Econohomes
In the PD’s story this morning about the new Case Urban Poverty Center study:
Several out-of-state companies have purchased dozens of houses in Cleveland, some for less than $1,000.
One of the companies, Texas-based Econohomes, provides affordable housing to buyers with tarnished credit, Jeff Ball, the chief executive officer, said. Econohomes provides the loans and carefully screens customers to ensure they are reliable, Ball said.
“We buy property at such a deep discount we are able to sell it to people who are economically disadvantaged at very attractive terms,” Ball said. “These properties otherwise would most likely sit vacant.”
Former Cleveland Law Director Craig Miller represents the company in Cleveland. He says Econohomes’ owners are “very well-intentioned, very good businesspeople.”
Compare and contrast with this forum posting from “Amber Work” who identifies herself as an Econohomes representative:
Econohomes has properties all over the U.S. We sell the properties as-is and they are priced to move. I work with investors and owner occupy buyers on a daily basis. Currently, we don’t have a website that is accessible to the public, but there is a link to our inventory that is pasted below [link]… We are buying large packages of properties and have more coming online every 2-3 weeks.
Maybe Ms. Work just didn’t get Mr. Ball’s memo about careful screening, etc.
Econohomes currently holds title to seventy Cuyahoga County properties — fifty-nine in Cleveland, nine in East Cleveland, and one each in Euclid and Garfield Heights. Almost all have been acquired since July. The biggest single source has been Destiny Ventures (twenty properties), but Econohomes has also bought houses directly from Lasalle Bank, Deutsche Bank, US Bank, Wells Fargo, and ten other subprime lenders.
Here’s one they’ve owned since August 28 at 3271 West 34th Street (purchase price $1,500). Click for a closeup:
May 7th, 2008 at 1:42 pm
Econohomes buys foreclosed properties in bulk and resells them at 300-1000% markups often to the very same people defaulted on mortgages and were thrown out the house they are now rebuying. The loans are typically carrying 10-12% interest. Econohomes then markets the paper (they call the product loans from investors) to affluent retail customers promising 15% annual interest and collateralized by 125% worth of notes written against sold homes. Econohomes swaps out high risk borrowers for low risk “investors” and it costs them only a few percent. Sweet deal for Econohomes. HUGE risk for investors. Econohomes also touts the community benefits of their program, but they are not Mother Theresa, not even close. There is some truth in their claims that they letting people own homes who would never qualify with any other seller or lender, BUT… this is subprime redux, it is subprime squared. If a borrower defaults, the investor has only notes as security. If the investor had to execute against the underlying properties, the chickens would come home to roost. Remember, Econohomes sold the house for 3-10x markup over what Econohomes recently paid for it. Do you really think an investor who forecloses on a note can sell the house for anywhere remotely close to the note value? Cluck cluck cluck. Hope it all works out for buyers and investors but here is my prediction: Econohomes will be successful in offloading the credit risk to investors who will wake up to a nightmare if the borrowers default. Econohomes will be sleeping peacefully. Don’t confuse an investment in Econohome’s remarketed notes with an investment in Econohome itself. Econohome is not going to let you invest in them, only in what they want to get rid of: high risk loans on overvalued distressed properties. Econohomes execs include some seasoned lawyers, so they will do it right. I am sure their papers have all the right risk disclosures etc. Good luck trying to get recourse against Econohomes if you are left holding worthless paper and the keys to a property that had a skyhigh loan to value ratio. Be careful out there!
May 12th, 2008 at 6:51 am
Investor raises some important points, that require clarification. First, do we really sell them at up to 1000% premiums? The key to this question is the true cost basis of the property along with the true costs of reselling it and servicing the note if we provide the financing.
Econohomes true cost basis: Econohomes purchases most of its properties in bulk packages of 5-50 properties. Each package typically has properties spread out across multiple states and usually multiple cities within certain states with concentrations of foreclosures. When Econohomes decides to purchase a bulk package, it does not have the opportunity to select only certain properties in the package. Instead, it is an all or nothing proposition. So, while each property in the package has an assigned price, the realty is that certain “higher quality” properties in the packages likely are subsidizing other very poor quality properties in the package. Some of the “poor quality” properties may in fact have negative value because of contingent liabilities (including the $8K or so we pay to have condemned houses demolished in Cleveland). Moreover, the cost that shows up in the city records does not take into account the fees we pay to get the property, or the back taxes we have to pay when we sell the property. In sum, Econohomes true cost basis is much higher than it appears on the public records.
True cost of reselling and note servicing: reselling houses with owner financing and servicing the resulting property loan is not inexpensive. Econohomes has a substantial staff that sells properties, prepares contracts, underwrites the credit requests, performs deed and property tax research, services the property loans, performs collections work on delinquent accounts and handles all of the accounting.
Investor’s second issue has to do with our financing model. Investor is correct that our investors would have a very hard time reselling properties at or near their note value (unless they were to provide owner finance or find an alternative source of borrowing for the homeowner). This is the reason that Econohomes contractually commits to maintain the 125% collateralization level that Investor cites above. Unlike traditional market securitization, Econohomes promises its investors that if one of our home buyers defaults, Econohomes either will replace the defaulting note or evict the buyer and resell the home on a new note. Our investors effectively have full-recourse against Econohomes. Not quite subprime redux.
Nonetheless, Investor’s point about valuation is important. Here is the dilemma. What happens to a market when the availability of credit either is limited or eliminated? Market values decline because the buyer universe shrinks dramatically. Simple supply and demand. Let’s take an example. Rehab Investor has $20K to buy an investment property he is going to improve and resell. Since he cannot afford to buy in bulk, he has to buy off of MLS and is going to pay $10K for the property after fees and other costs. The house requires at least $15K in improvements and Rehab Investor thinks he can resell it for $45K. This is because the improved property will attracted an FHA approved buyer. Yet, Rehab Investor does not have enough money to buy the property and make the improvements. So, instead, he buys a similar property from Econohomes for $20K with financing. He uses his cash to make improvements and then resells it for $45K. What was the value of the property at the time Econohomes sold it to Rehab Investor?
The same thought process applies to our owner occupiers. Econohomes tries to price its homes at a discount to the estimated market value less the estimated cost of repairs. We do not assume market values are going to go up (another very important difference from subprime). Instead, we assume market values will stabilize or not go down much further. If our buyers invest in improvements to their homes, they can unlock value similar to the Rehab Investor discussed above. Moreover, since our owner finance notes for owner occupiers do not have prepay penalties, our Buyers are free to refinance with a traditional lender as soon as they can qualify.
Major metro areas in the U.S. with high foreclosure rates face a very difficult situation, particularly if they have high concentrations of aging housing stock. The subprime debacle has mortgage lenders, banks and government agencies tightening lending standards by the day. This is understandable, but creates a vicious cycle where there are no buyers for foreclosed properties. Those properties sit on the market dragging down the prices of other surrounding homes which in turn can lead to more foreclosures. So, here are some of the choices we see. First, wait for non-prime lending 2.0. It eventually will come back with more regulation and hopefully a more disciplined approach. Who knows how long it will take (but it will be measure in years rather than months). Second, pray for a government bail-out. Three, demolish huge swaths of homes. Or, our solution which is to responsibly lend money to higher risk buyers who will occupy the homes (or higher risk investors who will improve the homes) and improve them over time. Econhomes cannot solve all of the problems; however, we do believe we are offering a very important element to the overall solution which is responsible first lien financing. We do it on a straight fixed rate note (10-12%) with no hidden fees or penalties. The average note term is less than 15 years. We perform extensive credit underwriting on our owner finance buyers similar to the non-prime auto lending market. In Cleveland, our median owner finance buyer has a 595 credit score and annual income of approximately $36K. At least half of our buyers have owned a home previously.