Thursday, March 17, 2011

Bring Back the Dollar House Program

Post by the Hawthorne Hawkman, image from the My Enterprises blog.  Note:  I do not endorse anything on the linked blog; I am only citing the source of the image.

Ever since alluding to the Dollar House program in a recent Paul Koenig post, various friends and neighbors have been telling me stories about people they know across the city of Minneapolis who have one of the actual dollar houses.  I'm told that most or perhaps all of those homes are still standing, still occupied by the owners who bought through the program, and have been a springboard for other revitalization in their neighborhoods.  For anyone unfamiliar with this initiative, it essentially boiled down to the city buying houses, selling them for a dollar "as is" to new homeowners who would then use their own funds or a mortgage to fix up the property.

I'd like more history on the Dollar House program, and the history could be either anecdotal from people who actually used it or wonkish and empirical so we can see how the public portion of the funding was structured.  Of course, some items would have to be reworked to fit today's housing market, but those would be minor considerations if the program was fundamentally sound and successful.

If we brought the Dollar House program back tomorrow, what would it look like?  Let's walk through a purely hypothetical example here.  (Be forewarned, the numbers I'm going to use are both purely made up and also based on my knowledge and experience.  Numbers that I'm completely guessing on will be highlighted in green.)  We start with a vacant house that is on the market for $15,000, and would be bought by the city and demolished if not for this tremendously successful, yet currently hypothetical, program.  The cost to demolish is roughly...

...$15,000 to $30,000.  We'll be conservative and call it an even twenty.  Right there, the city has spent $35,000 in acquiring and demolishing a structure, and now the vacant lot will sit there and generate no tax revenue until someone comes along and buys it.  If the house were in tip-top shape though, it would generate between a roughly a grand or two per year in taxes.  Split the difference and call it $1,500.  If it takes five years for a private party or non-profit to come along and buy the lot to build on, it will be at least six years before significant tax revenue starts to come in.  That's another $9,000 that the city did not collect because either the value wasn't there or because the property was owned by a party that paid no taxes.  Right away, the purchase, demolish, and hold the land strategy has cost us $44,000.  We haven't even gotten into gap financing yet, if it costs more to build new than what the new construction sells for.

One of the strings attached to the main funding source for city and non-profit acquisitions is that the federal funds likely being used require the full abatement of lead and asbestos that may be at the property.  That added cost is often a factor in moving forward with demolition.

What if, instead, we spent the $15,000 to acquire, and the $20,000 in lead/asbestos abatement?  We could even go a bit higher since in the second scenario we are not going to encounter anywhere near as big a drop-off in tax revenue at the site.  The city is now the proud owner of a lead-free house it's ready to sell.  Granted, the house itself needs work, but this is where the private market comes in.  If the buyer's loan numbers don't quite get high enough, it's possible that the gap financing could be shifted towards the owner-occupant instead of a developer.

Even if I'm missing a few pieces, for the sake of this argument, the program works just flawlessly except for one thing:  Nobody's buying the houses.  What to do?

The way I see it, we've got two barriers to people buying condemned houses.  The first is a sense of intimidation at buying a home that needs too much work.  The vast majority of home buyers want to walk into a house, say, "This is gorgeous, I'll take it," and close quickly and easily.  It's a rare bird that can see the restoration possibilities in a distressed home, and a rarer one still who has the desire and capability to go through the process.

The second barrier comes from hearing horror stories of how hard it is to make it through the code compliance process.  Many people have said, "I'd buy that (condemned) house because I know I could fix it, but I don't want to try and navigate the city's compliance process.  It's just not worth the headache or the risk."  How do you address one but not the other?  By combining the two supposed problems into one solution.

How the Hawkman would market a Dollar House

Once a home has been identified as a dollar house, a full code compliance would almost have to be done.  That code compliance list would then be shared with a rehab adviser, a licensed home inspector who could price out very rough estimates for repairs.  With the property in hand, and a full list of easily understandable repairs and their costs at the ready, we can now look for buyers.

Don't try and lump in Dollar House marketing with bigger events like the Minneapolis/St. Paul Home Tour.  Dollar House participants are going to be a niche group and I'd want to focus specifically on them.  If the city had ten dollar houses, we could do a Dollar House Home Tour solely for buyers wanting this program.  At each stop, there would be the aforementioned code compliance and scope of work.  There could even be loan originators on the tour who are well-versed in purchase/rehab products.  They could run numbers on a mortgage payment and talk to buyers about what the loan process would entail.

There's not going to be much of a way around the difficulty of trying to get potential buyers to visualize their home when they're staring at a vacant property that needs significant repair.  But if you've got ten or twenty people on a Dollar House Home Tour, you've already moved beyond that mental barrier.  Now all that needs to happen is they need to be convinced that the home is affordable and the process for buying it is easy enough.  We as a community and as a city should be able to handle that part.  We've done it before; let's do it again.

14 comments:

  1. Excellent Post! You're correct- the city would need to adopt more reasonable timetables for code compliance for the program to work.

    ReplyDelete
  2. After some cajoling from the neighborhood toward the City of Minneapolis former MCDA, I purchased a "dollar home" in 1999, with the aid of Southside Neighborhood Housing Services. I got a mortgage for $63,000 to restore the house (the City estimated that it would cost $150K to rehab it, to which I replied, "Hooey!"). Over the years I have taken put in an additional $60K to remodel the kitchen, landscape and add a bath, a deck and a garage. Newest assessment is $195K, with a $3000 tax bill. I have little intention of selling or moving out any time soon. In years past I have been an active proponent of neighborhood revitalization and community development. It was a great investment on both mine and the City's part. I think the program is a win-win-win!!

    ReplyDelete
  3. It will never work over North, at least not for now. Foreclosures are still coming on the market at the rate of 15 to 20 a week and will be for years to come. It will be 10 years at least before a house in Jordan or Hawthorne is worth 100 grand. It would work over South where the values are no where near as tanked.

    ReplyDelete
  4. I don't get the point of Anon 5:16pm. What does your estimation of future values have to do with a dollar house program working or not working? Don't you think that the investment that folks would put into a house they could acquire for a dollar is exactly what will bring up the surrounding values?

    ReplyDelete
  5. Great Post!

    Send this to CPED and our council members! If those bureaucrats in city hall were more in touch with their constituents rather than pandering to "business" interests, this would be a better town to live in.

    Anon 5:16 what are you thinking? Do the math.

    Minneapolis homes are no different then structures any place else. Prices are depressed because of the stigma of dysfunctional social activities brought about by poverty pimps and their Neanderthal tenants.

    Every house occupied by a homesteader willing to invest in the property means one less rental. The defered cost of rent/mortgage put towards restoring a home will pay huge dividends in resale value as these buyers stabilize the community.

    These may be the only homes values that will appreciate in the next 5-10 years.

    ReplyDelete
  6. You stated: "We've done it before; let's do it again."

    OK

    Have you contacted anyone at the City or at CPED to find out a bit of historical data on how the program worked from their perspective? There must be a reason why the program went away?

    ReplyDelete
  7. The program went away because many of the buyers did not uphold their part of the program and defaulted eventually. I agree to a certain extent with anon 5:16. Whre are these people going to get the funding to do the extensive upgrades that these houses need? They can not go to the private sector banks because no one will lend money ($50,000 on an asset that is no where near worth that), so they would have to rely on City funding and the City has no money to even fill potholes!

    ReplyDelete
  8. Actually, the program stopped because the housing market improved and the program was no longer needed. As for folks not finishing the rehabs, keep in mind that under the original Homestead Act only about half the homesteaders were able to fulfill their contracts. None the less, the Homestead Act is still considered a roaring success.

    ReplyDelete
  9. Funding can come from the same tax dollars currently used to tear these homes down and the creation of a local Residential Homestead TIF(Tax Incentive financing district) where a portion of the (otherwise noncollectable) tax revenues go back towards low interest and deferred loans earmarked for home renovation.

    Homes get new owners who participate in the community, Home values increase, Tax revenues increase, and we have better and safer neighborhoods.

    Worst case scenario is that a few homesteaders who take on previously vacant properties have difficulty bringing the portions of the structure up to code.

    ReplyDelete
  10. I would be willing to wager that the program went away because of control issues. The culture of the city of Minneapolis is one in which the city can not handle the idea of the private individual doing anything. They do not trust the private individual or private markets. Everything has to be done with non profits and subsidies. With oversight and guidelines, the private market has the power to do a lot of good. There are simply too many houses for the non profits and subsidies to reach them all. We need to use every tool in the toolbox, including incentivizing private individual homeowners to rehab houses.

    ReplyDelete
  11. The real reason is this: The city of Minneapolis is scared to death that DIYers will be able to rehab houses for $50k or less, and that the tax base won't jump. The city is essentially demanding that the nonprofits put at least $150k into a rehab... That produces a taxable value of at least $150k to support the bureaucracy of city hall in perpetuety.

    ReplyDelete
  12. Dyna - you are one smart person! You hit the nail on the head - bullseye!

    ReplyDelete
  13. Okay, i want to know who has been puffing the Peyote bud. We start a program based on the Used Housing program that was implemented in the city of Minneapolis back in the Sixties and base it on a sliding income scale designed to benefit one and all. It does not take a genius to realize that folks ,shall we say, are a slight bit more dubious in their intentions and we will just have to install someone with the utmost integrity to run it and run it under strident guidelines and oversight. All right, all of you powers that be, i'll give you a head start and tell you that the Used Housing program is now known as section 8. It doesn't work fairly in its current form. Remember the day when we had money for things like this and the school system also? Do not tell me that it cannot be done these days once you eliminate all of the crooks that are constantly trying to undermine the same people that i am stressing that we help because it is a fight between the haves and the have-nots and the haves want everything and do not care if the working poor rot and die in their own shit. Time to turn the tables, folks, and really start to realize that we are pawns in the rich man's con game and only we can continue to let him fuck us in the name of skin pigmentation misrepresentation. Screw ALL Fox news tea partying two faced poisonous toad consuming tin foil cap wearin'teat suckin' sorry sacks of shit.Good Day.

    ReplyDelete