Thursday, Feb. 21, 2008 | Lela Mazzeo rested an arm on a doorframe in the first home she ever owned and sighed. Behind her, sunlight streamed through a window and struck the dining room table, one of the only pieces of furniture left in the house. Her 2-year-old daughter, Marley, bounded up and down the stairs.

The two-story house on a large lot in Casa de Oro — on the less expensive side of the La Mesa border — has been listed for sale for three months. The Mazzeos haven’t lived in it since 2003, when they bought and moved into a home in Imperial Beach. They kept the Casa de Oro house, renting it at first to friends and then to long-term tenants. The last tenants moved out in December 2006, leaving the Mazzeos to 11 months and at least $75,000 of cleanup and renovating before they deemed it sellable.

But even when they had tenants, the rent the house garnered — $2,000 to $2,100 — fell far short of the nearly $4,000 the Mazzeos paid each month on its mortgage and upkeep.

And since listing it for sale in November for $575,000, they’ve dropped the bottom of the asking price range to $499,000, less than they owe. They bought this house in 2001 and have accumulated four more properties, including the house in La Mesa where they live now.

This home in Casa de Oro isn’t appreciating the way it once did, the way they counted on it doing when they refinanced to buy other properties. And they can’t get enough rent to sustain their payments in a down market.

“It’s just a matter of how many we lose before we get to a place where we’re sound financially,” James Mazzeo said last Wednesday as he waited for his appointment with a lender rep at a foreclosure clinic. “It’s been like a really long rollercoaster — just down. Just falling, falling, falling.”

The housing boom earlier this decade yielded a slew of first-time landlords like the Mazzeos. Homeowners who’d scrimped to save a down payment for a conventional loan on their first home found a windfall in equity as home values ascended dramatically. They refinanced to take advantage of that, applying that equity to purchase another property, and another after that. They rented out the houses along the way, dreaming of easy retirement when, one day, they sold all of the properties to realize the millions they were sure they’d make in the San Diego real estate market.

Now those times have changed. Many of those novice landlords used the troublesome loans with spiking payments that have sent so many San Diegans into foreclosure. And rents, though rising modestly in some areas in the county, haven’t seen nearly the dramatic bump that for-sale homes experienced, widening the gap between the monthly payments landlords are making and what they can expect to rent it for.

“The big question really for them is what did they pay for it?” said Bob Pinnegar, executive director of the San Diego County Apartment Association. “Even if it’s not subprime, as the [mortgage payment] goes up, there may or may not be room for those rent increases.”

Pinnegar estimated detached homes for rent comprise about 7 percent of the county’s housing stock, compared to the 38 percent for apartments. He said he expects that 7 percent represents growth from a few years ago, when selling proved quite lucrative for owners of single-family homes. But now that the market has cooled, Pinnegar said he hears often that novice investors are holding on to their homes and renting them out, hoping for a better market in a few years.

“I think that it’s probably more common than we realize,” he said. “There were a lot of people who wanted to get into real estate, wanted to get income property, and they over-leveraged. If the market could’ve continued to go on for five years, they’d be fine, but especially where you see values dramatically dropping, if they don’t have the cash flow, they’re in trouble.”

Last week, Lela and her husband squeezed into a middle school auditorium in southeast San Diego with 200 other distressed homeowners clutching their mortgage documents. Some were already in foreclosure. Others, like the Mazzeos, are thinking about sending the lender their deed — a voluntary surrender of their property in lieu of a foreclosure. The prospect leaves their faces grim and their financial outlook gloomier.

While the Mazzeos say they’re not in danger of losing the home they live in with their two toddlers, they’re not sure how long they can hold onto this home in Casa de Oro, the two homes they own in Imperial Beach, and the condo in Oceanside. They admit they were blinded by the allure of appreciation. They speak frankly about their part in signing up for loans that were quite contingent on the market boom.

“I don’t want to rent it back out and have it be a huge struggle for three or four years and get it back in bad shape again,” she said. “We don’t want to throw good money after bad. When do you make the decision to say we have to cut our losses? Whatever we’re going to do, we want to do it now so we can just start digging ourselves back out.”

The average monthly rent for a two-bedroom unit — including apartments — for the Mazzeo’s ZIP code was $1.49 per square foot in fall 2007, according to the most recent rental rate survey conducted by Pinnegar’s organization. For the Mazzeo’s house, that would look like a monthly rent of $2,795 — still well below the amount they’ve been paying each month on the mortgage and maintenance. But even when landlords use such models to calculate their rental rates, they have to find tenants who are willing to pay that.

On a recent afternoon in the house, Lela Mazzeo showed a visitor all of the work she and James had done to fix it up. Wood floors and new appliances and fresh paint gleamed throughout the house. A silver decoration of the word “INSPIRE” sat on a shelf under a glass vase filled with sparkly decorative pears.

But even though the $500,000-range asking price is more than $200,000 more than they paid for it in 2001, selling it for that much wouldn’t let them break even, because of the repairs they’ve made and because they owe about $500,000 on it.

But this type of close call for the landlord-owners of individual homes is less common on the apartment side these days, said Robert Vallera, principal with Commercial Realty Advisers. Vallera has watched the apartment-investing market for more than 25 years here, and remembers in the early 1990s when lenders foreclosed on about 10 percent of the apartment stock.

In the most recent boom, lenders had learned a lesson, Vallera said — they were requiring “substantial down payments, of 25 to 50 percent,” he said.

“Couple that with the fact that the rental market is not being adversely affected by the for-sale side of the residential market, and apartment investors are not having the operation problems they had in the early 1990s.”

Please contact Kelly Bennett directly with your thoughts, ideas, personal stories or tips. Or send a letter to the editor.

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