COMMUNITY SWEAT EQUITY HOUSING CORP.: HIGH HOPES FOR LOW-INCOME HOMES WIND UP IN BANK FORECLOSURES

Copyright 1998 Southeast Missourian

It began as what most people considered a noble idea: an opportunity for families of low and moderate incomes in Cape Girardeau to buy homes of their own, investing not only their money but also their hard work. Sweat equity, it was called.

Within 18 months of its incorporation as a not-for-profit organization, the Community Sweat Equity Housing Corp. had purchased 10 properties in the older section of the city east of West End Boulevard.

Four years after the last house was purchased, all of the 10 properties were lost or in danger of being lost by CSEH. Eight of the homes were either foreclosed or deeded back to lenders in lieu of foreclosure. The remaining two homes were threatened with foreclosure by the bank. Action on the two has been delayed until the first of December. None of the tenants or former tenants has yet to purchase a home through the program.

Those who have supported the program and worked with it still defend it as a worthwhile project that should continue.

"We were excited about the opportunity to provide housing," said Dr. Bernice Coar-Cobb, president of the CSEH board.

"The concept was good. We still think it can work," she said.

While most who were involved with the program viewed the concept behind Sweat Equity, as the project is often referred to, as a good and viable way to bring much needed housing to the community, disagreement remains about how the actual program was carried out.

Local real estate broker Thomas M. Meyer, who worked with CSEH from 1994 until the end of last year and who managed the properties for the organization for over two years, said there were several contributing factors that led to the loss of the properties by CSEH, among which he included the lack of management skills by members of the board.

When Meyer relinquished managerial control over the properties at the end of last year, CSEH still had seven homes. In less than a year, all seven homes have been foreclosed on by banks.

"Not everyone can manage real estate," Meyer said. "They think it's an easy way to make money, but it's not. It's difficult."

The beginning

Community Sweat Equity began in 1993, the brainchild of Coar-Cobb, a former education professor at Southeast Missouri State University and currently a biology teacher at Charleston High School, and her husband, Michael Sterling, president of the local chapter of the NAACP.

Both Coar-Cobb and Sterling saw a need for housing within the community, particularly for low- and moderate-income families, the disabled and the elderly. They established CSEH as a way to provide housing to those who qualified. Incorporation as a not-for-profit organization was filed with the Missouri secretary of state's office July 1, 1993.

In the original incorporation papers, CSEH stated that its purpose was to "buy, construct, repair, renovate, sell, lease, rent and otherwise deal in real estate with a view to the provision of adequate housing for low and median income, disabled and elderly persons."

CSEH entered into an arrangement with three local banks -- Mercantile Bank, Capital Bank (now Union Planters) and South East Missouri Bank (now Wood and Huston) -- to purchase homes for the program.

Jim Ham of Mercantile Bank said the bank had been involved with CSEH almost since the organization's inception.

"The bank was excited at what we considered a good project,"he said, "but it hasn't turned out that way."

The bank involvement came as a part of the banks' compliance with in the Community Reinvestment Act of 1977. The act requires banks to invest money back into the community in which they do business, including meeting the credit needs of low- and moderate-income neighborhoods. The loans the banks gave to CSEH to finance the houses qualified as CRA credit.

"The purpose was to pick areas that had poorer economic conditions and provide housing that could be rehabilitated," said Charles Daniel, regional president of Union Planters Bank.

CSEH had a loan with Union Planters on several homes. Some of the loans were what Daniel called "high risk or a higher risk."

On Dec. 7, 1993, CSEH purchased it first home, a house at 1129 N. Middle. South East Missouri Bank provided the loan.

By the end of January 1994, buoyed by a loan from Mercantile Bank, CSEH purchased three additional properties -- two on Sturdivant in south Cape Girardeau and one in the 600 block of South Pacific. A month later, on Feb. 24, Sweat Equity used a second loan from South East Missouri Bank to purchase another home on North Middle and a home in the 500 block of South Middle.

A third bank joined the effort in May 1994 when Capital Bank, now Union Planters Bank, helped CSEH to purchase a home at 4 N. West End, bringing the total of CSEH-owned homes to seven in less than six months.

An eighth house, located at 227 S. Pacific, was purchased May 27, 1994, with a loan from Mercantile Bank. The final two properties -- 921 Bloomfield and 1304 Independence -- were purchased by CSEH on Nov. 10, 1994, financed by a loan with Capital Bank.

The idea was for CSEH to acquire the homes and, with the assistance of the tenant, rehabilitate the properties. Payments on the loan were to be made through the rental income generated by the houses, Daniel said.

The concept

The concept behind Community Sweat Equity was to allow the tenants of a house to earn equity in the house not by what they paid, but by how much work they put in to the rehabilitation of the property -- the sweat equity. Tenants would make repairs and improvements on the houses, then the CSEH board would assist the tenant in getting financing to become a homeowner.

During the tenancy, CSEH would collect rent from the tenant and make payments to the bank, reducing the principal on the loan. CSEH would build up equity in the house which they would turn over to the tenant in return for the work that the tenant put in on the house.

The tenant was supposed to keep a log book in which he would record how much time he put into improving the home. The CSEH board would then identify how much sweat equity the tenant had earned.

If, for example, a house were valued at $20,000 and the board determined that the tenant had put in $3,000 worth of work on repairing and improving the house, the tenant could then purchase the house for $17,000.

"The idea was never that we would hold on to the property forever and become landlords," said Sterling, the treasurer for the organization.

"We wanted them moving from loanership to ownership," Sterling said.

The loss

"When you go into a program, you're optimistic," broker Meyer said. "You have grand ideas and expect success."

"At first, things went fine and its control over 10 properties seemed OK," Meyer said.

Then, Meyer added, problems began to arise. Tenants did not pay the rent. Houses fell into disrepair. Mismanagement by the board occurred.

The first three houses lost came in connection with the loans from what had since become Union Planters Bank. On March 27, 1997, CSEH deeded the properties at 921 Bloomfield, 1304 Independence and 4 N. West End back to the bank in lieu of foreclosure.

CSEH held on to the other seven properties for over a year before beginning to lose them.

During most of that additional year, Meyer continued to manage the properties for the CSEH board. But on Dec. 18, Meyer sent a letter to Sterling, Coar-Cobb and the CSEH board confirming that he was returning management of the properties back to the board.

In the letter, Meyer summarized the physical condition of the seven remaining properties owned by CSEH and told the board members something of the tenants who occupied each home.

Meyer wrote: "Again, for a suggestion, we would recommend for your Board to have at least two board members responsible to each house for rent collection, indentifying repairs and ways this could be accomplished in a cost efficient way, and reviewing and meeting future housing possibilities with in the community."

The decision for Meyer to return managerial control was made, Sterling said, by mutual agreement. Coar-Cobb added that since the first of this year she and Sterling have been managing the properties and that the CSEH board has not been meeting regularly.

In his letter, Meyer said that at least five of the seven tenants were in a position to make some sort of financial arrangements with the banks or the CSEH board to purchase the homes. He also recommended the board involvement in order to maintain the same number of homes as the tenants began to purchase their homes.

But it did not happen.

On April 23 of this year, the house at 1129 N. Middle was sold back to South East Missouri Bank for $21,000. The other two properties mortgaged with South East Bank were also foreclosed upon. They were sold at public auction three months later, on July 24, to South East Missouri Bank for $24,599.

In October, Mercantile Bank began to advertise the public sale of the last four properties in the hands of CSEH -- two on Sturdivant and two on South Pacific. The sale was scheduled for Nov. 3.

The two Sturdivant homes were sold back to the bank for $5,000 each. John Oliver, attorney for the bank, announced that the sale of the two remaining properties would be delayed one week to allow the tenants an opportunity to secure a mortgage. The delay was continued for another week on Nov. 10.

On Nov. 17, the sale of the two properties was delayed a third time, this time until Dec. 1. Jim Ham of Mercantile Bank said the bank must act on the announced sale within 28 days. If the current tenants have not been able to secure financing on the homes by the end of the 28-day period, the bank will foreclose on the properties, Ham said.

"It began to snowball," Meyer said of the problems that led to the sale of the houses.

NEXT: What went wrong?

TIMELINE OF CSEH EVENTS

July 1, 1993 -- Community Sweat Equity Housing Corp. becomes not-for profit organization.

Dec. 3, 1993 -- CSEH purchases its first home east of West End Boulevard in Cape Girardeau.

Jan.-Nov. 1994 -- CSEH purchases 9 more homes for a total of 10 properties in eastern Cape Girardeau.

March 27, 1997 -- Three homes owned by CSEH are deeded back to bank in lieu of foreclosure.

Apr.-Nov. 1998 -- Five more of the homes are foreclosure upon and sold back to banks in public auction.

Nov. 1998 -- Public auction of the remaining two homes is delayed while tenants seek financing.

HOW IS COMMUNITY SWEAT EQUITY HOUSING SUPPOSED TO WORK?

1. CSEH purchases homes in Cape Girardeau area.

2. Individuals unable to make down payments apply for tenancy.

3. CSEH Committee reviews applications, looking for history of payment and genuine interest in home ownership.

4. CSEH collects rents from tenants and makes payment to bank, reducing the principal on the loan.

5. Tenants expected to keep log book detailing their "sweat equity" or repairs and improvements they made to property.

6. CSEH board places a value on the amount of work tenant has done.

7. CSEH assists tenant in getting financing.

8. CSEH sells home to tenant at reduced price determined by principal paid and value of home improvements completed by tenant.

(Graphic by Teresa Connell)