By Tami Luhby, CNNMoney.com senior writer
NEW YORK (CNNMoney.com) -- City officials and community activists can't wait to get their hands on nearly $4 billion the federal government is about to inject into blighted neighborhoods suffering from record foreclosures.
Opponents of the measure say the paltry sum won't do much good considering the number of vacant homes on the market - one million families are expected to lose their homes this year - and will more likely turn into a political boondoggle.
It remains to be seen which side is right. But the program - part of the massive housing rescue bill Bush enacted last month despite his own misgivings - will serve as one test of Washington's ability to mitigate the foreclosure crisis.
The U.S. Department of Housing and Urban Development is expected in late September to come up with a formula for how to distribute $3.92 billion to states and cities nationwide to turn foreclosed property to affordable housing for sale or rent.
The funds are intended to help communities deal with the flood of vacant homes, which drain public resources and drag down property values of neighboring houses.
"This money will help get neighborhoods hard hit by foreclosures back on their feet again," said Jeff Falcusan, policy advisor for the National Association of Housing and Redevelopment Officials, a trade group.
Congress mandated that the money be allocated based on the number and percentage of foreclosures, homes financed with subprime loans and homes in default or delinquency in the community. Once the formula is set, HUD has 30 days to dole out the funds. Government officials then have 18 months to put the money to use in their neighborhoods.
In addition to buying and fixing up homes, municipalities can use the money to demolish blighted structures and redevelop vacant land. The foreclosed property must be bought at a discount from its current appraised value to avoid bailing out the lenders.
Local governments could rehab the properties on their own or with the help of public housing authorities. They could also partner with community groups.
The program is also designed to increase the affordable housing stock in the community. The law mandates that the homes be sold or rented to families at or below 120% of the area median income, with one-quarter of the funds set aside for families at or below 50% of median income.
Communities "will have the opportunity to put these houses back into productive use," said Steve Adamske, communications director for the House Committee of Financial Services.
Vacant properties can cause big problems for municipalities. As the number of abandoned homes multiplies, property tax revenues fall. Yet, the vacant houses often require more public resources, including frequent visits by police, health department and code enforcement officials. And they hurt property values of surrounding houses.
In Tucson, Ariz., which has been hit hard in the housing slump, abandoned pools have been a particular concern because they attract West Nile-carrying mosquitoes, said Emily Nottingham, the city's community services director. Neighbors also complain about dilapidated houses and overgrown gardens.
"It can really become an eyesore for a neighborhood," she said. Vacant houses "can attract squatters and if the weeds are overgrown, it's harder for adjoining houses to be sold. Pools turn green and attract mosquitoes."
Foreclosures are a widespread problem in Tucson. It already has 4,000 foreclosed properties on the market and is expecting the number to grow. The city is projecting 8,000 homes to enter foreclosure this year - some of which are already up for sale - and another 8,000 in 2009.
The key to using the federal funds most effectively is concentrating efforts in particular neighborhoods rather than scattering the money around town, experts said.
"Target neighborhoods where it can make a difference," said Buzz Roberts, senior vice president for policy at Local Initiatives Support Corp., a national non-profit group which focuses on rebuilding low-income communities.
Rehabbing blighted communities is nothing new for many municipalities and community groups, experts said. Numerous efforts are underway to address the mess left behind in the foreclosure crisis, said Ali Solis, vice president for public policy and industry relations at Enterprise Community Partners, a non-profit group that develops and finances affordable housing.
For instance, Living Cities, a collaboration of corporations and philanthropies, is doling out $10 million in grants to renovate foreclosed properties. The initial recipients include Dallas, Detroit, New York and Washington, D.C.
In Cincinnati, local officials are hoping to use the federal funds to augment a $1.25 million revitalization effort already in the works, said Michael Cervay, director of community development.
The funds should allow the city to demolish or fix up hundreds of vacant homes. The city has about half of the 5,600 homes that went into foreclosure in Hamilton County in 2007. Even more foreclosures are expected this year.
"It will make a significant impact on the problem in Cincinnati," he said.
Some foreclosure experts, however, said that the funding is too little to have any real effect, especially in the hardest hit areas. California, for example, had 209,000 homes go into foreclosure over the past year, said Sean O'Toole, founder of foreclosureradar.com, a foreclosed properties website for real estate professionals.
"$4 billion is kind of a meaningless sum," O'Toole said. "It can't possibly make a difference. You've brought a pistol to a nuclear war."
Converting foreclosed houses into livable homes may prove a big challenge for many municipalities, said David John, senior research fellow at the Heritage Foundation, a conservative think tank. He foresees a lot of the funding going to waste in poor planning or fraud.
Also, because of the weak housing market, local officials might find themselves unable to unload the houses once they are renovated at a price the recoups the repair costs, he said.
"The money could be better used for other purposes," John said. "State and local government have a rather bad record of managing this kind of activity. They don't really have much expertise in retail housing."
Les Christie, CNNMoney.com staff writer
The real estate market is so awful that buyers are now scooping up homes for as little as $1,000.
<!--- Insert the sidebar information --> <!-- Article Related Media -->There are 18 listings in Flint, Mich., for under $3,000, according to Realtor.com. There are 22 in Indianapolis, 46 in Cleveland and a whopping 709 in Detroit. All of these communities have been hit hard by foreclosures, and most of these homes are being sold by the lenders that repossessed them.
"Foreclosures have turned banks into property management companies," said Heather Fernandez, a spokeswoman for Trulia.com, the real estate Web site. "And it's often cheaper for them to give these homes away rather than try to get market value for them."
In Detroit for instance, Century 21 Villa owner Randy Eissa has a three-bedroom, one-bath bungalow of about 1,000 square feet listed at just $500. It's a nice place with lots of light, but it needs a total rehabilitation inside, which Eissa estimates will cost between $15,000 and $20,000. But that's not bad, considering that the home last sold for $72,000 in late 2007, according to Zillow.com.
With prices this low, lenders aren't looking to make any money on these deals. They just want to get these houses off their books, so they don't have to bear the cost of maintaining them and paying property taxes.
In fact, the $500, $1,000 or $3,000 that a buyer forks over often goes straight to the real estate brokers as a commission. And often the lenders have to kick in extra cash to make it worthwhile for a realtor even take the listings, according to Eissa.
"Usually these homes are bank repossessions that the lenders have already tried to sell on the market, perhaps then put up for auction without success and then re-listed," he said.
Fixer uppers
These houses are almost always small fixer-uppers. Wiring, plumbing and heating systems have to be replaced, walls and ceilings sheet-rocked, plumbing and light fixtures installed and new kitchen cabinets and counters put in. Few come with working appliances.
Often buyers are legally required to rehab these homes to bring them up to code. In Detroit, buyers are required to sign Affidavits of Compliance Responsibility, which obligates them to make repairs outlined in an inspection report. Only after that can a certificate of occupancy will be issued, which makes the house legal to live in.
But even factoring in these costs, they're still bargains.
And as the housing crisis drags on, there are more and more four-figure listings popping up, as lenders try to unload their repossessed properties.
Cleveland is another city with many incredibly inexpensive homes. On Ardenall Avenue, in East Cleveland, McMullen Realty has a listing for a four-bedroom, one-and-a-half bath house for $1,900. It's been vandalized inside, but the outside is in good shape.
It features a deep front porch with Doric columns, double dormer windows and a separate garage. It's an excellent opportunity, according to agent Tonya Stoudamire. The last time it sold was in March of 2008 when it went for $16,677, according to Zillow.
"East Cleveland has a beautiful housing stock," she said. "These houses just need someone to come in and love them a little."
Another property for sale in Birmingham Ala. is priced at $1,900. The one-bedroom, one bathroom home was built in 1923 and has major fire damage, according to its listing broker, Tom Murphy Realty. The listing states that "Rooms are hard to distinguish."
But it's on a nice-sized lot, about 0.38 acre, close to downtown and transportation and has all utilities. Nearby, comparable homes in good condition sell for about $100,000, according to Zillow.
Rehab money
Most of these $1,000 homes can be renovated relatively inexpensively, and buyers can actually get government help to finance these repairs. The U.S. Department of Housing and Urban Development (HUD) has a special loan program for just such purchases.
Its rehabilitation mortgage insurance, available through FHA-approved lenders, was designed to encourage banks to issue a single, long-term loan to buyers that covers both the acquisition and rehabilitation of a property, according to HUD spokesman Brian Sullivan.
He adds that there may also be grant money available from the $4 billion Neighborhood Stabilization Program, which was a part of the massive housing rescue bill passed by Congress in July, to assist buyers with grants for down payments.
Buying homes like these is certainly a leap of faith; they're generally not in the best of neighborhoods and they're often surrounded by many other vacant and deteriorating homes. Still, some of these neighborhoods may turn around and provide residents with good, dirt-cheap housing.
"It's a sad time," said Stoudamire. "But it's also a time of opportunity, especially for low and moderate income people."
By Michael Braga
BRADENTON - Joseph Kandel is itching to get hold of serious cash so he can take advantage of real estate deals he sees every day as an agent with Horizon Realty in Bradenton.
A 50-year-old entrepreneur who has written a book on dating, Kandel formed a company called 1st & 10 Properties in early 2008 and is trying to raise at least $10 million through a public stock offering.
Kandel wants to use the money to buy as many as 80 luxury homes and mid-range vacation properties at bargain-basement prices and hold those properties until the values appreciate by 50 percent.
"Ultra-luxury homes are expected to increase from $1 million to $1.7 million in the next four to five years, while multi-family properties in the $200,000 range are expected to appreciate to approximately $300,000 within four to five years," Kandel says in his registration statement with the U.S. Securities and Exchange Commission. "It is for those reasons, 1st and 10 Properties will purchase as many units in those price ranges as possible."
Throughout the 51-page document, Kandel expresses what a lot of investors and market watchers are feeling right now -- that this truly is the right time to buy.
The problem is that turmoil in global financial markets is making it difficult for investors like Kandel to raise money and is prompting others with cash to hold back for fear the economy will deteriorate further.
"There were a lot of players that were looking last year, but the prices were not right," said Jack McCabe, a Deerfield Beach-based real estate consultant who correctly called the housing downturn. "This year, a lot of players have fallen by the wayside due to the economic crisis, but others are coming out of retirement for what should be one of the greatest buying opportunities for distressed properties in a generation.
"I would say 2009 really will be that year."
Big dreams, big obstacle
In 2007, another Joe appeared on the Southwest Florida real estate investment scene.
Joe Long, a New Jersey entrepreneur who built a New York elevator company into one of the biggest in the country, tried to raise $700 million to buy 1,500 homes from Southwest Florida builders and developers for about 70 cents on the dollar. But Long was unable to raise to the cash from hedge funds and other institutional investors. He got in the game much too early and was offering too much money for properties, real estate experts say.
Hedge funds and other larger institutional investors are no longer the primary actors in the vulture game, said Peter Zalewski, founder of a Miami-based consulting firm that caters to vulture investors. These big players, which deal in the hundreds of millions of dollars, prefer to let smaller players take the lead.
"Institutions are reminding us that the first settlers usually get the arrows and the second ones get the land," Zalewski said. "That's why we haven't seen them pull the trigger."
The result is that smaller players will be the ones that dominate the market in the short term, Zalewski said.
In Southwest Florida, it is people like Elizabeth and Michael Thrasher, Michael Averbuch and Peter Arguelles who have started buying.
The Thrashers have spent $11.6 million to buy seven properties on Anna Maria Island since April. Averbuch spent hundreds of thousands more to buy condos and raw land in North Port and Sarasota. Arguelles has paid $1.6 million to buy 19 houses in Sarasota and Manatee counties.
"If you can buy houses where the cash flow more than covers the operating costs, why wouldn't you buy?" Arguelles said. "We are able to do this now. We can buy houses for less than the freakin' cost of nails and wood. If you can buy dollars for dimes, then you should buy all you can."
Realtors say investors like these are rare and the growing financial crisis has made them more uncertain about parting with their cash.
"The whole Wall Street thing has unnerved people," said Jo Rutstein, an agent with Premier Properties of Southwest Florida. "We had three investors ready to buy, but when they saw their stock portfolios drop 25 to 30 percent, they decided to hold on."
Everybody is frightened, agreed Steve DuToit, an agent with Keller Williams in Sarasota.
"They don't know what is going to happen, whether this thing has bottomed out," he said. "But once they realize that this is a great time to buy, they will come alive again."
Opportunities abound
Kandel is eager to buy. The real estate firm he works for -- Horizon Realty -- is seeing investors and end users close on 35 bank-owned properties every month and another 25 short sales, in which buyers negotiate with banks to buy properties for less than what banks are owed by the former owners.
Kandel's problem is money.
Though he bought and sold five properties for $440,000 more than he paid during the boom, his fortunes changed in the bust. He has defaulted on four loans totaling $2.4 million since the beginning of the year.
But that apparently is not stopping him from going ahead with his public offering.
"I was flipping and made a nice living for while, but I got caught with my pants down like everyone else," Kandel said. "The problem now is there is just too much inventory and not enough end users. So the same investors who were buying up properties during the boom are needed to help with the resurrection."
The model for his new company is different than the model he operated under during the boom, Kandel said. Then, it was all about flipping properties for ever higher amounts. Now, it is about buying and holding for four or five years.
"Each property we buy will be self-sustaining," Kandel said. "It will generate enough rent to cover the carrying costs."
Unable to borrow from banks because of his worsening credit, Kandel hopes to persuade investors to buy shares that may one day be traded on the over-the-counter penny stock exchange, or pink sheets, in which stock generally trades for less than $5 per share.
"I know there is a lot of money out there," Kandel said. "Unfortunately we're running into resistance from spineless people who have money but no vision."
A history of failure
In his effort to sell stock in a fledgling company that has no profits or operating history, Kandel has called on the experience of Kenneth Brand, a Sarasota entrepreneur who spent 2002 through 2006 as the chief executive of Central Wireless, a perpetually money-losing cell tower builder that also traded on the over-the-counter exchange.
Central Wireless built a total of 12 cell towers at $30,000 each and ended up accumulating more than $5.5 million in losses. Brand is now one of four directors, including Kandel's sister, who sit on the board of 1st & 10.
In his registration statement, Kandel does not oversell his company's prospects. He clearly points out there is a good chance 1st & 10 will have to punt.
"Since the incorporation of 1st & 10 Properties, we have not generated revenues. With limited financial resources, we may not be able to continue as a going concern," the registration statement says.
Despite those very strong negatives, Kandel remains optimistic. "We're at the bottom," he said. "Anyone who knows real estate knows this is a great time to get in."
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