August 03, 2008

Cool housing market spurs unconventional means

When owners are in trouble or homes are up for auction, 2 Valley investors buy the house then try to turn a profit

BY JOE ESTRELLA - jestrella@idahostatesman.com

When owners are in trouble or homes are up for auction, 2 Valley investors buy the house then try to turn a profit

Shane Davila and Lance Churchill consider themselves entrepreneurs who provide a service, not sharks feeding off a growing Treasure Valley foreclosure crisis.

Davila and Churchill acquire, rehabilitate and then resell distressed residential housing. Their methods include buying a property in foreclosure from an owner - Davila's specialty -or at auction - Churchill's. Churchill is one of 15 to 20 local entrepreneurs who show up routinely at foreclosure sales.

Davila, managing member of Helping Hands Home Service, says professional investors like him provide a service to homeowners whose credit would be destroyed by foreclosures, to banks carrying repossessions on their books as depreciating assets, and to neighborhoods in danger of being overrun by abandoned homes.

"I can get up every morning and go to work knowing that I'm keeping people out of foreclosure," said Davila, a 1998 University of Idaho graduate in wildlife resources who worked as a personal trainer and computer salesman before getting into real estate investing in 2005. "And I help create affordable housing because when I sell a home, it's at below-market price."

Davila's clients include Jenni and Ryan Kroon.

In 2005, they traded the 1,100-square-foot, three-bedroom, two-bath home in Boise they shared with their two children for a 3,500-square-foot, seven-bedroom, four-bath home in Nampa that cost $200,000. Although financed with a 30-year, fixed-rate loan, the move still tripled their monthly mortgage payment to about $2,100.

That's when the problems began.

Jenni Kroon's diabetes took a turn for the worse, requiring increased out-of-pocket outlays for doctor visits and expensive medicines. Then Ryan lost his job when his brother's residential construction company folded.

"With every month, it was more and more obvious that we had bitten off more than we could chew," said Jenni Kroon, who works for Blue Cross of Idaho in provider relations.

The couple were two months into foreclosure proceedings when she spied one of Davila's street signs.

Davila paid the couple about $205,000 for the home, enough to pay off the mortgage and pay for a truck for Ryan to commute to and from a new construction job with a commercial builder.

Davila said he was able to pay that much because he expected to increase the value of the home by finishing the basement. His strategy backfired, however, when the market turned while the basement work was being done.

Suddenly, large homes were not selling. Davila sat on the Kroons' home for about nine months before selling it for $310,000. After his expenses, his profits were modest, he said.

"The timing was off a little bit," Davila said. "Instead of making the $60,000 I was estimating (on the sale), I made $10,000."

Today, the Kroons rent a four-bedroom, two-bath home in Nampa's Royal Meadows subdivision for $895 a month.

"My children and my husband hate it because it so much smaller, but I'm grateful for the cover," Jenni Kroon said.

Davila said the decision to get into real estate investing was easy.

After graduating from college, he found that jobs for people with degrees in wildlife resources "were not plentiful." A job as a personal trainer meant long hours spent away from his wife, Jodie, and their five children. He tried his hand at selling computers.

On the advice of his brother, Davila spent two years taking courses from Nouveau Riche Real Estate Investment College, a Scottsdale, Ariz., school that teaches the concepts and strategies of real estate investment. Today he is an independent student adviser for people looking to get into real estate investing.

"I made $27,000 on the first house I flipped," he said. "I was making $35,000 at the time selling MPC computers. I told my boss 'I'm out of here.' "

Since then, Davila has bought and sold 35 homes. Sometimes he fixes up a home, rents it, then sells it to another investor. Sometimes he sells it as a fixer-upper to a contractor investing in real estate, or to someone wanting to acquired distressed properties. Sometimes he rents out the home while waiting for prices to appreciate enough for a profitable sale.

Treasure Valley homeowners are increasingly turning to investors like Davila as Idaho's foreclosure problem worsens.

Many buyers facing foreclosure bought their homes in 2005 and 2006 using adjustable-rate mortgages whose rates bumped up after two years. Most of those mortgages have since reset at interest rates that sometimes double or even triple the homeowner's monthly payment.

A Mortgage Bankers Association survey late last year said 14 percent of the 28,035 "subprime loans" - to Idahoans with shaky credit histories - issued in recent years were in trouble, with 8 percent falling into the category of "seriously delinquent."

IdahoDataProviders, which tracks foreclosures statewide, says 2,232 notices of default - the first step in the foreclosure process - were filed during the first six months of this year, a 139 percent increase from the first half of 2007.

The bad news opened a door for Lance Churchill's company, Frontline Realty Inc., which specializes in acquiring foreclosures.

That door is likely to stay open awhile. While adjustable-rate mortgages with two-year rate adjustments already have reset, five-year ARM adjustments are still to come. Plus, there are homeowners who took interest-only loans, option-rate loans with payments that might not even cover the interest due, and so-called "liars loans," where borrowers' income was never verified, Churchill said.

Originally, it was estimated that the five-year loans would not begin resetting until March 2009. That's not the case anymore, Churchill said.

"If the value of the home falls beneath what's owed on it, the lender has the right to immediately adjust the interest rate and demand that you pay full price," he said.

As a result, some homeowners with five-year adjustable rate mortgages saw their payments begin to skyrocket as early as last April, Churchill said. The high water mark is now expected to come in January 2010, when $10 billion worth of mortgages will reset nationwide.

But just because foreclosures are booming does not mean his business has followed suit. Lenders who once threw loans at "anybody who could fog a mirror" have tightened their credit requirements to the point where "it's hard to find buyers because nobody can get a loan," Churchill said.

"So where we used to buy 100 homes a year, now we buy about 50," he said. "And we pay less for those homes because of the risk that it may be impossible to find a buyer."

Churchill got into real estate investing after spending years as a lawyer who did the legal work on distressed housing acquisitions for a California investor. In 2001, the two founded Frontline Co. in Meridian, which includes the realty business that specializes in buying foreclosed properties.

Most homes he acquires need new carpet and paint, which can cost $10,000. Some require more extensive work, and often the investor will not find out until after acquiring the property.

"You're bidding blind," Churchill said. "The bank can't let you in because they don't own it. It's still the property of the owner."

Mostly, though, homes in foreclosure offer opportunity.

Once a house has been auctioned off to an investor, it can be rehabilitated and sold at an attractive price, said IdahoDataProviders president Charlie Nate

"They're going to be the lowest-priced home on the block," Nate said. "Now is the time to buy a foreclosure, if you're going to live in it for at least two to three years. When home prices start appreciating again, you'll be sitting pretty."

Joe Estrella: 377-6465