HomeStretch: Building and Selling, Affordably
Innovative group helps working families live close to town
June 30, 2006 | By Carolyn Kelly
Great Lakes Bulletin News Service
HomeStretch builds modest, quality homes in Traverse City and Empire and sells them for between $85,000 and $130,000, well below the median price of a home in that part of the state.
TRAVERSE CITY—For the past ten years HomeStretch, a non-profit organization based in this northern Michigan town, has been putting on something of a magic show—building modest houses and then selling them for about half the price that a typical Traverse City home goes for.
It is easy to explain why HomeStretch does this: Many working families cannot afford the price of a decent home within the city, where most jobs are. High housing prices, combined with a preponderance of lower-wage service and highly seasonal hospitality jobs, are pushing many young families out into the countryside, where land and housing are relatively cheap.
But that exodus harms Traverse City. It slows the growth of year-round local businesses; worsens commuter traffic and its accompanying air and water pollution; and cuts into public school enrollment in the central city. It also is hard on the workers themselves, who must spend much of their limited incomes on the rising cost of driving a car, and lots of their time commuting instead of being with their families.
Those are some of the facts that prompted Rotary Charities of Traverse City to found HomeStretch in 1996, and convinced the Traverse City Area Chamber of Commerce and economic development groups around the region to view affordable housing as a top priority.
Explaining how HomeStretch works its magic is a little more involved: The group weaves together grants, loans, and expertise to slash the price that homeowners pay for one of its modest, well-constructed homes to between $85,000 and $130,000.
The numbers that describe the size of the problem that the organization is tackling are daunting. Many working families here earn just $30,000 to $40,000 a year. But the median price of a three-bedroom home in Grand Traverse County is $249,000—far beyond the reach of many public safety employees, hospitality workers, cashiers, legal secretaries, beginning teachers, and other middle class people who provide the community with important, even crucial services.
One recent study found that more than 44,000 families in the five-county region will be facing the same problem by 2010—earning less than 80 percent of the median income and badly in need of housing that they can afford. So far, HomeStretch’s ten-year effort has helped 51 families buy and 10 families rent attractive and affordable homes in the Traverse City region.
Stretching Those Dollars
Founding CEO Bill Merry says his group’s approach starts with two basic strategies: obtaining grants and stretching each dollar as far as possible.
“We’re just like a private developer in that we need capital to buy land and build homes,” Mr. Merry explained. “What makes us different is that we have access to funding that private developers don’t.”
Then HomeStretch multiplies the effect of those dollars in a number of sophisticated ways. It cultivates business relationships with banks and developers, and works with a number of government agencies and programs. It employs creative financing and smart timing, finds income-eligible households with good credit and steady jobs, and manages the HomeStretch Community Land Trust, which keeps down property costs, the biggest driver of high home prices.
When HomeStretch receives a grant from the Michigan State Housing Development Authority’s Housing Resources Fund, the organization’s primary source of capital, it uses the money to pay for some of the land and construction costs—a big step toward lowering the project’s eventual price to a homebuyer.
HomeStretch then negotiates low-interest loans with banks and non-profit lenders, such as the Michigan Interfaith Trust Fund, to finance the rest of the home’s construction costs. Usually the group uses equity loans, which allow it to repay the bank when the home is sold, rather than while it is still under construction. That, Mr. Merry explained, helps his organization’s cash flow and accelerates the building schedule.
Mr. Merry emphasized that HomeStretch does not ask banks for handouts. The federal Community Development Act requires banks to provide credit to all segments of the community—including nonprofits and low-income families—and HomeStretch uses that to great advantage.
“People get the impression that nonprofits get breaks, but it’s a business relationship,” said Mr. Merry. “All of the loans are secured on them and the banks expect a return on their investment.”
Homestretch also pursues predevelopment grants from the the Great Lakes Capital Fund, largely for surveying, appraising, engineering, and purchasing property options. These early cash infusions from the funds help HomeStretch to leverage much larger investments later on.
“They are excellent partners for us,” Mr. Merry said of GLCF. “They don’t put a lot of money in, but they put it right up front, where there’s the greatest risk.”
Good Locations, Good Connections
Since building homes far from established communities would defeat one of the basic goals of affordable housing—helping families live closer to jobs, schools, services, and shopping—HomeStretch always looks for inexpensive land in built-up areas that already have sewer and water mains. Most government affordable housing programs require building homes where that basic infrastructure is already in place, too.
Because finding inexpensive land with sewer and water service in northern Michigan is tricky, HomeStretch is always looking for donated or discounted property from private individuals, non-profits, and even local governments. In 2000, for example, HomeStretch built 10 attractive, three-bedroom homes on city-owned vacant land just two miles from downtown Traverse City, after Rotary Charities purchased the property and sold it as seven lots to the organization at a discount. A private owner sold the group three additional lots.
Another way to find good locations is to build good connections with for-profit developers. That has the added advantage of accomplishing another of the organization’s goals: mixing affordable housing into “market rate” projects.
For example, when Tim Burden, a local developer long interested in affordable housing and New Urbanism, was preparing to build Midtown, a new neighborhood just blocks away from downtown, Mr. Merry bought eight units there. Mr. Burden sold them to HomeStretch at a $20,000 per-unit discount; better yet, the purchases occurred before the project’s land prices skyrocketed. That generated further savings and helped Mr. Burden pay down his initial land debt more quickly.
This project worked so well for both HomeStretch and Mr. Burden that he and Mr. Merry say they will collaborate again, most likely on a proposed development around Traverse City’s old train station. The two hope to build 30 low-priced homes in a neighborhood of approximately 100 homes.
Mr. Merry’s organization also stretches its dollars by doing its own general contracting, which avoids extra overhead. But he said the group does not cut corners on the quality of their work. In fact, Homestretch and Rotary Charities of Traverse City decided early on that good design was essential because the organizations believe that working families should have homes they can be proud of and that it is important that affordable homes blend well into neighborhoods—which is what happened in the Midtown project.
“We make our homes look more expensive than they really are,” joked Mr. Merry.
Closing the Deal
Homestretch is also exacting about who can buy its affordable homes. Purchasers may not earn more than 80 percent of the area’s median income; they must also have good credit, a stable employment history, and enough cash for a small down payment. That gives families a chance at homeownership but prevents them from taking on too much debt.
Though HomeStretch homebuyers are responsible for obtaining their own loans, the organization tells its customers about low-interest mortgages, particularly the N Champ Mortgage program at National City Bank, whose interest rates are 1.5 percentage points below a typical mortgage. The bank also administers a federal program that provides grants to homebuyers for down payments and closing costs. Mr. Merry added that HomeStretch works with other banks as well, including Fifth Third Bank and the Federal Home Loan Bank of Indianapolis.
HomeStretch also takes steps to ensure that its program’s effects last well beyond the first purchase of one of its dwellings. When a family buys a HomeStretch house, they do not buy the property beneath it. Instead, they sign a 99-year lease on the land itself, which is owned by Homestretch’s Community Land Trust. That prevents rapidly appreciating land prices from making the home unaffordable when it is resold.
HomeStretch owners still build equity, however. When a family resells its house, it receives 22 percent of the dwelling’s assessed appreciation and all of the equity. Whenever the house is resold, the new buyer must earn less than 80 percent of the area median income.
HomeStretch also takes some additional steps to make sure that their buyers, who are almost always first-time homeowners, fully understand the physical, financial, and legal aspects of homeownership. The organization requires them to go through homeownership training with Northwest Michigan Human Services, and a realtor helps families wade through all the paperwork.
Mr. Merry added that the group also aims to help people who make even less than 80 percent of the median income—most of the projects have served people earning between 50 and 80 percent, and sometimes as low as thirty percent, of the area median income.
This article is the second of six articles about affordable housing produced in cooperation with Rotary Charities of Traverse City. Click here to read the first article, in the series. Carolyn Kelly is the Michigan Land Use Institute’s associate editor. Reach her at email@example.com.