Housing market looks much better but looks could be deceiving

July 21, 2012
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Although better news has been spreading through the local residential market lately, some in the industry are keeping their fingers crossed and hoping the “other shoe” doesn’t fall.

The Grand Rapids Association of Realtors said the sale of single-family homes in May and June was up by 17 percent this year from the same months a year ago. The Home & Building Association of Greater Grand Rapids noted that housing starts last year rose by 3.6 percent from 2010. Those findings have added optimism to an economic segment that has been in dire need of some confidence since 2008. And yet …

“Although many of us in the real estate industry are grateful the market is turning around, we are still not out of the woods. One of every three sales is a distressed sale,” said Lola Audu, owner of Audu Real Estate in Comstock Park.

The U.S. Census Bureau reported last year there were 19,000 vacant houses in Kent County, a figure it arrived at from the 2010 census. Those empty homes accounted for 10.5 percent of the 180,737 houses in the county.

The Community Research Institute at Grand Valley State University reported there were 3,011 mortgage foreclosures in Kent County in 2010, and 1,126 through the first half of 2011. If the second half of last year produced the same number of foreclosures as the first half, the tally will be the lowest since 2005, when there were 1,398 foreclosures.

Tax foreclosures, though, are headed in the opposite direction. According to the Kent County Treasurer’s office, 340 properties were initially listed for the tax-foreclosure auction set for Aug. 16. That number is up by 48 percent from 2011, when the total was 229. The 2012 total of 340 is nearly 10 times the 35 tax-foreclosed properties that went to auction in 2007. If the rise continues, there could be 1,080 properties being publicly auctioned in 2015.

“Within three years, we could have over 1,000 properties foreclosed on,” said Dave Allen, executive director of the Kent County Land Bank Authority.

Kent County Treasurer Kenneth Parrish, who founded and chairs the land bank, recently said he expects a similar number of properties will go through the tax-foreclosure process next year as this year. “I think it’s going to be somewhere in that neighborhood. I’m hoping we’re not going to see that increase continue,” he said.

Parrish said the biggest reason more properties are making the annual tax sale is the mortgage holders aren’t paying the delinquent taxes in order to hang on to their investments, which are mostly houses. In prior years, Parrish said mortgage companies and banks normally paid the taxes, but over the last five years, he said more lenders are letting properties go into foreclosure.

But properties don’t go into tax foreclosure quickly. It takes about three years for a home to reach that status. Most of the parcels on the 2012 list began heading in that direction March 1, 2010, when the property taxes for 2009 weren’t paid and the properties were declared “delinquent.”

A year later, on March 1, 2011, the properties were labeled as “forfeited” by the Treasurer’s office. At that point, an owner still could redeem a property. Then about 13 months later, on March 31, 2012, the forfeited properties were foreclosed on, and an owner’s redemption rights officially ended.

At this point, state law requires Parrish to offer the foreclosed properties to the state, but he said the state never buys the properties because it has to pay market value. Then Parrish has to offer the properties to the local jurisdictions where the parcels are located. The local units can buy the properties for the minimum bid — the back taxes, interest and fees — but the governments have to have a “public purpose” to make a purchase. All unclaimed properties are then offered to the county, which can buy them for the minimum and doesn’t need a public purpose.

Until a few years ago, all the remaining properties would then go directly to the public tax sale in August where buyers could make purchases for the minimum bid but have to pay cash on the sale date. Parrish said the cash requirement results in a limited pool of buyers, often the same ones for several years.

The properties that don’t sell then go to a second public sale, called the scavenger sale, in September or October, and the minimum price for each property is $1. “This is not the Sheriff’s sale. That sale is for mortgage foreclosures,” said Parrish.

The properties that aren’t sold in the public sales normally revert to the county. Parrish said most of those parcels have no practical use, like the drainage ditch on the list last year that ran between properties. What is very interesting about the public sales is the majority of properties are owned by private investors. These are landlords, basically, who offer houses for rent rather than owners who reside in their homes.

Sixty-three percent of the 102 tax-foreclosed properties in the 2009 auction were owned by private investors; 71 percent of the 150 in the 2010 sale were, as were 89 percent of the 229 in last year’s auction. In short, private residential investors are the single largest group of property owners that don’t pay taxes on their holdings. The county Treasurer’s office said private investors have also been repeat offenders going back to 2007, the year the housing market began to crumble.

Allen said these investors buy on the cheap, generally don’t make repairs or pay the taxes, and get foreclosed on every three years after they’ve made a purchase. He added that they specifically look for houses in the auction that are occupied by renters because that’s how they can earn a profit of $30,000 to $40,000 over their investment. Quite frankly, he said, it’s their standard method of operation.

That’s largely why the land bank is stepping in to help stabilize the residential market. The land bank received clearance from county commissioners to buy 43 of the 340 properties on the tax-foreclosure list before the auction is held. Thirty-seven are houses, and the land bank is selling 19 of them to four nonprofit developers that will rehab the homes and then find owners.

“I’m held to a standard of rehab that is pretty high,” said Helen Lehman, executive director of the New Development Corp., which is buying six of the 19 homes. “I think having the land bank purchase properties is a good thing.”

Habitat for Humanity of Kent County is buying four houses from the land bank. “We have a strong partnership with the land bank, and I believe the city will greatly benefit from tax-foreclosed properties being purchased by the land bank as opposed to being auctioned off,” said Mary Buikema, executive director of Habitat for Humanity.

Allen said the nonprofit developers that are buying houses from the land bank, which also include LINC and Next Step, have a year to get the homes rehabilitated and ready for sale. “We don’t allow the nonprofits to buy properties and then sit on them. They have 12 months to develop a home,” said Allen.

The land bank will take possession of 18 residences, of which nine are in Grand Rapids, and also will rehab and sell the homes. One of the houses is on Benjamin Avenue. It looks great from the outside, but the interior is a wreck. The land bank plans to make $80,000 worth of repairs and then sell it for about $89,000.

Tom Paarlberg of Greenridge Realty, also president of GRAR, said his group hasn’t taken a position for or against what the land bank hopes to accomplish, but he is on the bank’s advisory council. “The land bank is an extra tool to save our neighborhoods,” he said. “We haven’t seen or heard of any controversies about land banks across the state since the legislation passed in 2004.”

Lee Kitson has been building homes in the region since 1971 and is past president of the Home & Building Association. He said the land bank’s focus is different than the one held by the private sector, and the bank can stabilize the residential market. Kitson called the bank’s mission a “very positive step” for the local market. Emily Siebert, executive director of the association, is also on the land bank’s advisory council.

Because the land bank isn’t supported by tax dollars, it will use a low-interest, revolving loan from Grand Rapids Community Foundation to buy the tax-foreclosed properties for $420,400, which makes the county whole, and will borrow the funds from local banks to rehab the houses. The bank will list those properties on the Multiple Listing Service and pay a 6 percent commission for each one sold.

“KCLBA will always use GRAR realtors to market and sell the properties,” said Allen.

This year, the land bank is buying 24 properties for itself — a high-water mark for the three-year-old entity. It bought 10 last year and picked up two houses in 2010. The bank has since renovated the two houses it bought two years ago and sold both, for $64,000 each.

“The city of Grand Rapids believes the land bank can be an effective tool in the revitalization of the city’s residential neighborhoods and commercial business districts,” said GR Deputy City Manager Eric DeLong. “With the right procedures and partnerships, the land bank has the potential to rehabilitate a significant number of properties that may otherwise continue to be neglected.”

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