Tough times for landlords: Report finds two-, three-family homes have twice the propensity to face foreclosure

Apr 13, 2008 (The Sun - McClatchy-Tribune Information Services via COMTEX) -- -- While being a landlord has never been easy, a recent report from The Warren Group suggests that it has been a whole lot tougher of late.

The Boston-based real estate and banking information company recently reported that 23 percent of all petitions to foreclose made in Massachusetts during February involved two- and three-family homes -- despite the fact that such properties comprise just 11 percent of all the state's housing stock.

Also in February, there were 1.8 petitions to foreclose for every one sale of that property type. For all properties, the ratio was almost the reverse -- 1.5 sales for every one petition to foreclose.

Dick Macdonald, president of the Greater Lowell Landlords Association, a regional landlord advocacy group, said the biggest reason investment property owners fail is insufficient funding.

"You have to be able to handle a vacancy," said Macdonald, who said he knows of "a few" people who have lost property to foreclosure. "This is a tough business, and right now there is a shortage of tenants. A lot of good ones bought condos" in recent tears.

Other theories on the tenant shortage include Massachusetts' stagnant population, including studies showing that younger people -- those more likely to be renters -- are leaving the state. In a specific case, Macdonald also said the conclusion of Boston's Big Dig construction project a couple years ago hurt several area landlords, as thousands of temporary construction workers

"went home" to other New England states.

Timothy Warren Jr., CEO of The Warren Group, suggested that another reason for the higher propensity of multifamily properties to face foreclosure is that many are owned by people who don't actually live there themselves.

"For them it's a business, and at some point they decide it's not working out," Warren said. "There have always been people who get interested in that road to riches -- that's not anything new."

Others say that even for those who do live on the premises, many bought at high prices two to five years ago -- sometimes with adjustable-rate mortgages that are now resetting to higher rates -- and are thus more dependent on steady rental income to help pay for bigger mortgages.

"It magnifies the problem. It's one thing to have a $1,000 or $2,000 a month payment for a single-family home. In the case of a multifamily, it can mean coming up with $4,000 a month," said Jeremy Shapiro, co-founder of ForeclosuresMass.com, a Framingham company that tracks foreclosures.

"If a tenant loses a job, skips a payment or just moves out, it precipitates a problem," added Richard Howe Jr., register of deeds at the Middlesex North Registry of Deeds in Lowell.

The Warren Group reported that there were 2,835 petitions to foreclose among all property types in Massachusetts during February, 27 percent higher than the 2,232 recorded in February 2007. Six hundred and thirty-five of this February's petitions involved two- or three-family properties.

A petition to foreclose is the first step in the foreclosure process, and doesn't always result in actual foreclosure. Some property owners are able to sell or refinance before foreclosure occurs.

But that's become increasingly difficult for multifamily owners, as sales and property values have plunged. The Northeast Association of Realtors, a regional Realtor group that tracks statistics for 15 communities near Greater Lowell, found that just 360 multifamily homes were sold in the region during 2007. That's easily the worst total in the last 10 years, and down 63 percent from the high-water mark of 976 sold in 2004.

Furthermore, the median price of a multifamily (which the Realtor group defines as either a two- three- or four-family home) last year was $270,000, down 19.4 percent from the year before. Perhaps more telling is that it's even less than the 2003 median of $288,500.

"They (multifamily properties) tend to be closer to the inner cities, and are in neighborhoods most quickly affected by declining prices," said Howe.

The declining prices have some saying that now is a good time for well-capitalized investors to pounce.

"I try to stress that. It may not have hit bottom, but if you wait you might lose out," Macdonald said. "But you have to have enough money to hang in there."

That's because contrary to popular belief, tenants aren't coming back in droves. Macdonald said the theory that the state's higher foreclosure rate in recent years would result in marginal homeowners becoming renters again doesn't seem to have panned out.

"I'd like to think so, but I haven't really seen it," he said, reiterating his point that the tenant population appears to have remained stagnant. "The past four years have been a tough market for finding tenants."

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