Back on the block

Leaning off a ladder with paintbrush in hand, sweat dripping from beneath a floppy hat, David Frayne hardly looks the part of a budding real estate mogul.

But as one of the architects of a plan to buy up to 1,000 damaged, decrepit or abandoned single-family homes in the region over the next 18 months, the 39-year-old is well aware that looks can be deceiving.

Since forming Affinity Neighborhoods in May of last year, Frayne and his partners have purchased roughly 35 distressed homes in and around Compton and Long Beach, fixed them up and sold them at market rates. Before the business was incorporated, an informal group of investors led by the three founding Affinity partners had acquired and refurbished about 50 homes, mostly in Oakland.

But Frayne said the group quickly realized that south Los Angeles County -- with its large stock of single-family homes and its shortage of quality, affordable options -- was a better fit for its business model.

“We take housing that’s already there and not being used, and we make it better and add it to the mix,” said Frayne, vice president of research and development for Affinity. “Our goal is to advance the quality of life in these neighborhoods and get a good return for our investors.”

Now the real test begins.

Long Beach-based Affinity aims to raise $100 million to finance its planned buying spree. So far, less than a tenth of that has been committed. But Frayne says he’s talking with a number of well-heeled investors who are as intrigued by Affinity’s social objectives as they are by its professed ability to achieve returns of up to 30% annually by snapping up properties that nobody else wants.

Most of its homes are still on the market or being fixed up, so it’s difficult to gauge Affinity’s potential for that type of return. But Frayne insists the group’s Oakland investments returned that much and more.

Affinity’s niche is a corner of the market where few real estate partnerships have dared to venture, and for good reason.

Home appreciation in the lower-income neighborhoods that make up large swaths of southern L.A. County has generally kept pace with countywide gains in recent years, but lower selling prices mean smaller profit margins for basically the same amount of work. Moreover, relatively high crime rates, struggling schools and other social ills combine to scare off many private investors.

There’s also the fact that most real estate professionals are loath to take on the hassles that come with properties that violate local codes, are in obvious disrepair or are in communities where much of the neighboring housing stock is in poor condition.

The scarcity of private capital in low-income neighborhoods means little investment in affordable housing, most of it dependent on such public subsidies as neighborhood block grants from the Department of Housing and Urban Development.

But with the demand for affordable family housing far outstripping the supply, financially strapped governments from the federal level down do not come close to making the investment required to catch up.

“There’s a huge demand for quality housing, and that need is as compelling in Los Angeles as it is in any large city in the country,” said Scott Syphax, president of Nehemiah Corp. of America, a Sacramento-based nonprofit that is a large provider of down-payment assistance.

“There is an availability of preexisting housing in [large cities], but you don’t see a focus on refurbishing it and bringing it back to market.”

Locally, at least, nonprofit developers and advocates for affordable housing say there are few if any real estate partnerships operating in lower-income areas in the manner of Affinity.

Unlike such nonprofits as Habitat for Humanity, which uses volunteer labor to build homes that are then sold to poor families with zero-percent mortgages, Affinity doesn’t solicit donations or partner with governmental organizations or lenders.

Guided by computer modeling that identifies clusters of below-market properties in areas with pressing housing needs, Affinity has set its sights on about 15 of Los Angeles County’s 469 ZIP Codes.

The partnership’s bulk buying creates economies of scale from an administrative standpoint and in its relationships with contractors, Frayne said. That enables it to operate more efficiently than an individual buyer might.

And the physical improvements Affinity makes to its properties are having a spillover effect in the neighborhoods where it invests.

On a recent Saturday, about two dozen volunteers joined Frayne and other Affinity employees beneath a hot sun on Peach Street in Compton to plant trees, paint walls and make minor repairs. Affinity was celebrating another refurbished house, but the homes benefiting from the volunteer effort were not owned by Affinity. They belong to about half a dozen neighbors.

It’s a new twist in Affinity’s plan. The company wants to organize similar volunteer efforts on other streets where it is making acquisitions. In this case, Affinity canvassed the area ahead of time to find out who would like some help.

By offering to spruce up neighbors’ homes, Affinity Chief Executive Ingrid Johanns said, the company is working toward its goal of improving neighborhoods while bolstering the value of its investments.

Along with Frayne, Johanns and Chief Financial Officer John Reitano make up the founding partners.

“You don’t have to buy every house on the street to have an impact,” Johanns said. “When the neighbors see such an obvious change, it has a spillover effect. And if we can help, that’s great.”

Neighbors say that has indeed been the case with 531 W. Peach St.

The tidy two-bedroom house is painted a warm rust color with green trim, making it one of the more appealing homes on the street. Inside, new wood floors, improved wiring and a fresh set of appliances have brought it up to code.

A few months ago, peeling paint, exposed wires and cracked and missing kitchen and bathroom tile had left the house unlivable. Out back, a once-inhabited shed was near collapse.

“I used to live in that house. It was horrible. It was an ugly house,” said 16-year-old Edward Hernandez, who now lives across the street with his parents and two younger siblings. “Everybody is excited they’re fixing it up.”

Affinity bought the house for $133,000 in December with a down payment of $26,000 and put it back on the market in June after an additional investment of about $25,000 for repairs.

Affinity is asking $259,000 for the home. That’s higher than the median price for the 90222 ZIP Code, which was $216,000 in June, according to DataQuick Information Systems, but it’s on par with other nearby homes.

If Affinity, which uses local Realtors, sells the home for the asking price, it will have turned a profit of $75,000 before closing costs.

Also on the market this month was a home Affinity purchased last year on 55th Street in north Long Beach for $250,000. Affinity invested $25,000 on the down payment and an equal amount in repairs and upgrades. The asking price was $359,000.

“It’s a balancing act, because if they are forcing people out of the neighborhood who need housing the most, they are compounding the problem,” said Jan Breidenbach, executive director of the Southern California Assn. of Non-Profit Housing, an organization of nonprofit home builders.

“If they are just going in there and sprucing up some neighborhoods, that sounds fine. The question is, are they contributing to the process of revitalization or gentrification?”

Johanns said Affinity is committed to the former. The group says that it sells its properties at or a little below market to encourage homeownership by area residents, she said. The strategy also accommodates Affinity’s desire for quick turnaround, so that it can reinvest its capital as quickly as possible.

“We want to swoop in and swoop out,” Johanns said.

On Peach Street, most of the volunteers (many of whom were part of a church group) didn’t seem to know that they had been recruited for a project organized by a for-profit business until a reporter mentioned it. But it seemed to be a nonissue.

As long as they were doing something positive for the neighborhood, they were happy to be involved.

“We call this ‘sacred Saturday,’ where you provide service, and this is what I chose to do,” said church member Rodney France, an optical physicist from Culver City. “There’s no such thing as an isolated neighborhood. You build around the edges and it will pick up.”

When asked about recruiting volunteers for a project that could indirectly benefit Affinity’s bottom line, Johanns acknowledged that the situation was a bit unusual.

But she said the group didn’t feel that there was a conflict because the volunteers were working on houses owned by Affinity’s neighbors and not on the home owned by the partnership. And she said leaders of the church group were aware of Affinity’s for-profit status.

The neighbors were certainly pleased.

The home Ethel Hayes rents to her cousins on Peach Street was getting a fresh coat of paint, and she came by to watch the work and say thanks.

“You can’t beat free,” Hayes said. “Prices have gone up, so people have been making improvements on this street. It used to be mostly all rental, but now more people are buying.”

Another volunteer was Mary E. Barton, a former business professor at Cal State Northridge who had heard about Affinity through friends. Barton is weighing a possible investment with the company, and she wanted to take a first-hand look to see whom she would be dealing with and how they operate.

“I believe in real estate as an investment and I think [Affinity] has a unique and much-needed approach to it,” Barton said. “Once in a while it’s nice to lend a hand and do something nice for people.”

Tony Salazar, West Coast president for McCormick Baron Salazar, which owns and manages thousands of units of subsidized housing around the country, praised Affinity for seeing unrealized opportunity where others have seen blight and red tape.

“Doing single-family housing is extremely difficult right now because the acquisition prices are so high. But they seem to have created a system that works,” Salazar said. “This is a mission that is helping to turn neighborhoods around. I commend that.”

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Darrell Satzman is a Los Angeles-based freelance writer. Contact him at satzman @earthlink.net.