Speculators snapped up converted units at Cityscape in Normal Heights, but now most dwellings are bank-owned or in default
The housing bust has spawned thousands of tales of staggering declines in home values in San Diego's foreclosure-ravaged neighborhoods. But few local projects have suffered as much carnage as the Normal Hights condo conversion Cityscape.
Units started selling in late 2006 and early 2007, one-bedrooms for $237,000 and two-bedrooms for $345,000. Today, of the 70 condos in the flat-roofed, nearly 40-year-old complex, 66 have been taken back by lenders or are in default, the first step of the foreclosure process.
One-bedrooms are reselling for an average of $66,900 and two-bedrooms for $94,200 – down more than 70 percent from the original prices.
That's more than double the 31 percent drop in San Diego home values overall since early 2007.
What happened at Cityscape is unusual in San Diego, but it offers a glimpse of the most extreme excesses that occurred during the final spasms of the housing boom.
All the original buyers in Cityscape were speculators, not residents. That was uncommon for a complex of its size, real estate experts said. And it wasn't supposed to be possible, since lenders frown on making loans to condo buyers if a majority of units are not owner-occupied.
Banks fear speculators will abandon condos quickly in bad times or balk at paying for needed improvements – straining homeowners associations and hurting values.
But speculators at Cityscape had no problem getting mortgages in the lax lending environment of the housing boom. Several buyers purchased multiple units and often got zero-down-payment financing for at least some of them, according to deed records.
Speculators were far from unique to Cityscape. They bought clusters of condos in other large projects locally, often with results nearly as dire for property values.
Another example is Artesia, a 178-unit condo conversion in El Cajon, where a group of speculators bought 29 of the about 60 total units that sold before developers reverted the complex back to apartments last year.
Today, at least 27 of them are in foreclosure or default. The units are reselling at prices 62 percent lower than what speculators paid in early 2007.
But speculators usually did not buy the entire complex.Buying high
With Cityscape, some real estate experts were surprised that the units fetched such high prices in early 2007, when the housing frenzy had lost steam.
“It's a pretty low-quality conversion,” said Todd Lackner, a San Diego appraiser who has examined sales at Cityscape. “On the inside, very little was done. But these were selling at significantly higher prices than nicer properties at the same time.”
Lackner said a two-bedroom, two-bath condo on Monroe Avenue about a block away from Cityscape in Normal Heights sold in early 2007 for $231,000 – when two-bedroom units in Cityscape were going for $345,000.
Despite the avalanche of foreclosures, Cityscape is actually a hot property these days among investors looking for deals.
There have been more than 30 sales in the complex since April – mostly of bank-owned condos. Narinder Makkar, an investor who has purchased four foreclosures in Cityscape, said every time he makes an offer on a unit, there are multiple bids from rivals.
Makkar is upgrading the interior of his units to rent them, including putting in new flooring and paint. Other new owners have worked to fix a persistent water leak, trim overgrown plants and make other repairs.
But there are lingering problems – including a homeowners association that's about $40,000 behind on payments to vendors and faces threatened litigation.
For that reason, lenders are reluctant to provide financing for purchases, new owners said. So the new buyers are mostly paying cash.
“It's a nice complex,” Makkar said. “The previous owner did a nice job with the outside. But the interior renovations were not done.”Ghost town
From the street, the most noticeable thing about Cityscape is the signs.
The complex is plastered with real estate agent signs and for-rent signs. A string of real estate agent lockboxes hangs on a gate. One tenant has posted a sign on his door: “Real estate agents. You have no business here. People live here. Do not disturb.”
Villa Andorra Ventures, a limited partnership, converted the apartments to condos. Deed records list James Warren as the general partner, but efforts to reach him were unsuccessful. The duplex in Linda Vista that was listed as the corporate address for Villa Andorra Ventures is now bank-owned.
About 20 speculators were the original buyers in Cityscape, according to deed records. They came from across the country, and most bought multiple units. Deed records show buyers' addresses in Texas, New York, West Virginia and Utah. Several also came from Southern California.
Efforts to reach the speculators were largely unsuccessful. Donald Hamilton of Los Angeles, who has not defaulted on the two Cityscape units that he purchased for $345,000 each said, “I personally am crossing my fingers.”
Kendrick Green of Inglewood, who lost five two-bedroom units to foreclosure, said he was given false information by the loan officers selling the condos, though Green could not recall their names or the name of the company.
Green said Cityscape was sold to speculators as already-rented units, with the monthly rent “pretty much” covering the mortgage. He said he saw rental agreements.
“I was like, fine,” Green said. “They're covering the mortgage. That's fine.”
The monthly mortgage payments on his units ranged from $1,600 to $2,000 a month, he said. But once the sales closed, Green said he learned his tenants were paying substantially less in rent. Two elderly roommates in one of his units, for example, were paying about $300 a month.
“They were there since the '80s, and their rent never went up,” he said. “I went to them and said, 'Hey, I need more than $300 a month from you guys.' They said they couldn't pay any more.”
Green said he did not report the allegedly bogus rental agreements to authorities. He made about $60,000 in down payments to buy the units, according to deed records.
Attempting to save the units from foreclosure drained his savings, Green said, and he is worried about the future. “My goodness. So much money. I spent all my money pretty much. Every last dime.”
As foreclosures surged in Cityscape, the complex began to suffer. A homeless person was sleeping in the laundry room, said Ray Dill, a tenant for the past two years. Locks on the front gate were broken, so neighborhood kids streamed in during hot summer days to use the pool. The homeowners association wasn't paying bills, and tenants worried that the water would be shut off.
But most of all, Dill remembers that the complex seemed empty. “It was like a ghost town,” he said.Artesia's story
In El Cajon, a similar story of speculation played out at Artesia, a conversion near the city's gritty downtown.
Artesia stands out as being nice for its neighborhood. It has newer exterior paint. The landscaping and pool are well-kept. Condos have air conditioning, and the community is gated. Units have granite countertops, recessed lighting and new flooring.
But the project, which began selling condos in late 2005, started losing momentum in mid-2006 as the housing market slowed.
Then came the speculators in early 2007, most of whom bought several units each.
They paid $309,000 for two-bedroom units and $261,000 for one-bedroom units, according to county deed records. All but two of the units were purchased with zero-down financing, records show.
Those prices were high. For example, two similar one-bedroom units in Artesia were selling at the same time for $205,000 to $210,000 to owners who occupied the units, according to deed records.
“The unusual part of that is they were buying at significantly higher prices than the other sales in that project at the time,” said Lackner, the appraiser.
Today, almost all of those speculator condos have gone back to the bank. Efforts to reach the buyers were unsuccessful.
As Artesia sales sagged, the developers took a different tack. They formed a new company, El Cajon Holdings, and reverted the remainder of the units to rentals until the market improves.
Randy Hansen is managing member of the El Cajon Holdings, the Las Vegas-based limited liability company that now owns the complex.
Hansen said he thinks the speculator group – which initially wanted to buy twice as many units – sought to flip the condos fast but got caught in a bad market. A third-party real estate firm was handling sales at Artesia at the time.
“We were not focused on the buyers,” Hansen said. “They were crazy California investors who figured the sun would come up even brighter tomorrow.”
Hansen said there were no shenanigans, such as kickbacks to speculators, on the part of the developers. He said everything was legally disclosed on HUD 1 forms – a nonpublic document that outlines commissions and other payouts from loan proceeds.
Hansen said the chief effect of the foreclosures on the complex is delinquent homeowners association fees. He said that the HOA has done a good job of collecting the fees once the units resell and that the association is financially sound.
But the resale prices aren't good news for current owners. Two-bedroom units that sold to the speculators at $309,000 are now averaging $115,000.
One-bedrooms that went for $261,000 to the speculators are now selling for about $85,000.
Hansen doesn't think selling to speculators “had a bit to do with” the steep value declines at Artesia.
“Anybody who bought in 2005 or 2006 ... got toasted,” he said. “If anything, what we've done has propped up values. Like I say to the homeowners, I can fire-sale this and take the loss or I can ride this out just like you.”Finding good deals
Mike Stanhope of Temecula learned about Cityscape from his son-in-law, a lawyer and real estate agent who saw a listing in the complex last spring for a $75,000 condo.
It sparked Stanhope's curiosity. He came to look at what $75,000 would buy in pricey San Diego.
Since then, Stanhope and a partner have purchased 17 foreclosure units in Cityscape. His brother, Frank, moved into one of the units. Tenants now refer to Frank as the de facto manager of the complex.
Stanhope has tried to clean up the mess at Cityscape through the homeowners association. Landscaping and the pool have been upgraded. The gate has been fixed. The laundry room is no longer a homeless shelter. A troubling water leak appears to have been found and repaired.
Stanhope believes the project will be a good investment in three to five years. But for now, prices keep dropping. Recent sales in Cityscape have been at lower prices than those six months ago.
The homeowners association remains in debt. Association dues are listed at a steep $240 a month for some of the current units up for sale.
“We're still not out of the woods with the homeowners association,” Stanhope said. “In my opinion, as the project gets healthier and healthier, it should improve. But it's going to take time.”