Personal Finance 101: Know Your Credit ScoreGet It Now: See Your 2010 Credit Score
Owner of four properties in the historically black area on Chicago's Near South Side, including his primary residence, he'd like to take advantage of buying up foreclosures to add to his portfolio, but the neighborhood banks he has dealt with on his properties for 30 years are scrutinizing his credit more than they were a few years ago, just as he in turns screens his potential tenants creditworthiness more than he used to.
"There is a ripple effect that is further hurting the real estate business," says James, who is also co-owner of Island Furs, which he says is the only black-owned fur salon in Chicago. He even had a lot of challenges trying to get a loan for his business. "Out of five banks we tried to get loans with, two of them sold and one just wasn't loaning any money."
This domino effect in Bronzeville, a revitalized area known for its recent gentrification, is just a microcosm for the downward spiral the credit crunch is putting on neighborhoods all across America.
Whether as a resident, landlord, or small business owner, residential property owners like James have found that declining real estate prices have impeded their ability to borrow the money they need. Historically, small businesses have regularly used real estate to obtain credit for various purposes.
In fact, 21 percent of small employers have mortgaged real estate for business purposes and 11 percent use real estate as collateral for other business assets, according to a Gallup survey conducted for the National Federation of Independent Business Research Foundation.
In 2009, 44 percent of small businesses seeking credit received only some or none of the money they sought, whereas in the mid-2000s, nine out of 10 small companies seeking credit received it. Without access to those funds, the owners can't reinvest in their businesses or their communities, or even keep up with salaries for their employees, or even themselves.
It seems to be a no-brainer that James is faced with financial challenges at his fur salon business -- aside from the seasonal nature of the fur industry -- consumers, whose spending rose a modest 0.4 percent in July after three falling months, just aren't spending their money on luxury items like fox tail hats and mink stoles, especially not with a national unemployment rate of 9.6 percent.
"Luxury items get put on the back burner as people are taking care of the necessities," says James, who, along with his co-owner, has gone without a salary for several months in an attempt to keep his employees on the payroll. He says some of his tenants have lost jobs, but he is doing what he can to help out some of his loyal, long-time tenants, especially ones with small kids. Some of them are behind on rent payments up to six months, making partial payments or sometimes none at all.
"These are people who have fallen on hard times, but they want to pay their rent," says James. But sometimes the fallout of the economy catches up with them. In one greystone duplex that he purchased for $30,000 in 1990, the majority of the adult occupants in both units lost their jobs. Eventually they left, knowing they would no longer be able to pay the rent, so with the units empty, James decided to rehab-with all the bells and whistles, such as whirlpool tubs, sauna, and granite counter tops.
"With the revitalization of the area, I think that this duplex unit would be desirable," he says. Perhaps more appealing to the influx of doctors, lawyers and other professionals that have been looking to move to the area. One unit has 4-bedrooms, 3 baths, and the other 2-bedrooms and 2-baths.
Get Your 2010 Credit Score
"It seems like my credit was scrutinized much more than before," he says. "The bank asked for an additional year of taxes and information - three years worth instead of two." Although he was eventually approved for the $150,000 rehab loan, the bank is slowly disbursing the money in about $30,000 increments, with more frequent checks by an inspector, whose reports follow a more stringent guideline than they did a decade ago.
"They want to make sure a certain percentage of work is done before they disburse anything else," says James. As a result, the rehab that he started in February 2009 is still ongoing. He expects it to be completed by February 2011. In the meantime, he has been paying $1,200 a month on the 6.75% mortgage, not including property taxes, for a building that he owned free and clear and without liens before pursuing the remodeling. To recoup his costs, he hopes to sell the unit next year for around $425,000.
"WIth so many foreclosures on the market now it is a buyer's market and when you have a buyer's market everybody, and with so many people competing for the buyer, that reduces the chance of you selling your property and getting a good price for it."
That's one of the reasons, along with the credit scrutiny, that he says he has put buying foreclosures on hold for now. "I've stopped buying because the banks are not loaning money."
If for some reason he can't sell the duplex when it's ready, he'll rent it out again. His screening process for new tenants is stricter than it once was. "I did my own checking previously with phone calls to references that were put on the rental application, but now I use a third party service to do a background check.
"We look at the credit more seriously now than we did before because with so many people out of work now you want to make sure the tenants are gainfully employed or have a source of income to pay the rent."
Their credit score isn't as high up on the list, he says. "People are having such a hard time that their credit score may not be as good as you would like, but they are still paying their rent. They may not pay their cable bill or phone bill on time, because they are taking care of the necessities -- the luxury items get put on the back burner." Just like fur coats.
Mr. James is related to the writer through marriage.