects that at press time were offering buyers a year free of assessments include Chess Lofts, 320 E. 21st St.; The Flats on LaSalle, 1140 N. LaSalle St.; and Michigan Avenue Tower II, 1400 S. Michigan Ave.
Free parking, upgrades
Free or discounted parking, of course, usually has a higher value than the closing costs or assessment deals – assuming prices aren’t being padded elsewhere. A complimentary parking space can be worth $15,000 to more than $50,000 depending on the location. Buyers, of course, should check on the cost of parking in comparable projects to assess what a free space is really worth.
At Ontario Place, 10 E. Ontario St., American Invsco was offering free indoor deeded parking spots to the next 15 buyers at press time. Those spots are worth $46,000, according to the developer. The Gammonley Group is giving away free parking spots valued at $35,000 at its 1111 S. Wabash high-rise in the South Loop, and at press time, Sutherland Pearsall was giving a limited number of buyers a second parking spot free with the purchase of three-bedroom condos at 550 St. Clair. These condos are priced from the $800s, and Sutherland puts the value of the parking giveaway at $55,000.
Other developments offering free or discounted parking include Jackson Square at West End, McKinley Park Lofts, Metropolis and The Sheridan Grande. But parking perks aren’t limited to large projects or those located downtown. Jameson Realty Group at press time was offering half-priced deeded parking spots for the next five buyers at Wilton Schubert Condominiums, a 24-unit vintage conversion at 914 W. Schubert Ave. At two other vintage conversions, Eastwood Court Condominiums and Paulina Ridge Court, Jameson was giving buyers a year or more of free rental parking at press time.
Free upgrades and appliances are more common than parking deals, partly because developers typically get deals themselves on these items, or at least pay less than the average consumer shopping a showroom or hiring a contractor.
“A lot of times, prices haven’t dropped dramatically, but other things are given, like closing costs and upgrades – anywhere from hardwood in their bedrooms to paint jobs that are a little beyond the white walls, surround-sound wiring,” says Huzenis, of Jameson Realty Group. “A lot [of developers] are throwing in high-definition TVs, higher levels of granite.”
The particulars of upgrade packages vary widely and many are time-limited. Developments currently offering free upgrades, often in conjunction with other perks, include 1349 S. Wabash Ave., Bridgeport Commons, Hubbard Street Lofts, H3177, Lake Park Crescent, Pointe 1900, Printers Corner and Vision on State. It’s best to visit sales centers for current details – and to remember that builders often show some flexibility on these and other perks for motivated buyers.
One buyer reports negotiating an extra $5,000 off the standard $10,000 price cut at a South Loop development for a unit that had “a New York view” of a neighboring high-rise, rather than a skyline vista.
The kitchen sink
A number of developers are dangling multiple incentives, allowing buyers to choose between various packages and getting creative with raffles and other promotions. Keen to sell the last five penthouses and 11 townhomes at its River City condo conversion, which has been on the market for years, American Invsco is offering free assessments for three years, one year’s real estate taxes and three years of free outdoor rental parking. The penthouses and townhomes include $15,000 to $40,000 in free upgrades.
“After closing, buyers also will receive a $10,000 bonus check which they can use for anything,” says American Invsco project sales manager, Joey Clements. The developer decided to offer the $10,000 check because the project’s lender restricts the amount of price cutting allowed. At press time, the penthouses were priced from the $460s to the $720s and the townhomes were priced from the $540s to the $610s.
Winthrop Properties is offering condo buyers at Printers Corner, 170 W. Polk St., a “blind incentive.” Buyers choose small gift-wrapped packages from a pile in the sales center, and inside each, a message indicates which random incentive they will receive. The prizes include $7,500 to $15,000 cash back at closing, a year of free assessments, free hardwood floors throughout (the standard package has carpeted bedrooms), upgraded appliance packages and $2,000 for a new computer or printer. All units at Printers Corner come with a 42-inch plasma television. At press time, one-bedroom condos at the project were priced from the $260s and two-bedroom units were priced from the $320s.