As part of my ongoing rant about the high condo assessments in Chicago I’d like to revisit a topic I covered a while ago – what is the appropriate tradeoff between price and assessments? In that previous post I got into some fairly esoteric finance details about discounted cash flows and perpetuities that may have made the decision process seem a bit unreal. However, in discussions with a current client, I came up with a more concrete analysis that looks at what the impact of different assessments might be for a typical buyer with a finite time horizon.

In the example below I look at a theoretical high income buyer facing a choice between two condos, with one condo having assessments that are $100/month higher than the other. Given that the buyer is only going to live there for 5 years, the question is how much more can the buyer spend on the condo with lower assessments and still have the same monthly expenses, if the mortgage rate is 5%. In addition, are there any other economic considerations?

I factored in the buyer’s tax bracket because of the deductibility of mortgage interest. The impact of the deductibility is to make mortgages more attractive relative to assessments for high income buyers than for lower income buyers. I made a few simplifying assumptions as well: that assessments and the value of the condos would go up with the rate of inflation, assumed to be 3% per year and, that for purposes of this analysis, we could just look at an average of the monthly interest and assessments.

The conclusion is that you could spend an additional $41,000 on the condo with the lower assessments, have the same monthly after tax monthly expenses, and end up with an additional $6,580 of appreciation at the end of 5 years. In other words, think long and hard before signing up for a condo with high assessments.

Another South Loop condominium development is looking to clear their unsold inventory via an auction. On November 15, 2009 Michigan Avenue Tower II will auction off 41 units in one hour at the W Hotel, starting at 1:00 PM. Check out the link above for information on the building, floor plans, and some historic sales data. The building is located at 1400 S. Michigan Avenue and offers nice views from the north (above the 10th floor or thereabouts) and east facing units.

Here is the list of condominium units up for auction:

These units are being auctioned off without parking. Indoor, heated parking spaces can be purchases separately at a flat fee of $35,000. Notice that most of the units being auctioned off have the less desirable exposures. Units are available for previews daily through November 14. Every time I’ve been to the building it has been swamped with potential bidders so I’m thinking there aren’t going to be any bargains at this auction. Then again, all these people could be bottom feeders, who will drop out once the bids rise $20K above the minimums.

Bidders will be required to register in advance of the auction and should check in by 12:00 noon on the 15th at the W Hotel, located at 172 W. Adams St., in Chicago. Bidders must bring a cashier’s check or the usual substitutes for $5000 along with a blank personal check, which will be used in combination to leave a 5% deposit (of the winning bid amount). A separate cashier’s check is required for each property that the bidder is approved to bid on. It sounds like they won’t let you into the auction without presenting the checks.

Bidders can work with realtors but their realtor must be present at the bidder’s first visit to the building and all must register in order for the realtor to earn the 2% commission.

There will be a practice auction at 7:30 PM on November 14, also at the W Hotel. Interested bidders would be well advised to attend this event as it will provide an opportunity to find out what the bid increments will be, whether or not you will be able to understand the auctioneer (why the hell do they talk so fast?), and get a feel for the overall process.