The Ecology of Foreclosures

Two years ago, when I began writing about the housing crisis, I got to know a bungalow in Sulphur Springs, a Tampa, Fla., neighborhood that was famous in the 1920s for its sprawling oaks, giant water slide and shopping arcade, but which is now a ghetto. The oaks are still mostly there, but the water slide is long gone, the arcade a parking lot for a dog track. Suffer Springs is what a lot of folks call it these days.

The house had just been foreclosed, and I was there working with my father, a contractor who cleaned out and repaired homes that had been seized by banks. I dragged metal into the yard for the junkman who lived across the street, stuffed pictures and letters and Bibles into garbage bags to be hauled off to the dump, and drenched the yard in fumigant to kill the hordes of fleas living in the balding yard, which was more sand than grass. The former owner was a born-again deacon who had bought into a complicated refinancing deal and was now living on the couches and floors of family and friends.

The house, and the owner’s plight, were typical of the hundreds of thousands of foreclosures across the Sunbelt. But what set the house apart was the new owner, an investor named Alan, who soon bought the house at auction for just $26,000, then sank another $8,000 into repairs, transforming what seemed like a hopeless tear-down into a charming home.

I met Alan while still on the job; intrigued by his ambition, I kept up with his progress. In a few months, the flea-infested carpet was ripped out, replaced with white tile floors; the stained walls were painted white (requiring three coats); the outside was painted a festive scheme of yellow and green; the once sand-choked yard was now covered with grass. The house had been resurrected, and not just into something habitable, but as the anchor of that small and struggling block. Based on the value of the houses and duplexes nearby, Alan set the asking price at $80,000.

But as the block deteriorated, with surrounding properties slipping into foreclosure and decay, it didn’t take long for Alan to begin reducing his price by increments of five and ten thousand. Over the next couple of years, as I watched Alan struggle to sell this house, his story, and the story of Sulphur Springs, have become a prism for watching how the foreclosure crisis is and isn’t resolving itself on a granular level.

The housing market works like any other. Foreclosed homes, and foreclosure-afflicted neighborhoods, don’t stay that way forever. Eventually, the homes are bought and rehabilitated, resurrected, brought up a notch. This is a painful but necessary transformation, with investors like Alan seizing the real-estate remains of what my father and I cleaned out that spring day, and in doing so creating something that attracts life to the neighborhood. Call it the foreclosure ecosystem.

True, the very speculators who helped lead this economy into a crisis are becoming an increasing part of the solution, especially as banks continue to shy away from financing, preferring instead to work with “all cash” offers. But if banks persist in their financial stubbornness, you could very well see such investors filling the financing void for a portion of the housing market — a longstanding trend known as “owner financing.”

Here’s how it works: Alan buys property on the cheap — he sets his threshold at $50,000; other investors I’ve met set theirs even lower. He makes a few repairs (or not, depending on the condition of the property) and puts out a sign to attract a buyer.

In many cases, in poor and blue-collar neighborhoods especially, the would-be homeowner has trouble getting traditional financing from the bank. And this is where Alan and others fill the void left by the banks, financing a mortgage or even leasing with an option to buy. In the past, Alan had success financing mortgages to new buyers for a low down payment (around $5,000) and a reasonable rate of interest (around 10 percent). To protect himself — and to give him a return on his money so he could reinvest it — he’d set a balloon rate, in which the new buyer was given three to five years to find a conventional mortgage before the entire sum on the house was due.

Before the crisis, this informal-mortgage system always worked. “It’s a good alternative,” Alan says, “because half the buyers can’t get mortgages. They don’t have the income, they don’t have the credit. There’s a whole black market out there where people work under the table. They have no verifiable income, they work everything on the side. So they’re out of the mortgage market, basically.”

The system doesn’t work as well in a down economy, though in the past couple of years, with the crisis in full swing, I’ve met a handful of investors in Tampa and other parts of Florida who offer financing to people who otherwise wouldn’t be able to own a home. Why do it in a down economy? Because houses are historically cheap, and many people remain undeterred in their desire to own a home. For $30,000, the risk is often worth it.

Of course, as the story of Alan and the Sulphur Springs bungalow proves, not every investment is a winner these days. In the six months since Alan finished fixing it up, houses on the block have sold for less than what he paid, which means much less than what he has put into it. It still sits there with “For Sale” signs plastered about — on the windows, tied to the chain link fence, in both Spanish and English.

The neighbors have come and gone, except one — a man in his nineties named George, who was good friends with the evicted deacon. He paid his house off many years ago, and watched the bubble come and go. Even the houses themselves have come and gone: one on the corner was recently torn down. In fact, the block is more blighted than when Alan invested here. He’s dropped the asking price to $40,000. He might rent it out, but hates it as a matter of principle, since it ties his money up, and money must keep moving in order to grow.

Given the bills and taxes that have stacked up, Alan is deeper in the hole each month. “I don’t know what the solution is,” he says, frustrated and confounded by the stubbornness of his block. “Most of these properties that are being bought by investors, the government owns them. The government should instead give first dibs to homeowners, give them the first chance before the investors get them all cheap.”

I pointed out what he’d done for the neighborhood, but he wasn’t convinced. “I’m not good for the neighborhood,” he said. “Well, I’ve helped a little, so I’m a little good. But it’s better to have homeowners in any neighborhood. Everybody knows that.”

As for the former owner, the deacon, the last we spoke he was back on track: married, renting a home and looking to buy again, not the least bit discouraged by what he’d been through, but feeling the wiser for it. He said he missed his old house, and missed his neighbor George, too. It isn’t too much of a stretch to think that when he gets around to visiting, he’ll see those “For Sale” signs on his transformed bungalow, and give serious thought to taking another shot at it.

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Paul Reyes is a contributing editor with Virginia Quarterly Review and is the author of the forthcoming “Exiles in Eden: Life Among the Ruins of Florida’s Great Recession.” His work has also appeared in Harper’s, The Oxford American, Slate, Men’s Vogue and Details. In 2010, he received a Literature Fellowship from the National Endowment for the Arts.