By Jim Wasserman
Published Sunday, Mar. 28, 2010
Some of Sacramento's older working-class neighborhoods most devastated by the foreclosure crisis are seeing improvement as investors snap up properties at extreme bargain prices, fix them up and sell or rent them.
In places like Del Paso Heights, Oak Park and south Sacramento, you can now buy a fixer house for well under six figures a price that has proved irresistible to investors, some of them contractors who can do remodeling work themselves.
They are stepping in where homeowners departed, unable to keep up with subprime loans whose payments reset to much higher levels starting in 2006.
Real estate experts say the cycle will likely continue until prices rise to a level where it no longer makes sense.
Players include people like Jeff Douglas, a former custom homebuilder who saw his business shrivel with the recession. He adopted a new strategy: rebuilding bank repos priced below $100,000.
"In the last couple of years I've spent a lot of time driving on these streets. It's getting better. The houses are getting sold and they're getting fixed, and it's spreading," Douglas said.
Douglas pointed to one of a dozen houses he bought in Del Paso Heights, a neighborhood that was heavily seeded with risky subprime loans that later went into foreclosure.
"This was a really nasty place," he said of his acquisition. "It was almost a tear-down. Now it's rented out, and across the street they cleaned up. Like blight spreads, rehab spreads."
Rehab work continues
Make no mistake. Sacramento neighborhoods like Del Paso Heights, Oak Park and Meadowview still need plenty of fixing after suffering an epidemic of foreclosures. City code enforcement officers are kept hopping by continuing house vacancies that can become nuisances.
At this point, the evidence of improvement is mostly anecdotal. The number of building permits issued by the city in Del Paso Heights and Oak Park, for instance, actually dipped slightly to 2,083 in 2009 from 2,238 in 2008, when most bank repos hit the market. That was up from 2,164 in 2007. Douglas said many rehabs don't require permits and noted that a lot of the "most seriously beat-up" properties were rehabbed in 2008.
Still, the ongoing work of investors is readily apparent during a drive through Sacramento's foreclosure distress zone. There are new roofs, all-new interiors, landscaping and windows where homes were boarded up and trash marked the spot.
Some people who have worked in the area for years say they see the improvements, though with homeowners still in trouble, it can be hard to tell which trend is winning.
"I think it's better than 10 years ago," said Ron O'Connor, operations manager for the city of Sacramento's code enforcement division. But the crash that followed a bloom of investment and renovation during the housing boom was ruinous, he said. And O'Connor still sees newly vacant homes even as investors buy and fix earlier repos.
The current house-by-house transformation of the city's lower-income neighborhoods reveals the stunning rise of a new investor class that has moved in after the storm.
Its ranks include contractors, professional investors and ordinary people tapping their retirement accounts and stock funds for more lucrative returns in real estate. Some come from the Bay Area, attracted by Sacramento's comparatively low prices.
Investors now buy 27 percent of the houses sold in Sacramento County. In February, buyers paying cash represented 34 percent of the county's sales, according to La Jolla researcher MDA DataQuick.
Investors irk some
Some first-time buyers have come to resent the phalanx of investors, who fuel bidding wars in the city's most affordable neighborhoods and win deals with all-cash offers. But while investors often carry a stigma as bottom-feeders and speculators, many are improving the distressed properties after buying.
Douglas and other investors handily score homes for well under $100,000, which enables them to spend more fixing them up. He said the widespread sprinkling of rebuilt houses signals an investor belief that the worst is over in these inner-ring neighborhoods. Values have fallen as low as they'll go.
"If you buy inexpensively, and the rent covers the mortgage, you're safe," he said.
High-end markets have emerged as the places to avoid for investors, he said. Values in such neighborhoods continue to fall, and many owners owe far more than their homes are worth.
Bargain prices aren't the only factor driving new investment in neighborhoods like Del Paso Heights, Oak Park and south Sacramento. The federal government also has played a role through its Neighborhood Stabilization Program. Congress steered $31.8 million to the city and county of Sacramento last year to rebuild neighborhoods plagued by foreclosures.
The Sacramento Housing and Redevelopment Agency said $9.6 million in federal funding has so far put 114 properties into the repair pipeline. The SHRA reports 33 sales of upgraded homes to income-qualified buyers. Prices average $45,000 above their values as repos, said agency spokeswoman Angela Jones.
One Sacramento investor-contractor company, the Housing Group Fund, is rebuilding 15 houses with government financial incentives, mostly in North Highlands. The firm is buying and rebuilding eight more houses privately in Oak Park and south Sacramento.
"There are some wrapped up we're selling, some in construction and some just starting," said co-owner Brooke Hammett. Sale prices for newly remodeled homes range from $105,000 to $139,000, she said. Hammett cited a noticeable improvement in some neighborhoods as contractors buy, fix and re-sell.
The Sacramento Municipal Utility District has invested $77,000 in three bank repo rebuilds to demonstrate energy-saving techniques in drafty older houses. Eventually, these methods will help retrofit older urban areas to use less electricity and gas.
"We think we can get a consistent 50 to 60 percent energy savings, said SMUD project manager Michael Keesee. "Some of these older homes have up to $200 a month in utility bills. You can cut that in half."
Re-sell prices still low
Sacramento contractor Harold Maker, who is rebuilding one of Douglas' newer repo acquisitions, said private investors are creating affordable housing by returning trashed houses to the market fixed up and still reasonably priced.
As an example, Maker pointed to a house in the 2800 block of Albatross Way near Del Paso Heights. It had a bullet hole in the front door, signaling a shot fired from inside. On the front window was a September 2009 foreclosure notice from the mortgage servicer. But the small house had a huge backyard. It was getting a one-month makeover, including a new kitchen, Maker said.
Its eventual price tag for a new neighborhood buyer: about $115,000, said Douglas.
Douglas said it's only because prices have fallen to a "once in a lifetime" level that he can afford to buy, replace stoves, cabinets, blinds, carpet, make extensive repairs and still sell at such prices to working-class buyers.
"You can't do this if the price is $300,000," he said. "We just buy bank-owned houses, and the worse the better. If we buy it for the right price, we can fix it."
North Sacramento-based homebuilder Allen Warren, president and chief executive officer of New Faze Development, agreed that this is an "unprecedented" time for such a business model, and it won't last too long once prices start to rise.
"As long as you can do that, the market will be there all day long," he said. "But that will be short-lived."
Douglas agrees that time is short. So before the bargain-basement sale ends, he savors one repo makeover in particular. It's an Oak Park rebuild, once the worst house on a nice block.
He put $65,000 into the house and made it like new inside. Then he sold it to people from Carmichael.
"It's a jewel on the corner. It was a nasty house on the corner," he said. "I don't care what neighborhood you live in. Nobody wants that in their neighborhood."