The duplex next to Brian Connoy's bungalow had always been a nuisance. Loud tenants, people coming and going around the clock, violent arguments. When the property was raided by police, it fell vacant and went into foreclosure. "The property wasn't owned by anybody who had a vested interest in the neighborhood," the 30-year-old north Minneapolis resident said. Eventually, Connoy bought the property himself. "I wanted complete control of who was living next door."
When a house ends up empty, neighbors often take over outdoor maintenance, picking up trash, shoveling the walk and reporting problems to authorities. But a handful of homeowners like Connoy go a step further and buy troubled properties to save them from an uncertain fate.
"It's actually kind of a popular thing on my block," Connoy said. "I think we're trying to preserve property values and control our neighbors and you know, help the neighborhood prosper."
Although there's no research that quantifies the number of neighbors turned investors during the foreclosure crisis, it's happening "a fair amount," Kalima Rose, a senior director for PolicyLink, said. The Washington, D.C.-based research group recently completed an upcoming study for the Northwest Area Foundation and the Family Housing Fund about investors in neighborhoods. Investors like Connoy who purchase a property with the plan to maintain it and rent it to neighborly individuals is generally positive for a community. It's those that plan to flip properties, strip woodwork and other valuable amenities, or sit on a property with the hopes that it will increase in value that tend to destabilize neighborhoods, Rose said.
$80,000 to rehab property
"You can kind of tell who are the investors, who are those who don't have an investment in the neighborhood," Connoy said. "You go a little further down the street and you see the rundown yards, the boarded-up windows," Connoy said.
The previous problems at the duplex next door made Connoy feel "almost obligated" to buy it. He paid $24,000 -- 89 percent lower than the $210,000 the previous owners paid in Dec. 2006. Then he spent roughly $80,000 to rehabilitate the property, using a construction loan. The copper plumbing had been stolen, and he needed to replace the upstairs kitchen, redo hardwood floors and re-roof the garage.
A study by the Center for Responsible Lending found that the so-called "spillover effects" of foreclosure will affect 1.5 million homes in Minnesota to the tune of $12.8 million, or $8,547 in 2009 and 2010. Houses near a concentration of foreclosures will see their property values fall even more, Rose speculated.
While prices have begun to stabilize in recent months, the median home price in north Minneapolis has fallen by 72.1 percent over the past five years, according to data from the Minneapolis Area Association of Realtors. Such bargain-basement prices are attractive to investors as well as first-time homebuyers on a budget.
In the frenzied weeks leading up to the April 30 expiration of the homebuyer tax credits, many investors -- who didn't qualify for the funds of up to $8,000 -- sat out of the market, not willing to bid up prices. "I think the tax credit has made it tougher for residential investors to find great bargains," Scott Anderson, a senior economist with Wells Fargo, said.
With the credit out of the picture, "the pickings could start to improve once again," he said.
David Brown, a real estate agent and general contractor, started buying properties because they were so cheap. "Now it's more of a revitalization of north Minneapolis. ... I'm very optimistic," Brown, who is on the board of the Folwell Neighborhood Association, said. He owns 10 properties in north Minneapolis. His mother moved into a home he just closed on two blocks away. "She's retired. What better way to have no mortgage? We picked that up for $35,000," Brown said.
Neighbors around the block bought the house next door and moved into it. New tenants moved into their old home earlier this month.
Kris Nelson, director of neighborhood programs for the Center for Urban and Regional Affairs at the University of Minnesota, is intrigued by the idea. "We tend to overlook the contribution, however limited or finite that contribution is ... [of] people trying to stabilize their neighborhoods. It is about community development, not real estate transactions," he said.
Tough sell for banks
Joe Landsberger, who lives in the West Seventh neighborhood of St. Paul, bought the house next door to his in January, after the owner passed away last year. He's a reluctant landlord but feared the property would lower home values by languishing on the market for months, or would be purchased by an absentee investor. Purchasing the property was harder than he anticipated. He'd planned to use home equity and savings, but his home's appraisal came in for much lower than he expected. So the 64-year-old ended up using money from his IRA to make the $150,000 purchase instead.
Buyers need good credit and 20 percent down to finance an investment property, Even then, many lenders are reluctant to make smaller mortgages because the payoff is so small, Brown said. And it's tough to finance properties that are kitchen-less, infested with mold, or have the plumbing torn out, Kate Wilson, branch manager for Fairway Independent Mortgage Corporation, said.
Neighbors are at a disadvantage compared with "consortiums of private investors who have been saving cash for a long, long time and now see these as opportunities to go in and create a rental portfolio," she said. There are programs, such as Fannie Mae's Homepath, that will help investors buy and rehab properties. But most programs are designed for owners who will live in the home.
Nelson, cautions eager investors-to-be that it takes more than good intentions to make this work. "You need to be clear about what you're committing yourself to," he said. What happens when the property needs a new roof or expensive repairs? "By default it may become a problem property," he said.
Connoy is undeterred. He just put an offer in on the house across the street. It's a short sale -- the neighbor paid $128,000 in 2005 for the tiny two-bedroom that property tax records show is worth $88,500 today. Connoy is hoping the bank and investors will accept $35,000.
Kara McGuire • 612-673-7293