Supply & Demand
There is a paradox in San Diego that is both fascinating and frustrating to witness. Real estate is more affordable than it has been in years as once-pricey properties go in the Resolution Trust Corp. (RTC) and distressed-lender auction blocks for a fraction of the 1980s price tags.
Instead of taking advantage of the glut of available units, non-profit and quasi-government organizations struggle to raise funds to break ground for moderate and low-income housing projects.
The legacy of the savings and loan debacle is an RTC and lender frenzy of selling and auctioning of loan packages at 50 cents on the dollar. The surplus of units for sale means apartments that previously sold for $50,000 per unit three or four years age, can now be scooped up for just $35,000. And, additional properties are continually driven into the market at below-market rates as the Office of Thrift Supervision keeps the pressure on by requiring lenders that are solvent, but that don't meet new, more stringent capital requirements, to quickly eliminate non-performing assets or face seizure.
Over the last two years, several major lenders, including California Federal and Glendale Federal, have dodged the RTC bullet and successfully maneuvered through the review process. However, all regulated lenders are subject to an ongoing quarterly review. The constant threat of seizure of financial institutions has resulted in an imbalance in the real estate market.
Because lenders are compelled to unload as fast as they can, prices are forced down artificially. As a result, lender-owned properties are selling for less than non-lender-owned properties. This not only negatively affects lenders, but makes it more difficult for private companies to compete with lenders selling in the same markets.
This bust for lenders and sellers is a boon for buyers. Yet, some of the buyers that would seem to be a natural match for these opportunities are not taking advantage of them.
With discouraging regularity, one learns of non-profit and quasi-government agencies that are proposing the new construction of low and moderate-income housing projects at excessive process. Some proposed units have been reportedly as high as $150,000 per unit, a significantly above-market cost for developing and building a conventional apartment complex.
Typically, one of the most common responses or "explanations" of the exorbitant cost is the fact that the cap on rent makes financing difficult to secure. All the more reason to take advantage of existing foreclosed properties.
Foreclosed units can usually be picked up for $30,000 to $40,000 per unit. Why are many organizations seeking to build new apartment units at an above-market cost when there are many existing properties available to meet the needs of the moderate and low-income housing shortage?
If the units in a foreclosed property are distressed and in need of a major refurbishing, an additional $10,000 per unit can easily turn a renter's nightmare into the Taj Mahal. Even if the property costs $50,000 per unit after refurbishing, that's still one-half to one-third of the cost of new construction proposed recently. That is a major savings that could put up to three times as many people into moderate and low-income housing for the same dollars.
Providing affordable housing for San Diegans with low incomes is a social responsibility that we should not shirk. However, can't we use some creativity and common sense when it comes to how this housing is acquired? An incredible opportunity can obviously be reaped from the government-driven fire sale of properties. Why can't the government and government-related non-profit organizations take advantage of favorable market conditions just as any savvy businessperson would?
San Diego Business Journal
Robert Griswold and the Real Estate Today! radio show strongly support the intent and the letter of all federal and state fair housing laws. As a reminder to all owners and managers of real estate, note that all real estate advertised is subject to the Federal Fair Housing Act, which makes it illegal to advertise "any preference, limitation, discrimination because of race, color, national origin or ancestry, religion, sex, physical disability, or familial status, or intention to make any such preference, limitation or discrimination." Additional state and/or local fair housing laws may also apply. Be sure to inform all persons that all dwellings offered or advertised are on an equal opportunity basis.
Revised and Updated - Wednesday, April 26, 2006
Robert S. Griswold, CRE, CPM, CCIM,
PCAM, GRI, ARM
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