Toxic Zip Codes in Richmond, VA Series: Part 1 -- 23222

Introduction:

While Richmond, Virginia enjoys a lower home foreclosure rate than many areas in the nation, there are some areas in greater Richmond that have forclosure rates much higher than the national average.  In this article I would like to focus on the Zip Code 23222, which has the highest foreclosure rate in greater Richmond.  Buying in this area is not for the faint of heart, and will require expert analysis on a block by block basis.

The Numbers:

**Perhaps the most staggaring number is the percentage of vacant homes in this Zip Code.  13.3% of all homes in 23222 are vacant.  Investors can expect at least a 25% vacancy rate on rental properties.  This drives rent prices up in an area where the per capita income is only $16,570.

**Off all the active listings in 23222, 15.2% of them are foreclosures.  This number is triple the national average which is already higher than its been in fifty years.

**Of all of the homes sold in MLS over the past 6 months in 23222, 30.3% of them were foreclosures.

**When looking at home sales between Aug. 08 to Jan. 09 and comparing them with the same period one year ago, home values in 23222 have plumetted in value by 27.2%, and volume sales have dropped by 14%

**There is an 11 month supply of homes for sale in 23222

**36.4% of everyone who lives in 23222 rent.  Only 1 in 2 own their homes.  The rest are vacant.

The Problem:

All of these numbers add up to spell trouble for this zip code.  Even the best neighborhoods in this zip code will be affected by the foreclosure epidemic.  Also fueling the fire is new lending restrictions.  According to many lenders I've spoken with, banks are unable to finance more than two rental properties for investors.  That coupled with the 20% minimum down payment requirement drives away investor/developers who would ordinarily look for bargains in this area.

Many of these foreclosures are in disrepair.  First time homeowners searching for affordable housing are not able to purchase himes that do not meet FHA quality specifications.  There is very little to no renovation financing available, so many first time homeowners do not have the option to purchase a bargain home and renovate it.

Further compounding the problem is a new rule that prohibits first time homeowners from buying a property that the owner has not owned for at least one year.  Developers have very little motivation to renovate delapodated properties because holding costs are to high to sell to the target audience.  Very few investors are willing to sit on a moderately priced home for a year before they attempt to renovate it.

The opportunity:

Investors who have liquid assets or severly underperforming assests due to the current market can capitalize on the problems in this area.  Low cost housing supply is at a historic low and demand is high.  Investors requiring financing cannot capitalize on this unique problem because of current restrictions.  An opportunity exists for cash buyers to buy homes in this zip code at severly reduced prices.  They can then seek tennants through federal housing programs.  Rents are guaranteed by the government.

For example:
Investor purchases a home formerly appraised at 100,000 for $60,000.
He performs basic necessary repairs for $10,000.
The investors total cash instment is $70,000
The investor signs a five year contract with HUD for $700 per month rent
-----
The investor makes 12% return on his money per year
If the investor sells the property after 5 years, and the propert appreciates 3% per year the investor would make $42,551 in gross profit.
The investor uses another $12,000 renovating the property after five years, prior to selling.
-----

The investors cash flow report looks like the following
Investment:
    $60,000  Purchase Price
+    $10,000  Initial repairs
+    $12,000  Final Repairs
---------------------------------------------------
=    $82,000 Cash Investment

Income:
    $42,000 Rent Collected ($700/month for 5 years)
+    $112551 Sales price for the home after five years
---------------------------------------------------
=    $154,551 Gross Income
-    $82,000  Investment
---------------------------------------------------
=    $72,449 Return (88.5% ROI)



Final Thought:

As usual, cash is king.  Zip code 23222 is a very risky proposition for investors.  Based on the numbers, it will recover much slower than other areas in Richmond.  With that said, it will be very profitable for those few people who have liquid assets and are willing to take action rather than letting those assets dwindle in other investments.