Does it matter who is buying foreclosed homes?

August 22, 2012

By Callie Shanafelt
California Health Report

Putting homes in reach of the middle class might have seemed like a silver lining of the housing crash in places like Oakland, where housing prices jumped substantially during the boom years. The median home value went from $370,000 in 2003 to $590,800 in 2006. Between April and June of this year, the average home in Oakland was worth $240,000.

But, according to a recent report, more than 40 percent of foreclosed homes are not going to people who will live in them and are instead being purchased by private investors.

A June Urban Strategies Council report shows an increasing trend of private investors buying properties in Oakland. Investors bought 42 percent of the 10,508 homes foreclosed on in the city from 2007 to October 2011.

The report raised the ire of some Oaklanders who worried that outside investors are buying up the city and preying on the problems of homeowners in distress.

“It is an urgent time right now for us in the city of Oakland,” said City Council member Desley Brooks. “The individual home owner who simply wants to buy a home for their family doesn’t have that opportunity because they’re being squeezed out.”

The report expresses concerns that outside investors may mismanage upkeep of properties and drain local wealth. But local investors say that the issue is a little more complicated than the reaction to the report suggests.

The study does show that cash is king in the purchase of foreclosed homes, which eliminates residents’ chance to take advantage of the low prices on foreclosed homes.

Some of those properties, however, are going to small investors who say they are an essential part of getting homes back in the market in buyable shape. Mila Zelkha of Mint Condition Homes is a self-described green-flipper. “We acquire blighted houses predominately in Oakland and we do green-gut rehabs of them,” Zelkha said. Through “green-gut” rehabs Zelkha repairs and upgrades blighted homes to green-building standards while trying to retain their historic character.

She points out that you can’t assume that investors are bad just because they are making a profit. She says she is often welcomed by the communities she works in.

“In my dealings I haven’t had anything but really warm reception from the immediate neighbors around me,” Zelkha said.

A PolicyLink report studying national investor purchases distinguishes between the positive and negative investor. The report found that the smaller the investor, and the closer they are based to their property, the more likely they are to have positive impact on the neighborhood.

“Studies also confirm that neighborhoods with high levels of absentee ownership are less stable and more prone to experience crime and deterioration of property,” the report says.

Investor Michael Morrongiello of the Bay Area Wealth Builders Association argues that investor-owned properties aren’t likely to fall into further disrepair. He says that unlike banks, investors are trying to create a return on their investment so they fix up the property to rent or re-sell it.

The Urban Strategies Council is concerned that investors aren’t always returning homes to the market. USC conducted their own survey of the properties of those investors because of a lack of data about the housing conditions. They found that community Fund LLC and REO Homes LLC in Oakland have bought 500 of the foreclosed homes in the flatlands of Oakland.

Steve King, Housing and Economic Development Coordinator at Urban Strategies Council, said it didn’t seem like any recent work had been done on Community Fund LLC properties in East Oakland. REO Homes LLC, however, seemed to be doing work on their properties in West Oakland.

Zelkha says Community Fund LLC has purchased homes on the courthouse steps for her. “I bet some of my houses are in that data,” Zelkha says “and it’s not fair to generalize and say that wealth is going somewhere else. My buyers tend to be Oakland residents who’ve been waiting for an opportunity to buy.”

It would be difficult for an average homebuyer to do what Zelkha does. People with FHA loans have to purchase a livable home. Zelkha said she has yet to come across a foreclosed home without major repair issues.

Cash buyers do have an advantage at multiple stages of the process of buying foreclosed homes. The USC reports that 16 percent of foreclosed homes are bought at auction on the courthouse steps where cash purchases are all that is allowed. But also when banks are selling their foreclosed housing stock many prefer cash buyers because they are able to unload the properties more quickly.

The trend is frustrating for people like Oakland-native Dorcia White who is trying to buy a home for her family. The mother of two works at a family-owned barbeque restaurant in Oakland and is married to a carpenter. They spent the last five years improving their credit and preparing to buy a home. She hoped that she could buy a foreclosed home that her husband could renovate.

In the past six months cash buyers have outbid her four times on homes in her $350,000 price range. “I’m on my third real-estate agent because I thought it was them,” White said. “I was like, why are you showing me these properties that have 20 bids?”

Now she doesn’t even think of bidding on foreclosed properties. “I’m waiting for some kind of legislation for a first look for people living in the home,” White said.

To address that issue the federal government developed the Neighborhood Stabilization Program. In 2010 they created the First Look program to give people with FHA loans the first chance to bid on FHA owned properties in areas including Alameda County where the stabilization program is in effect.

But the process is still complicated. Non-profits are trying to ensure people like White are able to get homes using these programs. Hello Housing works in Alameda County to access Neighborhood Stabilization funds to buy foreclosed homes, rehab them and sell them to low and moderate-income families. They’ve been taking advantage of the First Look program to bid on properties before they are put on the competitive market.

“There used to be a reasonable supply of Bay Area properties coming through the trust,” said Hello Housing Executive Director Mardie Oakes. “It’s radically dropped off over last few months.” She attributes this to banks holding foreclosed homes off the market in order to raise purchase prices.

They’ve had difficulty competing with private investors in the commercial market because funding regulations requires they pay 99 percent of the appraised value. Private investors with cash on hand can waive any contingencies on their purchase.

Despite their difficulties, Hello Housing still buys 15 to 20 houses a year. They’ve built a web portal to help buyers find homes in their area at homehub.org.

“We’re sort of on track with our goals but the amount of effort is radically different,” Oakes said.

The East Bay Community Foundation decided to work on neighborhood revitalization by helping to grow assets for low and moderate-income families. They are in the pilot phase of their program. They work with 6 different public and private stakeholders to buy homes, rehab them and sell them to qualified families from the area.

“None of us thought they would need cash in hand for an entire purchase,” said EBCF president Nicole Taylor. “Pretty quickly we needed to compete with cash in had because speculators were flooding entire region.”

They’ve been able to buy five houses at a time with cash and are looking to expand the program. Their main concern with private investors is that they are turning foreclosed homes into rental properties instead of selling them to residents to build their assets.

At a heated Special Community and Economic Development committee meeting in July at Oakland City Hall twenty impassioned speakers got up to argue for or against council member Desley Brooks’ proposed non-owner occupied ordinance.

The ordinance would require that single family homes not lived in by their owner be registered and inspected and brought up to code within a reasonable amount of time from their purchase.

Council member Brooks admitted that the ordinance doesn’t directly prevent investors from buying all the properties in Oakland. “You can’t write direct legislation on this – the only thing we as a municipality can do is slow it down,” Brooks said.

“We should be embracing the investor,” Morrongiello said. “The investor will be the solution to this problem.”

But USC’s Steve King sees something wrong with profiting off others’ financial hardship.

“The foreclosure crisis was predicated on speculative risk,” King said. “It was created by investors buying and fueling that bubble. Now we’re in this period of déjà vu. It created this opportunity for investors to come in and buy us out of this crisis. Seems the cards are stacked in favor of those with deep pockets.”

For now council member Brooks’ ordinance will be held in committee until September but other council members seemed willing to work towards supporting it if they have further information at the next meeting.

“Being a homeowner is, you know, the American dream and we want a piece of that,” prospective homeowner and native Oaklander Dorcia White said.

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