Sales Boom in Damaged Properties : Sellers Find Buyers Eager to Take on Their Quake-Scarred Homes as Fixer-Uppers

How much would you pay for a three-bedroom home with a view in an exclusive canyon neighborhood? What if a toppled chimney and a few cracks were thrown in?

Try $175,000. That’s what realtor Seth Phillips and his girlfriend, Jenny Herbik, paid for such a home in the hills of Studio City. Phillips calls it “a true steal.” The home sold in the mid-$500,000s when it was built five years ago--before it joined a new category of real estate: the as-is, earthquake-damaged house.

Sales of damaged properties have boomed since the Northridge quake last year shattered chimneys and split driveways across the San Fernando Valley. Real estate agents say as-is homes have become a regular part of doing business--so much so that a lively fringe market has cropped up to deal solely with this type of real estate.

“Seems like the market for damaged properties is even stronger than the market for undamaged ones,” said Ron Prechtl, an agent with Century 21 Lamb Realtors in Northridge.

That’s because damaged properties can be cheaper. Although severely damaged homes are thought to comprise a small part of the overall housing market, they have contributed to the long, downward slide in housing prices. That dip began during the local recession, even before the quake forced some lenders to put foreclosed properties up for sale. As of January, the median selling price for a house in the Valley was $165,000, the same as in August, 1987.

The market for damaged homes turns the conventional rules of real estate upside down. In this market, falling plaster and spider-web cracks spell opportunity, not headaches.

“It used to be even if a property was cleaned up, you were lucky to sell it,” said Phillips, a realtor for Remax in Sherman Oaks. “Now, the messier the better,” he said, and the lower the price.

*

Edward Milkovich, a retired aerospace engineer, recently bought two as-is homes with broken chimneys and other quake problems in his Northridge neighborhood for $138,000 and $170,000. The first he fixed for about $30,000 and put up for rent, planning it to hold as a long-term investment; a neighbor whose home was damaged in the quake promptly moved in.

Milkovich turned the other house over to his son and daughter-in-law, who moved in with their children. The couple are in the process of rebuilding it, including part of the garage that pulled away from the house.

“I’d like to buy another one,” he said. “These are better than bonds or stocks.”

Some local brokers have made earthquake properties their specialty. Contractors, real-estate agents and well-heeled investors are the chief beneficiaries of this market.

“With most of the west end of the San Fernando Valley, earthquake damage has something to do with the sale,” said Kathy Edwards, vice president of James R. Gary & Co., a real-estate company in Woodland Hills.

But real bargains--quake-damaged properties that owners will unload for less than current market value--are still few and far between. For most, the rule is “Beware!” said Edwards. “If it sounds too good to be true, it probably is.”

However, Phillips, who bought the Studio City home, is certain he made a shrewd investment in buying the Studio City home. He hired a contractor to fix part of the chimney and make some cosmetic repairs at a cost of about $10,000. The peach-colored hillside home has balconies in every room, lavish bathrooms and a spacious kitchen. The previous owner had almost no debts on the property, adequate quake insurance and “was fed up with it . . . so he told his agent, ‘Price it so it sells in a week,’ ” Phillips said.

Today, only the debris in the Phillips’ yard, a few remaining fireplace cracks and a broken window hint at past damage.

But so many people want to buy quake-damaged homes that the opportunity to profit from them is getting narrower, said Prechtl, the Century 21 agent. “I know clients who think they got wonderful buys,” he said, but then they find the property “has much more severe problems than they thought.”

*

Other buyers are disappointed by the poor resale market for homes they fix up in the hope of selling them. “They won’t necessarily see people lining up at the door making offers,” Prechtl said. “That’s a rude awakening for a lot of investors.”

The advantage held by contractors and builders who buy in this market is clear: They can fix the house themselves and boost their profits with what they save on labor costs. Besides, Phillips said, “they have the money now.”

Steve Angelo, a broker with Realty Executives in Canyon Country, refers to himself as “Mr. Earthquake.” He recently organized a one-day auction of quake-damaged homes and condominiums that drew about 300 would-be buyers to Woodland Hills. Of the 42 homes on the block, 28 were sold, said Angelo, whose firm got an 8% commission on the price. More than half the people at the auction were contractors, he said.

One was Dave Gatling, who lives in Acton. He was interested in a quake-damaged house in Valencia that he said would cost about $150,000 to fix. It needs to be jacked up to repair the foundation--a project that for him would be “just something to do on the side.” Gatling said such an investment would be worthwhile only if it yielded at least a 15% profit. But in the end, he let the house go to another bidder, choosing to look a little longer for just the right one.

Among those filling a room at the Warner Center Marriott were assorted speculators and a few people just looking for a place to live. Marc Rosenfeld, who had never owned a home, won the bidding on a Northridge house for $205,000. He planned to fix its collapsed ceilings himself. But like nine other top bidders at the auction, he later learned he would have to pay more for the house because his bid didn’t meet the seller’s minimum price. Rosenfeld was none too pleased, but he bought the house anyway, for $225,000.

Sherman Oaks resident Diana Darrid bought the wrecked house next to hers for $130,000 and planned to hold it as an investment for her grandson.

*

A stumbling block for speculators is the difficulty of getting loans to buy quake-damaged property. Some mortgage bankers have solved the problem by weaving together construction loans with home-buying loans.

Or buyers can take advantage of Federal Housing Administration rehabilitation loans that cover the cost of buying as-is property and some construction costs. The borrower’s first payment isn’t due for seven months after close of escrow, said Lori Dickstein-Bonfiglio of National Pacific Mortgage, a mortgage banking firm in Woodland Hills.

The sellers of quake-damaged homes are often people who owe little or nothing on them--who perhaps bought them years ago, before prices soared, or who got enough money from quake insurance and from sale proceeds to pay off their mortgages, with the sales receipts taking care of the rest.

Take Sandra Bersofsky, who owned an upscale house in the Santa Clarita Valley. Before the quake, Bersofsky’s lawn came up the footing of the house. Afterward, the house was ringed by a bare patch of dirt because its shifting during the quake had scraped the turf away. “My house jumped up, came down and moved from side to side,” she said.

In short, the house was a complete wreck: It sank four inches, and the foundation was destroyed. Bersofsky settled with her insurance company for slightly less than the after-quake market value of the house, then she sold the property at a modest price to a contractor who plans to fix it himself.

“If you think you are going to get top dollar, you will be sitting right where you are a year from now,” she explained.

Instead, Bersofsky ended up with enough money to pay off the mortgage on her old home and put a down payment on another home in the Newhall area.

*

“I am moving up,” she said. “My new house is bigger and better--it’s a new beginning.”

For other sellers, emotional benefits outweigh the financial ones. Grace Lesser-Elliott got a bang on the head during the Northridge quake and was hospitalized. Her jewelry store business was in disarray, her pets ran away and, to top it off, her Granada Hills home--purchased in the early ‘80s--was red-tagged. The daylight shone through some of the walls: “I didn’t start out with a view, but I ended up with a view in every room,” she joked.

Rebuilding the house was one hassle she could do without. “I was concentrating on rebuilding my business,” she said.

So she sold the house as-is to an investor. With the proceeds of the sale, together with her quake insurance money, she had almost enough to pay off the mortgage. She said it was worth it to escape a property that had become “an absolute nightmare.” Selling the house was “really sad, but at the same time, I was really relieved,” she said.

Just how many owners of quake-damaged homes will be forced into foreclosure is unclear, but such cases are expected to become more common this year. For example, Great Western Bank spokesman Tim McGarry says the S&L; is anticipating up to 200 quake-induced foreclosures in the year ahead. But the vast majority of borrowers who delayed payments on their mortgages because of the earthquake have now caught up, he added.

*

In the meantime, the unexpectedly healthy market for quake-damaged property has cast some daylight onto what has been for some years a frustrating market for both buyers and sellers, argues Bernie Leibovitch, a real-estate broker with Fred Sands in Northridge.

Some people who couldn’t sell their houses before now find they have enough money to sell them and move. And some brave buyers are finding they can buy homes--give or take a few blemishes--in neighborhoods they couldn’t otherwise afford.