Foreclosures can bring new opportunity
Guest post by Michael Carlson, Madison Area Community Land Trust
When You Start With Something Free
Homes live and they decay. Foreclosed homes - any homes - demand stable or permanent occupancy. Many foreclosed homes have fallen into disrepair, or are old, or have been neglected, or bear projects abandoned by owners in the midst of foreclosure. These properties need more money, but of a certain type, namely, capital improvement dollars. The project at 709 Gannon in Madison, WI fascinates both in the mechanics of its capital improvement financing, as well as its broader implications for home lending policy.
Madison Area Community Land Trust and Operation Fresh Start jointly purchased the Madison property with help from Buyer Specialist Darcy Haber of the Alvarado Real Estate Group, and paid with MACLT's allocation of federal, Neighborhood Stabilization Program (NSP) funding. The NSP dollars are issued federally, distributed to the states, and then municipally administered. The fund acts as a grant, which we're not obligated to repay: In a sense, a home has been donated to MACLT and OFS, on the condition that it be both bank-owned and located within a 'HUD-qualified census tract.'
MACLT chose to exhaust the grant dollars on the acquisition of the foreclosed home, reserving a nominal portion to cover the cost of administration. The grant effected a transfer of title free and clear to the Land Trust.
The Land Trust will sell the home to an income-qualified homebuyer. MACLT, like many of the housing non-profits around the Madison area, sells homes to households who earn incomes of 80% or less than Dane County's median income. Practically, those incomes can support a mortgage of $100,000 or less.
The Board of Directors authorized MACLT to borrow up to $100,000 in construction credit to carry out a 'deep green retrofit,' through which the home will be reconstructed using techniques that reflect a modern understanding of energy-efficiency, healthy building systems, and the like. Residential Services staff from MG&E, the local power utility, have partnered with the project in the review and development of construction specifications and performance modeling.
Construction will be carried out by Operation Fresh Start, located on Madison's East side, whose participation not only maximizes the sweat-equity value of the dollars borrowed to build, but whose joint ownership brings an additional infusion of federal subsidy to defray the cost of building materials. OFS will fully remediate the lead paint on site; they intend to deeply insulate the shell of the home and install new mechanicals; they will reconstruct the west facade to take advantage of solar gain; they will rebuild the rooflines, to protect the home from wet Wisconsin winters and springs, and to better shelter the interior from hot summer sun; they will restructure the interior to optimize space and build in accessibility; they will reconstruct the ceiling, to add architectural and aesthetic interest to a comparably small interior: These tasks paint the broad strokes of the 'deep green retrofit.'
The qualifying homebuyers will be pre-approved for a mortgage somewhere between $85,000 and $110,000. The quality of the improvements they stand to inherit, feels almost surreal. The funding volume is a builder's dream, and only a conservative, pragmatic ethic restrains what might be built, given how much money there might be to spend. In any event, MACLT will repay the construction loan from the proceeds of the sale, which itself is paid by the homebuyer's first mortgage.
MACLT anticipates and budgets upon $75,000 in capital improvements to the property. Because we bought the Madison WI East side property outright, and because the Land Trust model insulates homeowners from the liabilities of land ownership, the homebuyer's mortgage dollars match the construction dollars virtually one-for-one. Because the buyers can afford up to $110,000, our incentive - the almost embarrassing incentive, for an 'affordable housing provider' - is to upgrade, upgrade, upgrade: Upgrade the systems, upgrade the form, and upgrade the longevity of this structure, to endure for the next 100 years. 'Best practices' are well-known, and here the money exists to implement them, at a price the homebuyers can bear. Free transfer of title catalyzes the volume and the quality of these capital improvements.
When debt that was attached to the initial building of the home, is erased, new, productive money can flow into the home. In a sense, 'improvement dollars' buy you more than 'new build dollars,' -- as they intensify, rationalize, and perfect an existing, workable 'substrate' whose own construction dollars may have been spent less intentionally - and thereby shrink the total volume of loan needed by a potential buyer, even as the end product excels against the marketplace.
What needs to be done in housing, can in fact be supported by the reality of the incomes available, given free transfer of title to a responsible steward. Further, the free transfer stimulates at least two other loans - one to the steward or builder for construction, and one to the buyer - and both loans reactivate the home's asset value and recalibrate that value to market reality. When a bank releases the existing debt on the home, it frees itself to create new, productive loans that flow to right where they're needed, and at a volume that the occupant can responsibly bear.
In a sense, these piles of foreclosed, bad mortgage debt can restructure or crystallize themselves around an endeavor to finance capital improvements into pre-existing housing stock, and to fix the new mortgage loans to the cost of those improvements. The leap of faith, is letting go of the old, in favor of the new.