Cities face hurdle to buy foreclosed homes

Properties get many offers from investors.

Published online on Friday, Nov. 06, 2009

After months of preparation, local governments have started buying foreclosed houses under the federal economic-stimulus program. But they are running into an unexpected snag -- stiff competition from investors.

The reason: The market has changed significantly since early 2008, when the Neighborhood Stabilization Program was created. Home prices and mortgage rates have fallen so much that investors and first-time buyers have swept in, at least in Fresno and other cities in the Valley.

In some cases, foreclosures are getting 20 offers -- and those investors compete with the local governments, which cannot offer more than 99% of the market value. Investors can offer more.

Meanwhile, the clock is ticking. Fresno county and city officials have $18 million to spend, but they have to return any amount that's not committed by Aug. 31. Some feel that might not be enough time, given the competition.

A Fresno City Council member said it took too long to get the city's program going. City officials awarded contracts to four entities that are buying and remodeling the houses before they are sold to low-income families. The final contracts were signed last week.

"That is a potential problem," said Fresno City Council Member Lee Brand, who owns a real estate management and development company. "I've been hammering on this for six months to no avail. It took way too long."

The negotiations were complicated, said Craig Scharton, downtown and community revitalization department director.

"It would be great to see things move more quickly, but it's a pretty big ship," he said. "The four contractors are reasonably confident that we can get it all done."

The effect of any snags will be felt in troubled neighborhoods such as Lowell, an impoverished area near downtown that city officials have targeted. The goal is to boost homeownership in areas of many rentals and foreclosures.

To do that, the city and its contractors are focusing on the central and southern parts of Fresno. One of the city's contractors, the Fresno Redevelopment Agency, is buying a house in the Lowell neighborhood as its first purchase, said Marlene Murphey, executive director.

One of the goals of the program is to provide funding for renovations. The average renovation is about $20,000. Once that's done, the houses are sold to low-income families.

In some places, such as Stockton, families are already moving into houses bought through the stabilization program.

Fresno County hopes to have its first family in sometime next month, said Yvette Quiroga, a county resources and planning analyst. Many of the homes the county is buying are in the Sanger area, but it is also purchasing them in Riverdale, Coalinga, county islands and elsewhere.

The county has 22 homes in escrow under the program, or about one-third of the 65 it hopes to buy.

The city, however, is further behind, with just a handful in escrow. City officials hope to buy 150 houses.

The Neighborhood Stabilization Program was intended as an emergency action to preserve neighborhoods wracked by foreclosures and declining values. The federal government allocated billions of dollars nationwide to buy, fix and sell bank-owned houses.

Even though investors are buying many foreclosures, officials say the program still has a strong reason to exist. The government is charged with rehabbing and selling the houses to low-income families, thus building homeownership in shaky neighborhoods.

Many investors, on the other hand, rent the houses out and don't create the same investment in the community.