Chicago Condos: Incentives Blur Home Valuations

Let's say you were considering buying a $350,000 two-bedroom Chicago condo.

Now let's say the seller offered to pay six months of assessments if you closed before the end of the year--and that throw-in convinced you to buy.

Here's the question that appraisers and other experts are struggling to clarify: How much is your Chicago condo really worth?

With more and more developers and Chicago home- and condo-owners offering incentives--like plasma TVs, cars, media rooms, and months of free mortgage payments--to buyers, determining the true selling price of Chicago homes is becoming a less exact science than it has been in recent years.

When the buyer of a $500,000 Chicago home agrees to the deal based on an incentive worth $10,000 or $15,000, the discounted "real" value of the home may not be obvious to buyers who come along later. So new arrivals to the neighborhood make bids on comparable Chicago homes based on the $500,000 figure--rather than the actual $485,000 value--and may end up overpaying.

The softening of the Chicago real estate market over the last year has sellers worried, causing increasing numbers of them to offer "deal-sweeteners" in an effort to lure buyers. The National Association of Home Builders recently reported that 55 percent of U.S. home builders are offering incentives, up from 37 percent a year ago.

A large percentage of ads for Chicago homes and condos online, in the MLS, and in newspapers feature offers to pay buyers' closing costs, points on their mortgages . . . or even to send the buyers on vacation.

Historically, negotiated add-ons, like new appliances or money to replace worn-out carpeting, have always been a part of Chicago real estate deals. But the big-ticket incentives being offered today could, according to financial experts, raise troubling tax considerations.

"From a tax standpoint, I'd say it's a pretty untested area," said Scott Steiner, a Lincolnshire financial planner. "My guess is that there would be no rule against it, but if it became commonplace somebody might scrutinize it."

At the height of the housing boom, "this didn't go on because [Chicago homes and condos] sold instantly," with few major concessions being made, said John G. O'Brien, chairman of the Illinois Real Estate Lawyers Association. "Those days are gone."

He went on to say that the issue isn't one of prohibiting such incentives--just making them more visible.

Tinley Park appraiser Timothy McCarthy agreed that incentives--especially those offering cash back at closing--aren't necessarily a problem as long as all the conditions are on the table.

"Here's where concessions come into play, though," McCarthy said. "Let's say [a Chicago condo] sold for $200,000, and with the cash back, the seller walked away with $190,000. If I later decide to use his home as a comp, I have to reduce the value of that property by the amount of the concession."

"It puts pressure on the appraiser," agreed La Grange Park appraiser Robert Napoli. "When you look at the comparables, you're not seeing, say, a $450,000 house, because [the sale included] the land, the house and a car," he said. "Somebody paid $450,000, but the house is really worth $425,000."

Big-ticket incentives aren't likely to be a factor for long, however, as they've shown up during other slow markets and vanished again as sales improved, McCarthy added.

"Most of these incentives [today] range from 2 to 5 percent [of the purchase price]," he said. "In today's market, that amount could be picked up in six to 12 months, unless we fall into a tanking economy."