The New Math For Worcester's Three-Deckers | How the housing crisis is changing the market for these multi-family homes
The Worcester three-decker, once a common sense investment for someone looking to get into the multi-family real estate market, has seen better days.
With overheated buyers paying exorbitant sums for three-deckers in the last five years, now even foreclosed properties are too expensive to make money for buyers.
By The Numbers
According to the real estate listing service MLS Property Information Network of Shrewsbury, 293 three-deckers were sold in Worcester in 2003 for an average of $273,814 after being on the market for about 70 days. But during the boom times of the real estate market, some investors were even willing to pay more. In 2003, 68 Worcester three-deckers sold for between $300,000 and $399,999 after being on the market an average of just 60 days.
But the story is much different today. As of July 2 this year, only 94 three-deckers had been sold in Worcester after being on the market for an average of 171 days and for an average price of $165,067.
That’s a nearly 40 percent decrease in the average price and a nearly 70 percent increase in the time on the market.
By comparison, single family home prices fell only 4.6 percent over the same period and stayed on the market 54 percent longer so far this year than they did in 2003.
So, given the current market for real estate, what’s an investor in a three-decker getting himself into? The Worcester Business Journal did the math, with a currently available three-decker at 98 Ward St. in Worcester as the example. Here’s how the numbers shake out:
Donald Theoharides of Theo Properties in Worcester has the foreclosed 98 Ward St. listed at $149,000, well below its $300,000 assessed value and $15,000 less than this year’s average sale price. The property was put up for sale in March at $239,900 and it needs some work.
“To make it rentable, $20,000 might shape this right up,” Theoharides said. But in actuality, the 4,040-square-foot, 118-year-old Vernon Hill property within spitting distance of Interstate 290 could easily absorb $50,000 in improvements, including converting the heating system.
So, let’s assume a buyer takes out a $200,000 mortgage to buy and refurbish 98 Ward St.
According to Mark LaMountain, vice president and mortgage loan officer at Worcester-based Commonwealth National Bank – which advertises its mortgage department on billboards in the Vernon Hill area – a 30-year, $200,000 mortgage at 6.375 percent interest with no down payment would cost $1,247.74 each month. That’s $14,973 per year.
If the owner lives in the building and collects the average rent for an apartment in a Worcester three-decker — $800 per month — from the remaining two apartments, he’ll bring in $19,200 per year in rent. That’s more than enough to cover the mortgage. If all three units are rented out, the landlord would collect $28,800 per year in rent.
Depending on whether or not he or she lives in the building, the new landlord has a margin of either $4,227 or $13,827 on the mortgage.
Let’s see how fast that can be spent.
According to Theo’s listing report, property taxes would cost the owner of 98 Ward $3,767 per year, slightly more than the city average of $3,618.39.
City water and sewer use would cost the homeowner $1,200 per year, according to the city. Homeowner’s insurance would cost $1,200 per year and private mortgage insurance would cost $2,052 per year, according to LaMountain.
Theoharides said he would count on $1,000 per year to cover “incidentals” like vacancies and $1,000 per year for maintenance; all that adds up to $10,219 per year.
So far, 98 Ward costs the owner-occupant money, but only about $6,000 per year or about $500 per month. The investor that rents all three apartments still has $3,608 at the end of the year.
And in Worcester, the year includes winter, a fact every real estate agent the WBJ spoke to neglected to account for.
According to Pioneer Oil on Canterbury St. in Worcester, the average three-decker goes through between 2,400 and 2,700 gallons of oil per year. The current price of oil at Pioneer is $4.76 per gallon. A three-decker owner would probably get a discount to $4.66 per gallon, so the total cost adds up to between $11,184 and $12,582 per year on oil.
Distribute that evenly among the tenants, and rents exceed $1,100 per month, which may not seem excessive, but for 98 Ward St. and many of the city’s 4,888 three-deckers, it is. National Grid doesn’t break down electricity rate information by housing type, but according to company spokesman David Graves, the typical Massachusetts National Grid customer pays $1,035.84 per year for electricity.
Getting Out
With the math the way it is, some investors are getting weary of the three-decker, including Harry Avery, owner of Avery Investment Properties LLC of Worcester.
Avery has sold every last one of the 75 three-deckers he owned in Worcester, Southbridge and Webster and he doesn’t plan on buying another one anytime soon. The enormous costs of buying, refurbishing, insuring and maintaining a three-decker has made precarious an investment that was once pragmatic.
“You can’t spend a lot on them, because with the amount of rehab, it doesn’t make sense,” Avery said, adding that the most rent he ever charged for a three-bedroom unit was $1,050 per month.
These days, Avery said he wouldn’t pay more than $75,000 for a three-decker. Over the years, Avery spent as little as $40,000 to refurbish — and as much as $110,000 to completely gut — his three-deckers.
Today, with high heating fuel prices, high refurbishment prices, and perhaps most important, high purchase prices, landlords may choose to skip the rehab. Or they may choose to get out like Avery, either by putting the properties up for sale, or in the worst case scenario, waiting for foreclosure.
According to MLS PIN, there are currently 200 three-deckers for sale in Worcester, 50 of which are under agreement. But the foreclosure crisis is hitting three-deckers hard. Since the first of last year, 370 petitions to foreclose have been filed against Worcester three-family homes (not all of these are three-deckers) and 173 three-family foreclosure deeds have been filed, according to Boston-based real estate tracker The Warren Group.
The Future
Given the market, and the fact that oil prices are only going higher, is the three-decker an out-moded investment?
The economics of owning a three-decker could bring the city back to an oft-romanced time in its history when large, extended families lived under a single, flat roof in a Worcester three-decker. It’s still not a moneymaker, but living in one unit and renting out the other two to family still makes home ownership more affordable.
Currently, there are 2,661 owner-occupied three-family homes in Worcester and 1,595 that are not owner occupied, according to The Warren Group.
So it’s back to 98 Ward St., the interior of which Theoharides calls, “unbastardized.” There aren’t any drop ceilings, its common areas haven’t been divided for privacy’s sake. All of its original woodwork is intact. The large, three-bedroom apartments are still served by a lovely wood staircase lighted by small stained glass windows.
“If you were going to live here, and your mom was going to live here and your sister was going to live here, I’d say $15,000 per unit” in refurbishments, Theoharides said.
And even if the owner is paying $12,000 per year for oil and charging his mother and his sister $800 per month, the property costs a reasonable $1,500 per month to own. For anyone still brave enough to get into the market for a Worcester three-decker, Theoharides has simple advice:
“Plan for the worst and expect better.”
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