Outbid on the side

Loophole in Davis affordable housing program allows for shadow bidding wars

Michael Zwahlen, 45, sits at a patio in downtown Davis. He has struggled for more than a year to purchase a home for his family within Davis’ affordable housing program.

Michael Zwahlen, 45, sits at a patio in downtown Davis. He has struggled for more than a year to purchase a home for his family within Davis’ affordable housing program.

Photo by Ben Irwin

Davis resident Michael Zwahlen and wife Jasmine hoped the fourth bid would be the charm when they placed an offer to buy a three-bedroom, two-bathroom home at 3675 Nido Terrace through the city of Davis’ affordable ownership housing program.

The Zwahlens’ bid wasn’t accepted. While the Nido Terrace house had an asking price of $360,446, the Zwahlens would also have had to cover closing costs, moving costs and a month’s rent—a total of about $27,000, none of which would go to the actual sales price.

Over the last year and a half, the couple has attempted—and failed—to purchase four different homes through the program, which offers homes at below-market prices in a city where the median house value is $662,400, according to Zillow.

Each time, they learned a little more about the side cash offers from their fellow qualified buyers that have left them still searching.

“In vague terms, it’s never in writing,” Michael said. “You can offer to pay for closing costs, which can be a myriad of things. You can offer to pay for moving costs. What would moving costs be? ’Oh, whatever you feel is comfortable.’”

He questions whether the program is running as intended. “This is one of those programs that feels good—it’s a feel-good,” he said, “I’ve been through the grinder four times now, especially when I get my wife’s hopes up because, man, we’re throwing a lot of money at this.”

But the Zwahlens’ experience of being outbid through side deals is not actually against the affordable housing program’s rules.

Kelly Stachowicz, assistant city manager for Davis, said the program operates on two levels: new builds and resales. To be considered for either, a household cannot earn more than 120% of area median income.

New homes are purchased through the developer, which, “to ensure fairness,” conducts a lottery to determine which eligible applicants get the first chance, the city says on its website. That means competing buyers cannot sweeten the pot on the side.

But for resales, the rules are different, Stachowicz said. After occupying an affordable housing unit for at least 24 months, the owner may choose to sell. Prospective buyers must get on a list to be notified of available houses, and after getting qualified for a mortgage, can make an offer to the private seller and/or realtor.

There is no lottery, however, and the 3.75% a year cap on home price increases (5.5% in the Southfield Park development) doesn’t cover any concessions made in escrow as part of an enhanced offer.

“We haven’t gotten involved in those,” Stachowicz acknowledged, “and I think that’s where we are having some of our conflict right now.”

She said the city is looking at how they can better educate homebuyers about the process and may consider giving priority to interested resale buyers who have been waiting longer.

Now, she said, “somebody who just signed up has an equal shot to somebody who’s been on the list for six months.”

Rick Jacobus, principal at Street Level Advisors who works with inclusionary and below market rate housing programs nationwide, said these side payments are not a common problem.

“Many cities explicitly prohibit these side payments in their program rules or legal documents, and they monitor for compliance by reviewing a copy of the closing settlement statement from the title company,” Jacobs said. “Those steps may not eliminate all risk of side payments, but we don’t see many examples of this problem in other cities.”

The 2011-12 Yolo County Grand Jury investigated complaints about the fairness of Davis’ affordable housing program and found that all but 90 of the approximately 700 affordable housing ownership units had been sold at market value with significant profit to the sellers.

“It’s not like we have an epidemic,” Stachowicz said of the complaints. “We definitely have had people over the years who have been frustrated because, in my opinion, there’s a very small supply of these homes. So it’s a very tight market for anything, whether it’s market rate units or subsidized ones.”