Bay Area real estate investors get dose of Merced reality

By YVONNE HOLT
columns@modbee.com

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The duplex across the street went into foreclosure Monday. I met the owner when she bought the building -- a nice woman looking to invest in Merced with the hopes of providing a place for her son to live as he attended Merced College and then transferred to the University of California at Merced. But the transfer fell through and her son moved out.

She's been renting both units to two reliable renters ever since, but many problems have compounded to force this foreclosure.

First, she bought the building when the market was at its peak. She paid, I believe, around $390,000 for a duplex in a low-income, high-crime neighborhood. A common friend tried to tell her that she was paying too much, but she was sure that property values would only increase with the growth of UC Merced.

My friend and I did the math. The mortgage payment alone would have been more than $3,500 a month. To meet the mortgage, she would have to charge more than $1,500 a month rent. But in this low-income neighborhood, my friend and I knew she could never get such high rents. Average rents for the block had already increased by a few hundred dollars, but had settled at around $900 a month -- and many residents were feeling the pinch as salaries have not increased along with the rents.

The owner had a problem with her first tenants, who paid the first month and deposit and did not pay another dime until they were evicted three months later. She moved in her son and another tenant, who were good at paying rent -- so long as it was $900 a month. But she had to take a second job to make up the difference in the mortgage payment. Then she took a well-deserved but ill-advised vacation that caused her to miss a mortgage payment. Now the duplex is being auctioned off.

Her story is common to many investors in my neighborhood. A swarm of Bay Area people bought duplexes and apartment buildings in anticipation of the new UC Merced growing, and promptly raised rents to meet their mortgage payments. Unfortunately, they didn't factor in the reality that salaries and wages here in Merced are among the lowest in the region.

The apartments down the street are an illustration of poor planning on the part of real estate investors. The minute the owner raised the rents, low-income tenants started moving out, and the building has not been at full occupancy in five years. The owner of the building next door has the same problem -- neither can attract higher-income tenants to the neighborhood due to the unfortunate existence of gang activity. That building has been empty for months and the owner is trying to sell it for the same price he paid. With banks tightening up lending rules, it will be even harder for buyers to get financing; this unit could end up in foreclosure, too.

One unfortunate result of all that investment during the peak market is that it keeps rents high. The owners can't lower rents as they try to make high mortgage payments. Renters can't afford them because their incomes are fixed. So the apartments and rentals will remain empty.

Holt is a wife, mother and student at Merced College. E-mail her at columns@modbee.com.