So let’s recap what we have so far:

On June 25th, 2008, the Saint Paul City Council passed ordinance 07-1194 4 (“Green Sheet” number 3046791). You can read it for yourself – but in essence, it amends the city’s legislative code to say the following (I’m summarizing below):

To sell a vacant (or “dangerous” or “nuisance”) house, you need a Certificate of Occupancy.

To get a Certificate of Occupancy, you need to…:

1. Pay all vacant building fees (Category I properties – the ones in the best shape. There are about 300 Cat I properties among the 2,000 vacant houses in Saint Paul).
2. Get A Truth In Housing Report (again, for Cat I houses)
3. Post a Performance Bond or Escrow amount to cover the estimated amount of repairs to bring the structure up to code (all categories).

Now, let’s posit a hypothetical; say you’re a bank. You’ve had to foreclose on a ton of properties, because your CEO’s dimbulb nutslap of a nephew went to a bunch of sleazy brokers and bought a ton of Adjustable Rate Mortgages (ARMs) that were going to adjust to eleventy-billion percent, and went and spent it all on jet-skis and tipping waitresses at Hooters. Naturally, when the ARMs adjusted the owners defaulted; as housing values sagged, the owners came up “upside down”; they owed you more than the house could sell for.

So you foreclosed on ’em. Business is business, right?

Ordinarily, you’d wait out the market and sell the place when you could get a good enough price to make it worth selling. In the meantime, you are the owner; you and your bank are responsible for the property taxes and – to keep it saleable and keep the city’s code enforcement people off your back – enough maintenance to keep it ready for some approach to the market.

You grab a file at random from the pile of “foreclosure” files on your desk. You open it up. It’s a house on the North End of Saint Paul.

Eventually – I don’t think this is irrationally exuberant – the market’ll rebound. Right?

You have to hope so – because until then, the house that your bank is into for, say, $200,000 (plus fees and whatever maintenance it takes), would fetch $175,000, as is, if you tried to sell it today (and could find a buyer). Maybe less, since there are more and more foreclosures popping up in the neighborhood.

But the City has just passed a law saying:

To sell the property to anyone, you need a Certificate of Occupancy.

To get a Certificate of Occupancy, you need to…:

1. Pay all outstanding fees.
2. Get A Truth In Housing Report
3. Pony up whatever it takes to bring the structure up to code. And by “to code”, we mean “the current code, not the code when the building was built. For the sake of this hypothetical, let’s say the house was built when a lot of the houses in the St. Paul neighborhoods worst-affected by the foreclosure epidemic were built – say, 1920.

“Hm”, sez you, the banker and accidental owner of the property. “We have to pony up a bond, and get all the work done, to current codes, before we can even try to sell this house”.

“What would that mean?”

So you get an inspection. And you get the following letter back from the City (with marginal notes in blue:

(The letter below is an actual letter, to the owner of an actual vacant property, forwarded to me by a contact in Ramsey County’s government who wishes to remain anonymous. It is by no means atypical of a punch list for repairs to an older house – in this case, a 90-something-year-old home on the North End, not far off Rice Street, an area heavily beset by the foreclosure epidemic. I’ve redacted personal information and the address. I can scan and post the original, if needed)

[NAME REDACTED]
STATE OF MN TRUST [Department Redacted]
50 KELLOGG BOULEVARD WEST SUITE [redacted]
SAINT PAUL, MN 55102-1657

Re: [Your property’s address]

File#: 04 215708 VB2

Dear Property Owner

Pursuant to your request the above-reference property was inspected and the following report is submitted:

BUILDING

1. Replace or sister all damaged floorjoist on first and second floor per Code with proper supports and hangers.
2. Remove all exterior wall covering and insulate and frame to Code.
3. Replace first floor and basement stairs to Code. (Catch this? You need to remove all the siding and not only insulate, but make sure the framing complies with current standards – which means massive, expensive structural rework).
4. Install rear, exterior stairs and landing to second floor to Code with frost footings or close up and stucco.
5. Remove covering from first floor ceiling and add floor joist to support second floor. (Cha-chingggg!)
6. Install ventilation for bathroom per Code.
7. Insure sill plates are in good condition.
8. Exterior to be weather proof. (Not cheap!)
9. Insure basement cellar floor is even, is cleanable, and hall holes are filled. (Which, with an older place, can mean a ton of money!)
10. Install Provide hand and guardrails on all stairways and steps as per attachment.
11. Strap or support top of stair stringers.
12. Install floor covering in the bathroom and kitchen that is impervious to water.
13. Provide thumb type dead bolts for all entry doors. Remove any surface bolts.
14. Repair or replace any deteriorated window sash, broken glass, sash holders, re-putty etc as necessary.
15. Provide storms and screens complete and in good repair for all door and window openings.
16. Provide fire block construction as necessary.
17. Re-level structure as much as is practical.
18. Where wall and ceiling covering is removed, attic, replace doors and windows, (insulation, glass, weather stripping, etc.) shall meet new energy code standards.
19. Prepare and paint interior and exterior as necessary (take the necessary precautions if lead base paint is present).
20. Any framing members that do not meet code (where wall and ceiling covering is removed, members that are over-spanned, over-spaced, not being carried properly, door and window openings that are not headered, etc.) are to be reconstructed as per code. (Jeezus H. Christ On A Harley! That means the framing – which could be spaced pretty haphazardly in structures more than 30-odd years old – has to be re-done to current standards. After you remove the siding!)
21. Habitable rooms with new usage, replaced windows shall have glass area equal to 8% of floor area, or a minimum of 8 sq. fet., one-half of which shall operate and all bedroom windows shall meet emergency egress requirements (20″ wide minimum, 24″ high minimum but not less tan 5.7 sq. ft. overall). (In other words – egress rooms even on upper floors!)
22. Provide general clean-up of premise.
23. Provide smoke detectors as per the Minnesota State Bullding Code.
24. Repair soffit, fascia trim, etc. as necessary.
25. Provide proper draininge around house to direct water away from foundation. (Cha-chingggg!)
26. Install downspouts and a complete gutter system.

ELECTRICAL

1. Rewire all exposed areas to Code.
2. Install front entry light.
3. Wire basement to Code.
4. Rewire service grounding to Code.
5. Insure proper fuses or breakers for all conductors.
6. Repair or replace all broken, missing or loose ficxtures, devides, covers and plates.
7. Check all 3-wire outlets for proper polarity and ground.
8. Throughout building, install outlets and fixtures as per Bulletin 80-1. (In other words, you need to re-wire the place…)
9. Install smoke detectors as per Bulletin 80-1 and I.R.C.
10. Electrical work requires a Permit and inspections. (…and get a licensed electrician to do it!)

PLUMBING

1. All plumbing work requires permit(s) and must be done by a plumbing contractor licensed in Saint Paul. (Cha-chingggg!)
2. Expose all plumbing that has been covered with concrete on [sic] sheetrock so it can be test [sic] and inspected. (Not cheap!)
3. Finish all waste and vent, water and gas piping for a complete plumbing system to Code. (Major work!)

HEATING

1. Install heating system to Code. (You know what furnaces, and their support infrastructure done to code, cost these days?)
2. Install gas piping to Code.
3. Recommend installing approved lever handle manual gas shutoff valve on gas appliances.
4. Install chimney liner.
5. Replace furnace/boiler flue venting and provide proper switch for gas appliance venting.
6. Tie furnace/boiler and water heater venting into chimney liner.
7. Recommend adequate combustion air.
8. Provide support for gas lines to Code. Plug, cap and/or remove all disconnected gas lines.
9. Provide heat in every habitable room and bathrooms.

ZONING

1. This property was inspected as being a single-family dwelling.

NOTES

1. See attachment for permit requirements.
2. VACANT BUILDING REGISTRATION FEES MUST BE PAID AT NEIGHBORHOOD HOUSING AND PROPERTY IMPROVEMENT (NHPI) FOR PERMITS TO BE ISSUED ON THIS PROPERTY. For further information call, NHPI at 651-266-1900, located at 1600 White Bear Avenue.
3. Provide plans and specifications for any portion of the building that is to be rebuilt.
4. Most of the roof covering could not be properly inspected from grade. Recommend this be done before rehabilitation is attempted.
5. There was considerable storage/clutter within property at the time of the inspection. All to meet appropriate Codes when complete.
6. All items noted as recommended do not have to be completed for code compliance but should be completed at a later date. Possible purchasers of property should be made aware of these items.

Sincerely,

[Name redacted]
[Title redacted]

Remember – all of these have to be done (save for the two “recommended” items) before anyone can live in the place.

Any builders out there wanna take a whack at estimating this? I am going to take a very ill-informed whack at this, and say $20,000. I think I’m being conservative. Remember – you have a bank to run; no sweat equity here; you need to hire the work done.

And until your bank ponies up for all of this work, nobody can occupy it – hence, almost nobody will buy it (because they’ll just inherit the same problem!)

So, Mr. Banker – what do you do with the property? Remember – it’s already upside down. Its value is falling, since the rest of the block is slowly going vacant. You’re paying property taxes on it. So to sell this house, by the time you are ready you’ll have (counting the original loan liability, my conservative estimate of repairs, and property taxes, and vacancy fees) well over $225,000 on a house that, maybe, will be worth $165,000 for the foreseeable future.

That’s a $60,000 bath.

For one house.

And the one in the next file? And the next one? And the next one?

Repeat this process for most of the 2,000 currently vacant properties in Saint Paul. And for the dozens coming up vacant every month (my estimate; the five Twin Cities law firms that specialize in foreclosures say there are 500 foreclosures a month in the Twin Cities, today, and they are disproportionally focused in Minneapolis and Saint Paul.

So what does this mean for Saint Paul?

Good question.

We’ll look at it from a couple of sides – from the mortgage lender side, and the City of Saint Paul’s as well – on Monday.

UPDATE:  I floated this scenario past Dan Bostrom, City Councilman for Ward Six, the north-east part of Saint Paul. 

He got a chuckle out of it.  It doesn’t go far enough.  I am, indeed, too conservative in many cases.  “There are houses out there with $200,000 mortgages that aren’t worth $30,000”, he said, “And it’ll take $100,000 to bring them up to code”.   More from Bostrom – and a couple of other City Council reps – next week.

At any rate – put yourself back in the banker’s shoes, and plug those numbers in; you’ve foreclosed on $200,000 in loan, you’ll have over $300,000 in by the time it can be occupied, and by then you might – might – get back half of that when the market starts to tilt toward some kind of equilibrium.

More next week.

(Read the whole series: Part I, Part II, Part III, Part IV, Part V)