North Side home sale clears nothing but the books

The market for foreclosed and stripped houses has gotten so bad on the North Side of Minneapolis that lenders are walking away from some closings barely clearing any money when they unload a house.

Just ask real estate agent Scott Ficek. He represented investors at a closing Friday at which the lender walked away with a grand total of $69.60.

That's because normal closing costs plus city assessments against the property at 1914 Russell Av. N. nearly ate up the entire $12,500 sales price.

Ficek said he's seen banks walk away with as little as a couple thousand dollars before, but he found this closing so unusual that he featured it on his real estate blog. "This one happened to catch my eye," he said.

Get ready for more, said neighborhood activist Roberta Englund, who tracks North Side real estate patterns. She said she knows of more than 30 houses in the two north Minneapolis ZIP codes listed for less than $30,000. "I think in many cases the banks are clearing nothing except their books," she said.

The squeezed margins come after banks already have discounted sales prices heavily. The three-bedroom Russell Avenue house sold for $189,900 early in 2006. But after a year and half on the market, it had been stripped of its copper pipes and its radiators. It was listed for $35,300 when Ficek approached the agent representing owner Fannie Mae. He offered a mere $8,000.

Ficek had a powerful negotiating tool on his side. The city already had assessed $6,000 against the house, which represented an unpaid fee from 2008 that the city imposes on houses registered as vacant and boarded. With the same fee due to be imposed next month for 2009, Fannie Mae had a strong incentive to unload the house now.

But its seller-paid costs nearly ate up the entire price. Besides the $6,000 boarded building assessment, there were also smaller assessments the city imposed for reboarding the house after it was stripped, mowing uncut grass and clearing dumped tires. Normal closing costs plus agent commissions ate up most of the balance.

Assessments are increasingly a bargaining chip between buyer and seller because the city has tripled its annual fee on boarded buildings to reflect what it says is the cost of keeping them secure.

"The fees get tacked on so unless an unsuspecting buyer signs on to take those fees, the seller pays them," said Carolyn Olson, president of the Greater Metropolitan Housing Corporation (GMHC), a major nonprofit buyer in the north Minneapolis market.

She said her organization was approached recently by one bank that wanted GMHC to assume a $25,000 assessment on a vacant lot that largely represented the cost of demolition of the previous house by the city. She turned it down.

Despite efforts by the city to attract owner-occupants with closing-cost and down-payment sweeteners, investors are snapping up foreclosed homes. Ficek said he's representing both experienced rental property owners and new investors, some of them shifting their assets out of stocks or other investments in hopes of getting a better return on rental housing.

In this case, he said, the new owner probably will add $50,000 or more to renovate the two-story house with original woodwork, making a total investment of more than $60,000. The house likely will rent for about $1,200 per month. "He's betting that when the economy recovers, he'll be able to sell it for $125,000, or double his investment," Ficek said.

He didn't disclose who bought the house, but city records indicate that a Tom Wolfe signed a document the same day as the closing, accepting responsibility for correcting substandard conditions found in a mandatory housing inspection.

The mortgage on the house was made by Centennial Mortgage and Funding of Bloomington, once one of the state's largest privately held mortgage lenders. The Minnesota Department of Commerce shut it down a year ago for "financial irresponsibility or incompetence." Fannie Mae both retains some mortgages originated by others in its portfolio or guarantees loans made by others.

The influx of investors has Englund worried that poorly managed rental units again will affect the livability of the North Side, despite the rental workshops that a rental property organization is offering in the area. "This will happen anywhere that the banks have the houses," she said.

Steve Brandt • 612-673-4438