U.S. charges developer, four others in condo flips
Oct. 7, 2010
There was a time when Peter Power knew some of the people who lived in the six-family houses across Parkman Street. But that changed after mid-September of 2007, when the three buildings were converted into condos, all within less than four weeks.
“The next thing I knew,” said Power, “nobody was living in them at all.”
By mid-October, a developer had bought the three buildings for a total of $2.2 million. The units then were sold, on paper, for almost $4.9 million. All but one of them was sold within three days of the sale of their building. Lenders put up mortgages totaling $3.8 million.
Even more unusual was the assortment of condo owners – from the manager of the Bank of America Branch in Fields Corner, to buyers from Brooklyn, the Bronx, and as far away as Atco, New Jersey, and Norfolk, Virginia. On paper, some of them were owner-occupants. Others supposedly bought units as their second homes, or for investment—at a time when the condo market in much of Dorchester, and in many other places, was in decline. Yet, judging from the difference between sales prices and mortgage amounts, the down payments for the units ran as high as $75,000.
Less than three years later, the developer, Michael David Scott, is under federal indictment for mortgage fraud, along with the Fields Corner bank manager, an attorney who worked on many of the transactions, and two other people accused of being recruiters for straw buyers.
Last week, Scott and two other defendants pleaded not guilty to charges that they paid the straws to buy units at falsely inflated prices and made false statements to lenders about the buyers’ assets and down payments. Also pleading not guilty was the now-former bank manager, Arthur Samuels, who stands accused of producing false documents and recruiting a straw buyer.
Before the first indictments were handed up in late August, foreclosure petitions had been filed for eight units in the buildings on Parkman Street. But, even without going into foreclosure, the units that Scott had sold for as much as $299,900 apiece were being scooped up for as little as $55,000. Some were turned over for a nominal fee, with the buyer assuming the mortgage.
In the interim, the buildings were painted on the outside and filled with new occupants. But Peter Power says they still have problems. He mentions rodents attracted by trash containers that some residents don’t put out on the curb for collection. Plus, during the summer, there was a shooting in one of the buildings that, according to police, resulted in four arrests.
“It just brings the value of your house down,” he says.
A lifelong resident of Dorchester, Power describes the buildings as “flophouses” with “revolving tenants.” Saying he and his wife are thinking of moving, he adds, “I actually do like Dorchester, but I don’t like what’s coming down the street right now. It’s not safe.”
Federal authorities list fraudulent transactions by Scott and his collaborators on forty-eight units, all but six of them at locations in Dorchester. Most of them have since been turned over to new owners. In at least one case, a three-decker on Centre Street, there was a period when the doors and windows for one unit were covered with plywood.
But there were also problems at other buildings, including a three-decker at 672 Adams Street. “The lawn was disgusting. There was broken glass everywhere,” said a neighbor who described the building as “an eyesore. We own our condo,” she said, “and we were afraid it would bring the price of ours down.”
Records show that the units at 672 Adams were all sold within a few days after the property was bought under the name of Astoria Realty Trust. One unit was sold to Arthur Samuels, the others to buyers from Virginia and Pennsylvania. By February, all three units—which had been sold less than two years earlier for a total of $870,000—were re-sold in separate transactions to a buyer from Quincy for a total of $140,900.
To buy all the properties listed in the federal indictment, Scott and his associates paid almost $6.2 million. On paper, the separate units were then sold—mostly within a few weeks—for a total of $13.9 million, while the mortgages put up by lenders came to almost $11.8 million.
The highest loan totals were from Salem Five – more than $3.3 million – and from Gateway Funding Diversified Mortgage Services – $4.4 million. And sources at both lenders say a loan officer who played a role in some of the transactions for Gateway later went to work for Salem Five.
Records show that overall, Scott and his associates sold more than one hundred units in Boston, mostly from condo conversions in Dorchester and Roxbury. Foreclosure proceedings were started on at least 80 of the units, while some of the others were turned over in distressed sales.
One lender – Gateway – wrote mortgages totaling more than $13 million for 44 units. Foreclosure petitions were filed on 35 of them.
Many of the buyers purchased multiple units at multiple locations, with the same pattern found in multi-family transactions by other sellers. A partial review of records in Boston over the past few years shows foreclosure proceedings on more than 240 units against more than 100 owners of anywhere from 2 to 8 units. Some of those owners also turned over other units in distressed sales, without the filing of foreclosure petitions.
Researchers disagree about the effects of foreclosures on surrounding property, and they caution that poor conditions and price declines can also make distressed sales more likely.
The Rappaport Institute estimates a discount of 28 percent on sales of foreclosed (REO) properties, with the steepest discounts in areas where lenders have the most fear of property being damaged by vandalism.
According to a study by the Federal Reserve Bank of Boston, small multi-family properties make up less than one-quarter of the housing stock in Massachusetts, but they account for 33 percent of the post-foreclosure sales. Researchers say the REO property discounts were steepest in areas with lower income levels, a higher percentage of minority residents, and a sharper decline in overall prices.
In multi-family REO properties that were converted into condos, potential buyers face even more obstacles. With staggered foreclosures on individual units, observers say financing is more difficult to arrange in buildings without functioning condo associations.
“You’re going to be left with someone who’s going to be willing to buy for cash,” said one appraiser based in Dorchester, “and, when you’ve got the cash buyer, you’re going to be left with considerably less for it.”
Monthly reports by The Warren Group show that the sharp declines in the median prices for Dorchester condos have since been reversed, even if prices are still below the levels at the height of the housing bubble. In July and August of this year, after the expiration of federal tax credits, there was a fall-off in condo sales, though the median price was still moving higher.
According to a report by In Realty, housing prices strongly rebounded in the second quarter of this year in all areas of Dorchester. In the area where the market had been the weakest—between Blue Hill Avenue and Washington Street—prices were going up, but volume was down. According to the report, one reason was the decrease in foreclosures.
Helping to bring down the number of foreclosures are efforts to keep buildings occupied, sometimes through loan modifications or sales to occupants. The non-profit Boston Community Capital has arranged this kind of turnover for 85 units of housing, mostly in Dorchester, Roxbury, Mattapan, and Hyde Park.
“If we let nature and the market run its course, we have a real issue because of the inventory and the amount of time it’s on the market,” said Patricia Hanratty, president of lending affiliates for Boston Community Capital. “If the people who are in one of these units can afford to buy it back at $70,000 or
$80,000, why is that not under consideration?” she asked.
One reason is that, as speakers said last month in a Dorchester symposium on REO properties, non-profits are often outbid by for-profit competition. Though observers say the quality and intentions of the buyers are mixed, the competition increases demand for the housing supply. And that can keep the property values from going too low to make repairs unprofitable, explained Evelyn Friedman, director of the city’s Department of Neighborhood Development.
At 672 Adams Street, the new owner of the condo units sold the whole building in June to another buyer from Quincy for $235,000. With recent signs of repair work, the neighbor says, “In the end, it turned out okay.”
At a three-family house on Bernard Street, in the Franklin Field area, the people who bought units from Scott and his associates in late 2005 managed to stay in the building, after getting help from Boston Community Capital. Records show the units, including one with less than 1,000 square feet, sold for more than $900,000. Foreclosure petitions were later filed on two of them.
Hanratty said that Boston Community Capital intervened at Bernard Street and other locations because the mortgages had monthly payments that were “incredibly high,” adding that “nobody looked to underwrite these loans to say this is what somebody could afford.”
Despite the renovations, units, as they sold almost five years ago, were “vastly overpriced, they were very high, even then,” said Hanratty. “Just thinking about a three-decker on Bernard Street as being worth almost a million bucks is pretty challenging.”