How to finance real estate transactions in the current economy.

The Journal had an article last week wherein city officials were lamenting about the effects of foreclosures on the quality of life in Milwaukee. Below is my experiences as we put a number of properties back on line without any government funding.

Short version

Think twice before buying foreclosures in Milwaukee as the city will add unnecessary costs and aggravation to your project.

Longer version:

We were buying a number of foreclosures over the past two years.  We would go in fix them up and put them back on line.  This was good for the city in general in that the properties would remain on the tax rolls rather than being vandalized and ultimately bulldozed.  This is good for neighbors in that these were no longer boarded eyesores.  It was good for the people we employ as it kept them working and in fact resulting in a couple of additional full time positions. And of course it was good for our company or we would not have purchased the properties.

About a year ago the purchasing became more difficult. Not because there was no inventory, there was more property available in our market than ever.  Not because prices were rising, prices were actually the lowest I’ve since 1985.  No, the problem was that the selling banks were now verifying how much was outstanding in city taxes and city fines/fees before they accepted the offer.  If the city had too much in junk fees the banks would walk from the deal and apparently let the property revert to the city for back taxes. After a while the property is  vandalized to the point they have no economic value and are beyond rehab.

We had three offers that listing agents said our offers were solid, but the amount due the city in taxes, fines and fees exceeded that value.  All three properties dropped off MLS.  A couple of weeks ago I noted two remain boarded, vacant and today, a year later, vandalized. The third address I did not go by recently.

Here is another property I anticipate will revert to the city before long and will end up bulldozed instrad of on the active tax roll

At the beginning of this year the city threw yet another wrench into the process of putting boarded vacant and often vandalized properties back on line.  It used to be that only houses with orders to obtain a certificate of occupancy were required to go through this.  If you are unfamiliar with the process it involves paying for an expensive permit, then electrical, construction, plumbing and code compliance inspectors come through and find anything they think maybe a code violation.  They then require you to get plumbing, electrical and construction permits. They look at the dates on water heaters, furnaces etc and issue quad fee permits if someone in the ownership chain upgraded without permits.

Certificate of occupancies require odd expensive things.  In one such inspection we had a house with 1 1/4″ cast iron drain pipes for the bathtub.  Obviously this was installed either during original construction or sometime not too far after as all drains today are PVC and for many years before PVC was common drains were galvanized steel.  Cast iron is hard to work with, hard or impossible to find and expensive if you can find it.  The drains worked fine and did not leak, but the inspector ordered the drains changed to 1 1/2″ at a cost of nearly $1,800.

Back in October we bought a nice little single family on South 15th Place. The interior was in amazingly good condition and we had it rented a couple weeks after purchase.

There were a handful of minor exterior orders prior to our purchase.  These orders were issued upon the prior owner in September.  Even though the orders would have to be dismissed and reissued upon sale, we began them the Monday after the purchase. We also sided the property, which was not on the order.  The inspector signs the order off shortly thereafter.  Then the same inspector issues eight items on two notice letters in November.  It appears nothing on these notices were on the original September notice.  Petty, petty stuff – fine we do it a few days after we receive it.   Inspector signs it off. So far just a PITA and a waste of taxpayer money as well as wasting our money having staff chase a seemingly never ending list of things to do.

Same inspector comes back in December for the certificate of exterior code compliance. This inspection is required when you buy a one or two family rental property.  Four more petty, petty “violations” but this time he now also wants an occupancy permit.  I call his supervisor and am told it is now their policy to demand occupancy permits for anything they think was vacant for more than six months even if no order exists.  He even threatened to have the tenants removed.  At least his boss put an end to that nonsense.

Then in January we get a letter from the vacant building program. We responded that the inspector has seen the property occupied at least three times.  The person who answers the phone for the vacant building registration program says it doesn’t matter that an inspector saw tenants there in October, November and December, we need an appointment to meet you there to confirm it is occupied. And it wasn’t just one inspector that they may not have trusted enough to confirm occupancy, by then we had the certificate of occupancy inspections as well so three more inspectors were through the place and saw it occupied. Yet we had to meet someone from DNS there to prove it occupied.   You just cannot make stuff like this up…

Not an isolated incident:

This same inspector on another exterior code compliance application wrote defective siding on a house that was vinyl sided. I could not see any siding code violation.  I meet him there.  We walk around the house a couple of times because he is having a hard time finding what he wrote up. He points out an inch and a half crack in a piece of J channel by the back door and what may or may not be a missing shake on a gable end.  I pointed out the house adjoining our to the north as well as one across the street should be placarded due to the condition they are in. The inspector agreed with my comment that ours was the best on the block – and this is a highly visible block on an arterial street on the Southside.  Here are pictures of this property on the day of inspection as well as those neighboring it.

The larger effect of this:

I’m sure DNS and the city is all giddy over the hundreds of dollars in permits they collect from each property under their current scheme.  However, this is short term expedient and long term costly for the city.

As the city continues to make it more expensive and difficult to turn around vacant homes there will be an increasing number of properties that are no longer economically viable to rehab. This results in more houses being bulldozed and taken off the tax rolls due to unchecked vandalism and theft of anything metal inside them.

Despite what the City Assessor espouses, boarded, vacant, vandalized properties suppress all property values in their immediate neighborhood.

As more properties leave the tax roll the city will be forced to try and squeeze more money out of those that are left while providing less services.

The current city attitude is a no win for everyone.

Bottom line:

If you are thinking of buying foreclosures or other vacant property in Milwaukee make sure you figure in the extra costs and hassles associated with certificate of occupancy inspections.  Then decide if it is still worth it. There are plenty of other areas that welcome your investment of time effort and money as well as the jobs our industry creates.   Perhaps your investment would produce better results elsewhere.