An eye-opener: outstanding debt and liens on perhaps 25 of first 117 buyout properties larger than buyout payment

Posted on Nov 11, 2009 by Rick Smith.

The modest circumstances of some flood victims is being driven home by a new estimate: Perhaps 25 of the first 117 owners who will have their flood-damaged properties bought out by the city in the weeks and months ahead will not receive enough in the buyout to cover their outstanding mortgage and/or liens and judgments on the property.

In other words, the buyout at the pre-flood value of the property will bring those owners no money, and, instead, will leave them with debt they will still be answerable for.

This eye-opening state of affairs prompted the City Council to agree to earmark an estimated $20,625 in local-option sales tax revenue designated for flood-related housing needs to hire a mediator to help property owners resolve issues of outstanding debt on their buyout properties.

The amount is based on an estimate that it will cost $825 to use a mediator for each of the 25 properties.

Without a resolution between owners and debt-holders, the city won’t be able to gain title to the property. This could result in abandoned homes left standing near the river for an extended period of time, Rita Rasmussen, the city’s senior real estate officer, told the council on Tuesday evening.

All 117 properties – except for a few that are vacant lots – will be demolished within 90 days of buyout to make way for a greenway along the Cedar River.

The first buyout offers will be made within two weeks, with the first closings on buyout properties expected to come 30 to 60 days after that, Jennifer Pratt, the city’s development coordinator, said Wednesday.

At its Tuesday evening meeting, the City Council had a lengthy discussion before deciding to use local-option sales tax revenue to hire a mediator for buyouts in the proposed greenway.

Council members Chuck Wieneke and Pat Shey noted that paying a mediator only gets the debt-holder and property owner to the table to talk. It does not guarantee that the debt-holder will agree to set aside the debt, and then what happens, they wondered.

Council member Justin Shields, though, said the issue at hand was to get the parties to the table and see what can be resolved. Cleaning up the debt issues is a benefit to the flood victim because it will position the victim to move on and purchase other property, he said.

Rasmussen and Pratt note that such mediation service in will be paid with federal Community Development Block Grant funds for the bulk of the city’s buyout of flood-damaged properties. However, the Federal Emergency Management Agency, which is providing almost $8 million for the first 117 buyouts of properties in the greenway area, has decided not to pay for mediation.

The city estimates it may purchase 1,300 properties in total before all is said and done.