It’s clear from my work on our DBNR project - buying and reselling distressed properties - that the recent meltdown has changed the rules of real estate considerably. If nothing else, the people we’re encountering and the work we’re doing across the country differ greatly from what I’m accustomed to here in the Bay Area. Further, I’m finding that our project requires a different kind of due diligence - one that incorporates judging both qualitative and quantitative qualifications.
Take, for example, our property in St. Louis, Missouri. Generally, before any kind of a housing transaction, you request a credit report to see what someone’s payment and credit history has been. We had five prospects, four of whom supplied four credit reports. In the Bay Area, a credit score of less than 620 is cause for alarm. The highest score of the four in St. Louis was 524, and the lowest was 390; frankly, I didn’t know credit scores went that low.
You want to be convinced that someone can make their payments on time. The report should show whether there are late payments, and if so, with what frequency? Mostly, we want to see if there were any evictions, which would indicate they’d stopped making rent or mortgage payments.
With this group, though, we had to dig a little deeper and see if there were mitigating circumstances. I learned a lot by asking such questions. For instance, one woman had a foreclosure on her record, but it was because she had helped her sister buy a house, and it was her sister that hadn’t made the payments. Another prospect had declared bankruptcy, but was quite upfront that he’d done it to protect his assets from his ex-wife. In other situations, there have been medical debts that remain outstanding.
You might be surprised to know which prospect we finally chose - the one with no credit score. He had a good explanation - he had always worked for cash. While he had no credit score, he not only had documented income, but he was able to document that he’d owned other properties. We negotiated a $38,000 purchase price, with $500 down and $600 per month.
We also came up with what I think is a highly creative way to ensure his passion about his property. If he makes his payments on time for a year, and documents the repairs he’s going to make, we’ll reduce the balance by $5,000. That gives him a purchase price of $33,000, for a property he believes may be worth as much as $50,000 once it’s fixed up.
This is someone who’s passionate about owning a house. Given the number of people who have chosen to walk away from their homes in this crisis, perhaps this is the way the mortgage industry should have been qualifying homeowners all along.