Fred A. Bernstein

The Town the Boom Forgot

Tired of high real estate prices? Consider the alternative

Published in The New York Times, June 25, 2006

Canton, Ohio

TIRED of high real estate prices? Consider the alternative.

"I got that one for six," said Jack Lewis, a real estate investor, pointing to a trim Victorian with steep gables and a front porch.

He means $6,000.

"Around the corner, there's another one I got for three."

In the last decade, while houses in much of the country have appreciated at dizzying rates, Canton's prices have gone the other way; the median price in the metro area dropped 11.3 percent from 2004 to 2005, according to the National Association of Realtors. Houses under $20,000 are common, and even at those prices, they don't always find buyers.

The explanation is as simple as supply and demand - one stable, the other not. Canton had 110,000 residents in 1950. Now the population stands at about 80,000, according to the mayor, Janet Weir Creighton. Factories have closed, and few new jobs have come along.

With workers leaving the city, at least 2,000 houses - mostly Victorians from the boom years of the early 20th century - stand empty. And that makes it hard for sellers to find buyers.

It's even hard to find a broker. "It costs you money to sell a home that cheap," said Dennis Drennan, a local ReMax broker, who explained that the commission on a $20,000 house may not cover marketing expenses.

In many neighborhoods, "it's practically impossible to retail a house," said Mr. Lewis, referring to what in any other part of the country would be considered an ordinary real estate transaction, a purchase by someone who plans to use the house as a home. Instead, many houses sell not to owner-occupants, but to investors looking to flip the properties, or turn them into rentals. "You become a reluctant landlord," he said.

Even obtaining a reliable appraisal of a house is difficult, Mr. Lewis said, because there are so few "comparables" - arm's-length sales of similar houses. In some sections of Canton, most transactions involve a repossession, a sheriff's sale or a purchase by a professional real estate investor, Mr. Lewis and others said.

Not surprisingly, Canton homeowners are troubled.

"Does it make me feel good that you can buy any house in the neighborhood for $80,000?" asked Tom Hammond, a senior business analyst for Diebold, a manufacturer of A.T.M.'s and voting machines, who lives in a pleasant section of northwest Canton. "Of course not.

"If I had been acting in my financial self-interest, I would have left Canton long ago," said Mr. Hammond, who then listed many things he likes about the city, including an accessible downtown and lovely parks.

Mr. Hammond decided to become part of the solution. He and his wife, Karen, have bought three houses close to their own house to shore up the neighborhood. One house down the block, he said, stood vacant for 10 years. When it finally came on the market, he said, "it was in horrendous condition," with vines growing through the ceilings.

Mr. Hammond paid $24,000 for the house and is putting another $20,000 into bringing it up to code (working on weekends with his son and son-in-law). He hopes to sell it for around $70,000, but there are no guarantees. "We won't gain much, after taxes," he said.

At the same time, Mr. Hammond is pushing the city to limit the number of houses that are rented out. Right now, about 40 percent of the houses in the city are rental units, compared with about 27 percent in the rest of surrounding Stark County. Many of the renters are transients who don't have much incentive to maintain the properties, Mr. Hammond said.

If the number of rental units is curtailed, he predicted, rents will go up, and sale prices will follow.

His ally in the fight is Donald Cirelli, a dispatcher for the city's Water Department. At a recent City Council meeting, the two men pressed the members to stop issuing the permits that owners need before they can rent out their houses. The council has not acted on the measure.

The mayor said her priorities include attracting jobs to Canton and rebuilding the city's schools, a process that is visibly under way. At the same time, since taking office she has pushed to have more abandoned houses demolished. "We're tired of the dilapidated houses that are sitting there; we need to get them down," she said.

But Mike Rukavina, a real estate investor who was born and raised in Canton, prefers renovation to demolition. The lots that result from teardowns, he said, are often too narrow to build on, under current codes. "That means you end up with a weed-strewn lot, which the city doesn't have the resources to maintain," said Mr. Rukavina, a former marine and police officer. "And since you can't build another house, it's a net loss of people to the city."

Mr. Rukavina, who operates out of an office in Canton's northeast section, said that he used to buy about two dozen houses in the city each year, but that he had moved most of his investing to the suburbs, where demand is stronger.

Some investors have found ways to thrive in the depressed market.

Keith Michael, who is 37, said he had completed deals on about 130 houses in Canton in the last six years. Sometimes, he renovates houses and rents them out; other times, he simply flips the properties without so much as taking title.

On Greenfield Avenue, in the city's southwest section, Mr. Michael and his partner, Michael McClain, were busy renovating an old Victorian, a job that included replacing an antiquated electrical system. Many rooms lacked a single outlet.

Mr. Michael and Mr. McClain expect to rent out the house while giving the tenant the option to buy.

Mr. Michael said that the rent-to-buy agreements, which are common in Canton, require the tenant to maintain the property. That, he said, eliminates many of the headaches of being a landlord. "We deliver the houses up to code, and then it's up to them," he said. "But if it's a really big thing, like a roof, we may step in."

Rent-to-buy tenants are optimists by nature. Dan Brislen rents a house on Greenfield Avenue for $550 a month, with an option to buy it for $72,500. He was about to buy the house last year when he lost his job as a forklift operator.

If Mr. Brislen finds another job, he said, he hopes to buy the house before his option expires in 2007.

Mr. Michael, meanwhile, conceded that he had never had a single tenant exercise the option. "In Canton," he said, "99 percent of them aren't able to cash out."

Mr. Lewis, the investor, said, "The financial habits that get renters into trouble in the first place tend to get them into trouble again."

In 2003, Mr. Lewis became a franchisee of HomeVestors, a national company that specializes in buying houses from people who need to sell quickly. Between April and July of that year, he signed contracts to buy nine houses in Canton; his goal was to fix them up and sell them for a profit.

It didn't work out that way. Mr. Lewis complains that the company failed to offer him proper advice, rubber-stamping his decisions to buy houses that, in fact, were overpriced.

"In this market, if you're not properly supported, you run out of money before you can figure out what to do," Mr. Lewis said.

John P. Hayes, the chief executive of HomeVestors, disputed Mr. Lewis's charges. "There are plenty of franchisees in Ohio who don't share his opinion," he said.

No longer a franchisee, Mr. Lewis said, he buys houses and either rents them out or sells his interests to investors.

The purchaser may simply flip the house again. That's what happened with the house that he contracted to buy for $6,000. Mr. Lewis said he sold his contract to Mr. Michael for $9,000; Mr. Michael said he sold his contract to another investor for $12,000. Both said they don't know what happened after that.

But the house still has plywood over the windows, and one thing is clear: neither the house, nor Canton, benefited from the serial transactions. "I don't get attached to bricks and mortar," Mr. Lewis said. "I made my $3,000."

Mr. Michael did, too, and has moved on to other properties, including one as far away as Florida, where he hopes to apply lessons he learned in Canton.

"You know that saying about New York?" Mr. Michael said. "Well, in real estate, it's Canton. If you can make it here, you can make it anywhere."