Affordable and Profitable

Affordable and Profitable

By Sean Roth

Real Estate Editor

Sarasota entrepreneur Harvey Vengroff tends to turn to sarcasm when talking about the city of Sarasota's plans for affordable housing.

"They just muck it all up," he says with a wry smile. But unlike a common naysayer, the 64-year-old Vengroff, who founded the collection and receivables company Vengroff Williams & Associates, knows what he's talking about. As an owner of more than 1,000 residential apartment units in Sarasota and Manatee counties, Vengroff has made a habit of providing housing for lower- and middle-income residents. Hardly a matter of charity, Vengroff makes a profit off the rentals while cleaning up the neighborhoods and improving the appreciation value on his properties.

Now Vengroff is looking to make homeownership a reality for that same income market, and you can bet that, for Vengroff, it will make good business sense.

Starting with the employees of his own company, Vengroff plans to start offering potential homebuyers a rent-to-own option with fringe benefits.

VWA opened a $4 million line of credit with a local bank to purchase homes. So Vengroff, along with the five leading partners in VWA (Joel, Mark and Kristy Vengroff, Robert Williams and Gabriel Torek), will find homes starting in the $100,000 range. Currently, his most expensive purchase is a $240,000, three-bedroom house with additional rental space. Vengroff owns houses he plans for the program in Gillespie Park, Rosemary, Bayou Oaks and Park East neighborhoods.

"They're usually in pretty bad shape when we buy them," he says. "They're actually complete wrecks. So then we spend another $30,000 or so to fix them up."

From his rental background, Vengroff has compiled a list of experienced construction workers, which allows him to renovate a property for much less than it would cost a consumer.

"Then we rent it to an employee for whatever the interest is to us on $140,000 plus taxes and insurance," Vengroff says.

Using the example of a $110,000 home with $30,000 worth of renovation, at the going rate of 5.7%, the VWA employee would probably wind up paying $800 a month. If the employee makes his rent payments on time for an entire year, Vengroff gives him an option to purchase the home for the current appraised value.

"The deal pretty much takes care of the down payment," Vengroff says. "We give them half of the reappraised value. Let's say if the house reappraises for $160,000, then they get $10,000 toward the down payment. We also guarantee the note (for the first six years)."

As Vengroff tells it, in the example above, if the employee decides he wants to buy the home that is appraised at $160,000, the sale price would be that price minus half of the appreciation, or $150,000. The bank would then finance 100% of the price - thanks to the fact the VWA partners guarantee the loan for six years. Vengroff says closing costs would be included in that $150,000 mortgage.

To encourage employees to stay in the area, the program is structured with employees to allow limited appreciation for the first six years. For instance, Vengroff says, "If the employee sells the home after the first year, he only gets 20% of the appreciation," Vengroff says. "After two years that goes to 40%. It's basically 20% each year they are there. This is to keep people from flipping the homes."

Vengroff says the plan is advantageous for the neighborhoods, too.

"These homes were in such a state of disrepair that no one would buy them," Vengroff says. "This should bring some stabilization to some of these areas. We are the only guys on the block who would buy them. We pay cash, and we can close within a week. This allows us to buy a property for cheaper than just about anyone else. We think we've found a way to keep our people living in Sarasota ... and make money, too."

So far six employees have signed up to participate in the program. Vengroff expects that in the next six months the partnership will purchase 70 homes. After about a year, Vengroff expects to have exhausted a significant portion of the demand from his own employees and will likely open the program to others.

Asked if the program is the beginning of a new company, Vengroff says no.

"I'm really not trying to create a monster here," he says. "I am running it right now and not getting paid for it. This is just something we're going to do. I really think there is a limited market here. I really only want to buy four to five homes a month."

He also notes: "There's really no reason to create land trusts or things like that."

HOW THE VENGROFF PLAN WORKS FOR INVESTORS

How do investors profit from Harvey Vengroff's affordable housing program? When Vengroff explains the program, it's almost so simple it sounds too good to be true. But it's true.

Consider:

Say a Vengroff Williams & Associates employee decides to buy his home after renting it for a year. The home, as mentioned in the accompanying story, cost VWA partners $140,000. But at the time of the purchase, the home is reappraised at $160,000. According to Vengroff's program, Vengroff would sell the home to the employee for the appraised value, less half of the appreciation (half of $20,000 in appreciation is $10,000). That would make the sale price to the employee $150,000.

The employee would take out a mortgage for $150,000, with VWA's partners guaranteeing the note. The bank would pay VWA's partners $150,000, giving them a $10,000 profit.

VWA partners would earn additional return if the employee sells the house in the next six years. In Vengroff's program, VWA partners would give the employee 20% of the appreciated value each year. If, say, the employee sold his home after three years, the employee would keep 60% of the appreciated value, and the VWA partners would keep the other 40%.

Vengroff says this program could work with other private investors as well. "There's no need for land banks," he says.

Take an investor who has $1 million in cash to invest. Rather than outlay the cash in a property, Vengroff says the investor instead could obtain a line of credit. He would use the line of credit to buy homes that are rented out as affordable, or "work force," housing. The investor puts up no cash, only his guarantee. The return for the investor is on the appreciation when the renters convert to buyers.

"You're picking up income for having no investment," Vengroff says. "You really have no risk. I don't see how you're ever going to get killed on this. If you buy the rundown properties, you can't get hurt that much. It's not like buying a $2 million condo.

"It's not the solution to end all problems," he adds. "But you're not putting up any money, and you're solving a problem."