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.