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The Homesteading solution

June 7, 2011

What would you do if you were TCHC?

Here’s your challenge. You have a mandate to house low-income singles and families. You have houses that you can’t afford to renovate.  If you can’t renovate, you can’t rent them out at full market rates. If the house is habitable, you may still get revenue from a combination of rents and rent subsidies. But those subsidies could be used elsewhere too.

You can sell the houses, of course. But if you sell them now, you’re missing out on future gains as property values rise. And what about that mandate to house low-income families?

Is there a way to have it all?

I’d like to test out an idea I’m calling Homesteading. The inspiration for Homesteading is Canada’s past, when our government sold land for a song to skill-rich but cash-poor immigrants. But it’s also Canada’s future, where young adults like my daughter will spend the foreseeable future in minimum wage jobs. They’ll never be able to buy a downtown house at market rates. But they aren’t afraid of hard work and have creativity to burn.

Here’s how Homesteading might work.

TCHC would select vacant, poorly maintained houses – the houses that feel like a drain rather than an asset.

It would sell these houses for the price of the outstanding mortgage, and take back a second mortgage equivalent to the difference between the mortgage and the appraised value of the property. The deal would come with four conditions:

  • The new owners must occupy the house.
  • They must bring the house up to Code within a specified time – say a year or two, depending on the condition of the house – or before the house is re-sold.
  • Upon the sale of the house, the owner would repay TCHC the entire second mortgage, plus a portion – lets say two-thirds – of the difference between the appraised value at purchase and the actual sale price.
  • TCHC would also be given the first right of refusal on the property. If it chose to buy it back, it would pay the owner for one-third the difference between the current appraised value and the value at the time TCHC originally sold the house.

What does TCHC (and the taxpayer) get?

TCHC unloads all its operating and capital costs on the new owners, and all the work and expense of the renovations. Rent subsidies are freed up to subsidize other properties.

When the house is sold, TCHC also gets to retrieve its asset: everything it would have got if it had sold the property on the market the first time round, plus a cut of the increased property value.  TCHC can take the cash and reinvest it in other properties. Or it can buy back a now-renovated, mortgage-free property and rent it at market or subsidized rates.

What do the owners get?  A house with a tiny mortgage – probably no more than $40,000 – to live in as long as they want. They can use their own labour, or the labour of friends and family, to simply bring the house to Code.  Or they can splash out with more elaborate renovations for maximum re-sale value. And when they sell, they get a modest return on their labours.

What do the neighbours get?  A house occupied by people who are required to bring it up to Code, and have a financial interest in increasing its value.

Will it work?

Colleagues in the housing biz will have recognized the deft hand of  my husband Paul Connelly as soon as they read the words ”second mortgages.”  Paul is a board member of Options for Homes, the non-profit organization that has made affordable home ownership available to over 2,000 Toronto families – some with incomes as low as $40,000 per year. He also worked with TCHC and SEDI (Social and Enterprise Development Innovations) on a plan to bring affordable home ownership to Regent Park.

Paul doesn’t have access to TCHC data. But I asked him to draw up a Homesteading scenario using “best guess” figures. Paul’s guess suggests this approach could make home ownership affordable to a family earning $33,000/year. We won’t know the real facts until TCHC plugs in its own data. But we do know the types of data TCHC needs to test whether Homesteading might really work.

Well, what do you think?

Is the Homesteading concept a winner or a stinker? What do you see as the pros and cons? Do you see ways to improve the idea? Or does it inspire an entirely new idea of your own?

The comment box awaits!

Next week:  “When public housing was paradise,” inspired by the Saturday Globe article, Residents of Toronto’s public housing four times more likely to be murder victims

11 Comments leave one →
  1. Brian Eng permalink
    June 7, 2011 3:39 pm

    This certainly is an interesting concept and one that merits further attention and study. There are a couple of areas that need to be examined further to determine their impact on both TCHC and the potential buyer.

    There will need to be a level of support and bureaucracy built in in order to make it work effectively. There needs to be a system in place to determine and maintain a list of eligible buyers in order to make sure that the program is genuinely benefitting those people would not otherwise be able to purchase in the existing market. This might be something that Social Housing Connections could undertake without too much strain on its existing systems.

    Some additional resources (or, a diversion of resources) in the inspection department will be necessary in order to make sure that new home owners are meeting their obligations to bring the properties up to code.

    A system will have to be put into place to determine the value of upgrades at the time of resale.

    As well, the experience of Inclusionary Housing programs in the US has shown that they are most effective when low income home buyers have substantial training and support in this lifestyle choice. As well, no matter what level of “sweat equity” is put into the upgrades, their is financial burden for the cost of materials and some level of professional help. In my view, a good model is a partnership with a progressive lending institution that could provide the mortgage financing, low interest loans for upgrades and education and counselling.

    This is well thought out idea. Congratulations.

  2. Paul Connelly permalink
    June 7, 2011 5:42 pm

    I understand and agree with Brian’s concern that there be fairness of allocation. But I’d hate to see this experiment strangled at the outset by over-bureaucratization. For example, I don’t think there’s a need to determine the value of the upgrades. All you need to know is the difference between the market value when the first homesteader takes over the house and the value when the homesteader wants to sell. That difference would be the basis for each party’s return on investment. You don’t need to calculate the value of the upgrades as a sub-component of the overall change in market value.

    On the other hand, I like Brian’s take on the advisability of having a third party provide support. As Joy mentioned, SEDI – Social and Enterprise Development Innovations, has some experience in this field. Maybe a joint initiative with them and a local credit union would be productive.

  3. Nick Falvo permalink
    June 7, 2011 8:22 pm

    I’ve got a couple of questions about this…

    1. The proposal suggests that the new owner could obtain the house with a $40,000 mortgage. Wouldn’t the land alone be worth well over $100,000? If yes, are you suggesting that the new owner be heavily subsidized to the tune of $100,000 per unit?

    2. About five years ago, Michael Mendelson wrote a paper in which he argued that, from strictly a financial perspective, it’s ill-advised to subsidize home ownership for low-income households. His rationale stems largely from the fact that, when the market spikes downward, low-income households are very vulnerable (far more so than moderate- and high-income households); indeed, virtually all of their savings would be sunk into the home as equity. His paper can be accessed here: How would you reconcile the merits of your proposal with Mendelson’s argument?

  4. Paul Connelly permalink
    June 7, 2011 10:51 pm

    Regarding Nick’s points:

    1. In the example we’re using, the house is worth $400,000 today. The outstanding mortgage balance is only $40,000 because the house was bought 35 years ago for a price that now seems minuscule (in the neighbourhood of $55,000).

    In a way, there is a subsidy. TCHC could sell the house tomorrow for $400,000 (that’s the meaning of the term market value), pay off the mortgage principal and apply the $360,000 difference to the upkeep of other properties. But the decision to sell to the homesteader means TCHC defers receipt of the $360,000, so you could say the opportunity cost of that money is a subsidy to the homesteader.

    But there is no cash subsidy to the homesteader in the example. The house is worth $400,000 but the homesteader only has to finance a purchase of $40,000 of that price up front so that TCHC can pay off its existing mortgage. That’s the only money that needs to flow up front. In effect, TCHC would be hold a vendor-take-back mortgage (equal to the difference between the $40,000 needed to discharge the existing mortgage and the market value) on which the homesteader had to make no monthly payments.

    2. This leads us to the second point. Michael Mendelson, it’s true, doesn’t like homeownership programs for low-income families in general. But his argument against them, which Nick mentions, namely the highly leveraged nature of the investment makes the household vulnerable in a downturn, does not apply in this case. (It also doesn’t apply in one of the examples that Mr. Mendelson uses – the Options for Homes one – which is the closest to the one we’re looking at.) Rather, because it is a subsidy through delaying receipt of all the money available by not requiring the purchaser to pay the full value up front, it works out pretty well for the purchaser, as Mendelson points out (see pages 22 and 23 of his report).

    One way to avoid the negative-leveraging problem is to have the second mortgage also be liable for its share of the depreciation of the value. Mendelson’s opening example says that if a purchaser puts 5% of the value down and borrows the rest, if the property goes down 1%, the the purchaser has lost 20% the original investment. But if we have a second mortgage of 90% of the price and an agreement to take 90% of any dip in the market, then the risk to the purchaser goes down.

    Another approach would be to set the original sale price at less than market value (for example, if the market value is $400,000 then set the sale price at $375,000 or some other number). This would build in a “cushion” for a loss of $25,000 before anyone takes a hit through the value dropping below the price. But this seems unnecessarily complicated. There may be other approaches too, but for each one TCHC would have to weigh the costs (I don’t mean cash up front) and benefits of setting up a more complicated system.

    The main thing about the example is that it allows TCHC to get a household into ownership with no additional cash outlay by the company. In fact, it’s cash outlay goes down (no mortgage payments, no maintenance, tax or utility costs) and, while it does not pocket a pile of cash up front, it does have the opportunity of reaping a (shared) benefit when the house is re-sold in future.

  5. Yvette permalink
    June 14, 2011 10:10 am

    I could see this working versus wealthy people buying valuable properties to only make themselves richer with no benefit to those in need of housing support. This whole TCHC fiasco is draining me.

    To find out this week about the more then 100 units sitting empty downtown because according to some – no one wants to live in shared accomadation (4 bedrooms sharing living quarters). Really!! They are not even considering the many large new immigrant families in our shelters or moms fleeing domestic violcence with a number of children who would be grateful for that accomadation. How about 2 young moms with babies sharing the 4 bedroom units, How about college/university students renting them for the school terms? The city could have approached any one of the many housing networks working so damn hard to resolve issues of homelessness in Toronto and we would have that place full and making a profit perhaps also.

  6. October 30, 2011 8:32 am

    I feel so grateful and hopeful as I read the creative thinking going on in this blog. I hope Rob & Doug ford can take the time to read it & join the conversation. And I also hope the main media, like Matt Galloway’s morning program on the C.B. C. would pick it up as often as possible. We need to get the whole city community thinking like this. I learned about this conversation because the minister of our church posted the link in our weekly update sheet. More communities of faith should/could help educate their members in practical issues like this…I really like Joy Connelly tying this whole idea back to Canada’s early history:
    “I’d like to test out an idea I’m calling Homesteading. The inspiration for Homesteading is Canada’s past, when our government sold land for a song to skill-rich but cash-poor immigrants. But it’s also Canada’s future, where young adults like my daughter will spend the foreseeable future in minimum wage jobs. They’ll never be able to buy a downtown house at market rates. But they aren’t afraid of hard work and have creativity to burn. “

  7. sherri permalink
    February 25, 2012 8:01 pm

    How many people in these homes, earn 33,000/yr? ,,,,, its a concept that could work, but would need much modification, I reside in one of these houses, my working income /yr is approx 20,000,,,,, I and many many many many others would not qualify for this approach! Though my house was bought by the ontario government for 30,000 in the 70’s and is now worth 270,000, its structure is in great condition as I work with a home inspector and a realitor, it jus has low quality products inside! Would I like the chance to purchase the home yes, but I also think of those that won’t have the chance as they are on welfare, or the people on the wait list 80,000 strong, selling these homes would not help them, I came from a TCHC complex that had bedbugs, cockroaches, holes in the walls, ect ect, but to this home and am greatful for it, I think selling the units at all is a wrong direction, there is less crime on these properties, there is less infestations on these properties, there isn’t any cost to TCHC for lawn care, snow removal, the landscapers are the tenants, there is minimal cost to TCHC for minor repairs as tenants do most of them, also there isn’t a maintenace crew that cleans these units, the tenants do, but in the buildings, there is a need and extra cost of these things that scatter tenants do for themselves! TCHC should be looking towards scattered units a solution and not as a problem, the mass sell off of these units is a easy onetime solution! And next time 10 to 20yrs from now their in debt again, they’ll be selling buildings?,,,, homesteading is a option, but really how many tenants are going to qualify for that?

    • sherri permalink
      February 25, 2012 8:23 pm

      To add another note, on the street that my home is on, in the early 70’s the Ontario Government bought the land which was Ivanko’s farm, they got a low cost contract with a builder and they built homes, the Ontario Government then sold most of the homes under Home Ownership. Made Easy, H.O.M.E, a two part mortgage kinda like habitat, which I believe is another option, but again, its not a one way fix, many hands up not out have to take part in this issue!


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