Developers transform run-down housing into affordable New London homes
CT REIA Member "Jay Feldman"
With scores of homes sitting vacant or deteriorating in the midst of foreclosure proceedings, a few private developers are discovering deals in the New London real-estate market and turning them into profit-making opportunities.
And, while many of these deals are being done by opportunists derisively called "bottom feeders" – those who basically slap on a coat of paint and some carpeting and then try to quickly flip a house at a tidy markup – some private developers are doing quality work and adding to the value of neighborhoods.
In fact, community organizers say this may be a once-in-a-lifetime opportunity to improve the housing stock in New London – 90 percent of which predates 1978, according to a city official – while offering developers a chance to turn a profit. While nonprofit agencies such as HOPE have been actively working to revive city neighborhoods for more than two decades, housing officials said this is one of those times when fixing up old houses might make sense for private developers including those whose businesses have slumped in the current building downturn.
"It’s bargain time in housing," said Marilyn Graham, executive director of the city nonprofit group Housing Opportunities for People. "It’s buy low and sell high."
Cara H. Pianka, the city’s community development coordinator, said Jay Feldman and Frank McLaughlin are among the pioneers in spending private money to improve neighborhoods.
"Frank has been doing really good work in New London for a long time; Jay is a little newer to it," Pianka said. "Those two are the only two I know of."
"These guys are really spending a lot of money when people aren’t spending," said Ned Hammond, the city’s economic development coordinator. "Private development does not attract a whole lot of attention, but when you start adding it up … it’s pretty significant."
McLaughlin, the Chamber of Commerce of Eastern Connecticut’s downtown New London investment development coordinator, said he currently has a homebuyer under contract to purchase for $145,000 a house he and his son Brendan fixed up on Mountain Avenue. The sale, helped along by a $5,000 give-back to pay for closing costs, will include a clause requiring the homeowner to live in the two-family house for at least three years or forfeit part of any profits derived from the property’s sale.
Housing officials said they don’t ever remember a private developer requiring owner occupancy, but McLaughlin said it is part of his philosophy that New London will make a comeback only if it can promote more of an ownership mentality in the real estate market.
"We don’t want someone coming in and flipping it," McLaughlin said. "This is a personal crusade. I firmly believe owner-occupieds is what saves neighborhoods."
McLaughlin completely re-did the 2,700-square-foot home in one of the city’s downtown neighborhoods that until recently had been dotted by drug dens.
McLaughlin expects to make a tax-deferred $25,000 profit once the deal closes, but will plow the money right back into two other properties through what is known as a 1031 real estate exchange. Working through their joint firm, McLaughlin Cos. LLC, the father-and-son team offer cash for their properties, at this point mostly foreclosure purchases financed by Dime Bank in Norwich.
The McLaughlins look for well-constructed old houses, usually built before 1930, such as one they are currently rehabbing at 39 Belden Court. Many of the 26 properties they have worked on over the years have become rentals, but McLaughlin said prices today are so low that he prefers selling to homeowners when he can.
While novices often take a bath on rehab work when surprises present themselves, McLaughlin said his experience of more than 20 years in rehabilitating city housing gives him an advantage.
"There’s no luck involved; it’s a lot of hard work," he said. "Because I have done this so long, I have the ability to view a building and see that it will work. We know pretty much within $5,000 (how much it will cost to make a home livable again)."
It’s a good thing, too, that he’s not in it for the money, he said, because the profits are far from huge if you really want to turn a property around. The tax-deferred growth of the McLaughlins properties around the city, however, will eventually benefit Brendan, who said he takes little out of the business today but plans to cash in at retirement time.
Rentals make sense
While the McLaughlins say they currently own 21 buildings in New London, with more than 60 rental units, the three multifamily homes on Connecticut Avenue that Jay Feldman has been renovating side by side represent his first foray into the life of a landlord. Working through his companies, Timberlines LLC and Phoenix Solutions, he has been fixing up and reselling houses for the past two years, but decided that in a down real estate market the three houses he’s currently working on would be rentals.
Feldman, who has flipped about 15 houses over the past two years, said he works closely with real estate agent Elizabeth Alina to find bank-owned properties. At his new rental properties, the three-unit home closest to completion, at 68 Connecticut Ave., had a $325,000 mortgage on it, but Alina and Feldman convinced the bank to let it go on a so-called short sale for $56,000.
Like McLaughlin, Feldman believes at least one of his properties was once part of a deal put together by Jose Guzman, the former mortgage specialist who has been tied to a rash of bad real estate deals in the city during a predatory-lending scheme. The high prices paid by Guzman’s buyers and subsequent mortgage defaults were on the leading edge of what has become a foreclosure crisis for banks and a one-time opportunity for investors.
Feldman said he sees his investments in distressed properties as a help to homeowners caught in a bind. No one likes to acknowledge a mistake or lose a large investment, but he said short sellers – who sign their properties over for less than their original mortgage, with the approval of their lender – at least won’t be saddled with a foreclosure on their credit report.
"A foreclosure is worse than a bankruptcy on your record," Feldman said.
Feldman offers cash for homes through his funding source, Steve Tavares of Seaport Capital Partners in Mystic. Once a project is complete, he stands ready to convert the initial high-interest loan into a mortgage through a local bank at a significantly lower rate, he added.
Feldman held an open house last week for the public to take a look at how his project is progressing. The three-bedroom units that will prevail in the homes are expected to rent in the $1,050 to $1,100 range, and the nearly completed units feature an expansive kitchen, generous closet space and polished wood floors, along with new fixtures and appliances.
A family crew
Potential lead paint has been removed thanks to a city grant program, and asbestos has been remediated as well. Feldman saves expenses by acting as his own architect and home-inspection service, and works with a crew that includes his two brothers, Dan and Andrew.
"Anyone doing this type of work should be planning on spending more than they think and spending more time than they expect," Feldman said. "You need to support with rents all your expenses and still turn a profit … appreciation (in the property’s value over time) is a bonus."
But housing experts said people like Feldman and McLaughlin, combined with what nonprofits such as Alderhouse, ECHO, Habitat for Humanity and HOPE have been doing, will likely turn neighborhoods around quicker once people see renovations going on around them.
"That’s been one of HOPE’s goals – to inspire others to fix up their properties or invest in their properties," said Graham, whose organization just bought another property in the city at 62 W. Coit St.
"It’s all working together," she said.
"Any city has to be happy, whether it’s public or private money," said Terri O’Rourke, executive director of Habitat for Humanity of Southeastern Connecticut. "It’s all good."