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The Mess We’re Making | By: Multiple Speaker(s)

The Mess We’re Making
By Vena Jones-Cox

I got a call this week from one of the hedge funds I work with about a property close to my office. They’re asking $5,000 for a two family with two 2 bedroom apartments.

This might sound like an opportunity to jump on, but the problem is that this house flat out isn’t worth $5,000—or any thousand, for that matter. It need 2 furnaces, a whole house of plumbing, 2 new electric service panels and rewiring, 2 kitchens, 2 baths, 35 windows, gutters, flooring, wall repairs, 2 water heaters, the front porch rebuilt, and did I mention the termite problem?

And after all these repairs, the house will be worth about $55,000. As if the problem with paying $5,000 for a property that needs $50,000 in work were not clear enough, it also has nearly $10,000 in back taxes and tax liens against it,

Oh, AND, did I mention that the city has a condemnation order against it? And that within as few as 2 months, it could be torn down at a cost to the taxpayer of $25,000?

Sadly, I—and every other investor in most of flyover country—see this situation every single week. Properties in low-end neighborhoods in low-priced markets simply can’t afford years of abandonment, non-payment of taxes, vandalism, and intrusion by water and mold. Yet, thanks to the policies of lenders, government regulation, and the new trend in “strategic default”, there are thousands of properties in or near this situation in my area alone, and undoubtedly hundreds of thousands around the country.

The history of this property is typical: the prior owners, who bought the building in 1983, refinanced it in 2004 for $78,000-a loan that, even then the net income of the property wouldn’t support.

When they defaulted in ’07—the year the property became 100% vacant, according to the building department—the lender didn’t foreclose. This is a common strategy when lenders determine that 1) the property won’t sell for the amount of the back taxes plus the cost of the foreclosure and 2) the lender doesn’t want to be subject to the existing orders and potential cost of teardown.

Instead, they sold the defaulted loan to a company in California in 2009, which waited until 2012 to record a deed in lieu of foreclosure on the property. Perhaps not coincidentally, the property was transferred within days of the recording of this deed for $1,000—undoubtedly a loss to the notebuyer—to yet another bulk buyer, this time in Texas.

In the meantime, there’s a series of reports to the code enforcement department from neighbors regarding people spending the night in the property, syringes in the yard, and drug dealers using the back yard as an open-air market. With no identifiable party against which to enforce orders (the owners signed the deed in lieu, but were still appearing as the owners at the courthouse), all code enforcement could do was board up the house—and expense, again, borne by taxpayers—and reboard it each time the neighbors complained that more people were entering the property.

And, during the 5 years of vacancy, everything that could be stolen was stolen, AND prices dropped significantly from their 2007 values.

So what will the current owner do with this mess?

If this company follows the policy of others, nothing. They only paid $1000 for the house, and undoubtedly got enough “winners” in the package they bought that this one is unimportant in the big scheme of things. It’s a race now to see whether it will go to tax forfeiture sale first (in which case it will probably be bought by another out of town owner) or be torn down by the city and THEN go to tax forfeiture sale. The chances that it will ever be someone’s home again are slim to none, because the economic degradation has simply gone too far. Instead, it will cost local taxpayers tens of thousands of dollars, and then become a worthless lot in a neighborhood that needs more affordable housing, not more boarded up properties.

This mess is so tangled that it’s difficult to even know where to lay the blame. Is it with that bank in 2004 that made a loan that couldn’t be serviced by the income? Or with the secondary market buyers who were so ravenous for these bad loans that banks could literally sell them, unseasoned, long before the default? Or with the borrowers who made the extremely irresponsible decision to borrow more than the house could afford and who, as near as I can tell, made absolutely no attempt to sell it even when they were on the verge of default? Or on the thieves who stripped the property, causing it to need $35,000+ in additional repairs? Or the police, who at least in Cincinnati won’t even show up when a neighbor calls and says that the copper is being carried out at this very moment? Or on the governmental policies that encouraged—in fact required—banks to make loans in neighborhoods like this? Or on Ohio’s incredibly slow foreclosure process, which makes it expensive and time consuming for lenders to get properties back on the market in a reasonable period of time? Or on the bailout, which allowed these banks and secondary buyers to stay in business, when these properties should have been put into receivership and sold off in 2009? Or the out of town buyers, who of course feel no responsibility to even claim ownership, much less improve the property? Or on code enforcement in Cincinnati, which is going to make it significantly more expensive and difficult to renovate this property than it needs to be? How about the county, which kept charging taxes on a $78,000 evaluation despite the fact that the property has a current after-repaired value of $55,000, and thus allowed $10,000 in taxes that they won’t forgive to build up in the first place?

Where ever we decide to point the finger, the bottom line is that this mess can’t be solved without some serious creative thinking and collaboration between our cities and our local real estate entrepreneurs. As much as I’m against using taxpayer money for ANYTHING, I’d be in favor of the city of Cincinnati using the $25,000 it will spend to tear down this house as a grant or low-interest loan to a new owner to renovate it, instead.

But this, plus forgiveness of the back taxes for a new owner, would make this project—and thousands of others like it—economically feasible for the private sector.

Unfortunately, despite the clear harm caused to the neighborhood, the taxpayers, and the citizens of our cities an country, there are too many players there that benefit from the system as its set up today for a change like this to occur. The union workers hired by the city to tear these properties down won’t want to see demolition money repurposed. The federal government, which provides much of the money involved through grants to cities, won’t want to make those unions mad. Housing advocates won’t want the foreclosure process shortened; counties won’t want taxes forgiven; owners who’ve “strategically defaulted” on loans after having sucked out the entire value of the property in a refinance won’t want to be held responsible for the costs of what happens after they abandon them.

The players will keep playing the game as its been set up for them, and we’ll all continue to pay the economic and social price.


Reprinted with permission of Vena Jones-Cox. To get more free articles and tips, subscribe at www.TheRealEstateGoddess.com

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