How to Buy a Chicago “Fixer-Upper.”

A Fixer-Upper, or other distressed property such as foreclosed property, bank-owned property, or REO, can represent a great real estate opportunity, especially in today’s market. Of course, the potential is wrapped in risk. If you are an individual interested in this type of real estate investment, [1016] and Inside the Brackets attempt here to take some of the mystery out of tackling a fixer-upper in Chicago.

Some of these items were mentioned in our earlier post: What to Look for When Shopping for a Home in Chicago: From an Architect’s Perspective. This is not an exhaustive post, so feel free to contact us with questions.

Get Financing in Place:
This might seem like it should come later in the process but for several reasons this should be the first step (except for maybe contacting us). Here’s why: Getting pre-approved by a lender (not a broker) ensures you can determine a realistic budget for your project.If the property you find is a bargain, it won’t last long. Being pre-approved will allow you to make your offer more quickly and without financing contingencies. For example, bank owned and foreclosed properties typically require the letter of pre-approval with the offer. If you don’t have one, the property could go under contract while you scramble to get financing lined up.It is smart to shop around for the best lender, and this takes time. Rushing to get an offer put together is not conducive to getting a good loan.Confirm the lender is very experienced with the type of properties you are interested in buying. Confirm that the lender will do purchase and construction loans. If you want to use FHA financing, get the requirements from your lender, and make sure you’re looking at properties that meet them.

Determine the Type of Property You are Looking For:
With thousands of properties on the market it is important to narrow your search criteria as much as possible. When working with a real estate agent, and utilizing the MLS, it’s pretty easy to set up very specific search criteria to narrow down your list. Doing this from the beginning will save you time.

Here are some other things to help you determine which type of property might work for you:

  • Your interests, existing skills, time available, and budget will help narrow your search. For example, decide ahead of time if you want a multi-unit building, number of units, commercial space or all residential, target neighborhoods, price-range, features, zoning (if necessary), condition of the property, etc.
  • Can you perform the rehab work or will you hire contractors?
  • How do you plan to use the property and what is your exit strategy? Will you live in the unit (owner occupied buildings are generally eligible for better financing options)? Will it be all rental? Will you sell it as soon as the repairs are complete?
  • Depending on the deal that you find, your answers to the above could change.

Working with a Realtor® from the beginning of your search can save time and perhaps even money. In addition to MLS searches in realtime, they can provide you with tax searches, property history and other valuable information to evaluate the property. Plus, in Illinois, the seller pays all commissions, so the buyer gets these benefits with no out of pocket expense.

Find a Property and Make an Offer:
Once you determine your target property type, there will be many that meet these general criteria. How to determine which one deserves your offer? How much should you offer? Is the property worth what the seller is asking? Answers to these questions can be determined by property specific due diligence.

The purpose of due diligence is to uncover and quantify things that affect property value. There are always additional “surprises” along the way, but the more you find ahead of closing, the safer your investment becomes. Formalize your due diligence with written charts or spread sheets.
Formal due diligence will help you compare different properties in an apples-to-apples manner.

Your chart, also called a pro forma, should include all hard cost and soft cost estimates, purchase price, expected rent, expected price when you sell, etc. This will help you understand the value of the property and what the monthly cash flow will look like.

Here are some other top tips for this phase of buying a Chicago fixer-upper:

  • Have a contractor on your team to help you get a handle on potential renovation costs BEFORE you offer.
  • Don’t be afraid to make offers that are below the ask price. It is common to make offers on 5 to 10 different properties before getting one accepted. If your first offer got accepted, it probably means you were offering too much. In most situations, it is okay to offer well below the asking price, especially in this market.
  • If you are confident in your pro forma, the ask price is almost irrelevant. Offer what you want to pay for the property.
  • If the seller is a bank, expect long delays in communication. They might ask you to be ready to close in 15 to 30 days and then not respond to you for two months. Just be patient. There’s no way around it, so utilize the time for additional due diligence before closing.
  • Work with an architect to have any necessary drawings for repair ready for permit before the closing.
  • Interviewing contractors during the closing period can allow construction to start immediately. Because of interest charges, time is expensive in real estate. The sooner you can get the building occupied the better.

Close, Rehab and Move In/Rent
The key to this step is speed, unless you are planning on living in the property. If you are planning on renting your property, market to potential tenants even during renovation/construction. When tenants move in, they pay your mortgage. Until they move in, you are paying it all yourself. Consider using a rental agency to fill your vacant units. They will save you time, which as we said, is money.

Being able to accurately and quickly evaluate the potential of a building is critical to making a good purchase, knowing the required team members and actions to take during closing and renovation are critical to ensuring your purchase becomes a good investment.

[1016] and Jameson can help you with all of the above.

Through our relationship with Jameson Real Estate, we can represent you as a buyers agent (at no cost to you) and [1016] can help you evaluate each property for zoning and code issues that might arise or stand in the way of making the changes you want to make. Through our relationships with highly qualified contractors we can also help you get estimates for the repairs. And finally, if you would like, we can help you navigate the building permit process and execute construction.

If there are any steps you have questions about, or if you would like to discuss searching for a property, please feel free to contact us. We would be happy to discuss the process further or help you start your search. Let Jameson and [1016] make your purchase and renovation an experience that you’ll want to repeat.

For additional information, see this How to Buy, Find, and Renovate a Fixer-Upper by Andrew Wilson, AIA.