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Posted On: 02/04/2008

Q: I live near an area that has been dubbed the new Polo Capital of the World. It has some expensive horse farms plus equestrian communities, polo farms, etc. Prices have been going up like crazy around there.

I’m very interested in getting into this market, if not to live, just to invest in some property. I have a low budget (under $100,000) and the prices run approximately $10,000 to $15,000 an acre. Is this a good place to buy investment property? Should I buy a lot in a community/subdivision (usually two to 10 acres) and just hold on to it (and pay homeowner’s dues) or buy undeveloped property and just wait?

A: There is insufficient information to discuss a particular community or property, but let’s look at the general concept of buying land.

You have a limited number of dollars. If you buy land you will lose the interest you now earn on your cash, and if you finance you will have monthly mortgage costs. In addition, with raw land you will face property tax and insurance expenses.

At the very least, look at your local rental market. Would it make sense to consider rental properties? What about buying a two- to four-unit property, living in one unit and renting out the rest? With rental property you get income and depreciation and if you live in one unit you can get owner-occupant financing. Speak with local lenders and brokers for specifics.

Q: Is the Supreme Court going to revise or reverse its Kelo (eminent domain) decision? In my state, property seizures by government are a problem because owners are not being paid fair-market value.

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A: The “taking” clause of the Fifth Amendment permits government to acquire private property for “public use” but only with “just compensation” for the property owner. For instance, when a new road is being built, government must have some way to acquire property along the route. As to the road, it is plainly for public use.

The 2005 Kelo decision involved property owners and the city of New London, Conn. The city government condemned private property and then re-sold the property to private developers, an arrangement that the Supreme Court accepted on the grounds that there was a justifiable “public purpose.” What was that public purpose? Increasing the local tax base.

Writing in dissent, Justice Sandra Day O’Connor said that with the Kelo decision “the Court abandons this long-held, basic limitation on government power. Under the banner of economic development, all private property is now vulnerable to being taken and transferred to another private owner.”

The Kelo decision created immediate controversy. Many states, as well as the federal government, enacted legislation that effectively limits or reverses the Kelo decision. Why? Because under Kelo a politically connected developer who could not purchase a home on the open market effectively could have it bought by a pliant local government and then re-sold to him.

The Supreme Court works in a deliberate manner, and it may be years before the Kelo decision is reconsidered. Until then, the debate is a political matter and you are best served speaking with elected officials at all levels of government to voice your views.

Q: An investment property bought a few years ago has become a terrible problem. I can’t rent it, the price drops every month and the mortgage cost is set to escalate. I’m over 60, own my house free and clear, and I don’t want to fool with the investment property any longer. What can I do?

A: If you’re age 62 or older you may be able to get a reverse mortgage on your current residence. If sufficient, the money from the reverse loan can then be used to pay off the investment mortgage. Since a reverse mortgage does not require monthly cash payments, the investment unit could be rented at a below-market rate until (hopefully) the market improves.

Or don’t rent the investment property. Instead, get a broker to sell it and then use the proceeds from the sale to pay off some or all of the reverse financing. Since a sale might take some time, it will be easier to hold the property if you don’t have to face the monthly cost of a mortgage.

In other words, consider the use of a reverse mortgage to buy time, reduce cash flow and make the best of a difficult situation.

For details, speak with reverse-mortgage lenders and also get an attorney who specializes in elder law to help with the decision making before you sign any paperwork.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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