How are $250,000 homes considered affordable housing?

That question has come into focus after the Mitchell Area Development Corporation (MADC) unveiled its plan to create an affordable housing development on 21.7 acres of land located on the corner of Foster Street and East Eighth Avenue. The land was donated by Avera Queen of Peace hospital, and it could be the home of an affordable housing development with 90-plus homes estimated to cost around $250,000. Mark Vaux, CEO of the MADC, said the housing project would address the city of Mitchell’s serious need for affordable housing.

The project was tabled on Jan. 27 by the Mitchell Planning Commission, but project leaders have since tried to provide a clearer picture of the financing process and how the builders will be involved with the proposed development.

Clinton Powell, executive director for Shelter Community Housing Corporation, a nonprofit organization that helps bring affordable housing to primarily rural communities in need, broke down the financing process of the affordable homes and how the local contractors can be involved. Through Powell’s organization that was founded just over a year ago, he would utilize various financing methods that calls “creative financing.” Vaux said Powell's expertise and knowledge regarding community housing was a vital component of the housing project.

The cost of the homes that would be constructed on the development will be set by the builder of the home, which Powell said would have a maximum price of $275,000. However, Powell said he expects the home prices to be around $233,000 or below. There is not a minimum cost for the home prices set by the builders, according to Powell. Through Powell's organization, he would facilitate financing with the interested homebuyers. Powell said the homes would be attainable for people who earn around the average median household income level in Davison County — which is $47,772, as of 2018. For example, a married couple who each make $45,000 would qualify.

Powell said that a combination of financing through traditional banks and Shelter Community Housing Corporation will make the single-family homes a reality. If homebuyers are willing to make a 5- to 10-year commitment to own the home, Shelter could offer to forgive what's called a "silent second mortgage," which is used to supplement a traditional mortgage when a homebuyer cannot afford the full payment on a primary mortgage. The silent second mortgage is one delivery method of the three types of financing provided, which are down payment assistance, principal assistance and a reduced interest commercial mortgage.

“It’s instant equity gains for those homeowners, and a portion of those funds may happen at 0% interest on their mortgage to allow them to buy down their monthly payment while still repaying the full amount of the house,” Powell said.

The delivery of the financing methods — of which Powell said there are many — worry several residents living nearby the proposed development area, considering the silent second mortgage would tack on an additional mortgage for a potential homeowner. Pam and Mike Bathke, who live off East Eighth Avenue in the Firesteel Heights neighborhood, are two of those nearby residents concerned. Mike Bathke is also a contractor and business owner.

“I worry that we’re going to have a bunch of houses scattered across from me that are all going to have second mortgages on them when they are first purchased, which makes me question if that is really affordable housing,” Pam Bathke said. "I feel like it is a financing process for homebuyers that are buying a home beyond their financial means."

While agreeing to a time commitment is one method homebuyers have to make a $250,000 home more affordable, Powell said they have the option to sell the home sooner than the time commitment but the owners risk losing the equity.

Addressing concerns from nearby residents regarding whether local banks will be involved, Powell said the primary mortgages will be provided by area lenders. Considering the multiple funding and financing streams Powell’s organization offers for potential homeowners, he said the mortgage underwriters may face unique challenges in the lending process.

“From a lending perspective, it’s a lot of different funding streams that makes for a harder process for the banks' mortgage underwriters, and whatever banking partners there are will just have to be comfortable dealing with multiple funding streams,” Powell said. “We’re in the process of putting together a lending (request for proposals) as well to find out which local lenders are interested in working with the program.”

Powell’s organization is funded by multiple entities such as the state of South Dakota, the federal government, private companies and several banks that are involved with a commercial re-lending group to help reinvest in communities for housing related developments. Although Powell has received funding for affordable housing projects in small communities such as Parkston and Platte, he said the Mitchell development would mark the first project his organization has been a part of in a first-class municipality.

Building process

Powell and his nonprofit organization would be in charge of handling the request for proposals, which are documents that must be submitted by interested contractors to propose building a home or several of them on the lots in the development. Ultimately, a review committee that’s being organized will have the final say in which contractors will be allowed to build the homes.

The development was initially expected to bring as many as 94 homes to the area, most of which would be traditional single-family houses. But after nearby residents requested the lot sizes along East Eighth Avenue be widened from 60 feet to 80 feet, the development would now max out at 93 homes, Vaux said.

According to Powell, all of the homes in the development would be built on spec, meaning the construction company builds a home with features the builder believes will be appealing to interested homebuyers. The development would be entirely built by local construction companies and contractors, Powell said. In addition, there would be no charge for the lots that the builders construct homes on.

The builders who construct the homes, not the homeowners, would be obligated to fund construction. Powell noted builders could pre-identify a homeowner before they start construction, but they wouldn’t receive compensation for the sale of the home until the sale closes.

“By having the builder carry the construction costs, it really gets away from some of the issues that we normally have with new homeowners who tend to be not quite as financially literate as existing homeowners,” Powell said. “Going out and getting construction financing is a really scary process for potential homeowners, especially just compared to getting a mortgage. If we can switch that to the builder, it makes getting into a house much more attainable.”

From a builder's perspective, Mike Bathke said it’s a big financial commitment to foot the bill of building a home with the uncertainty of it selling.

“I support the concept of bringing affordable housing to Mitchell, but I don’t support the process of this particular project. The way that this is laid out, it could likely eliminate some of the smaller, independent contractors and construction companies because you must carry the cost of building the home on your own until the day the home sale closes,” Mike Bathke said. “There are a lot of contractors who can’t sit on a $250,000 bill for very long. What if the house doesn’t sell for a year, two or three?”

Other Mitchell developers said they are taking a wait-and-see approach to how the development might take shape. Jeremy Jensen, a local contractor with nearly two decades of experience, said he's supportive of growth in the city of Mitchell but would like to see more details regarding the business model before he can formulate a stance on the development.

Under the guidelines and regulations of the current builders' RFP, Powell said it is up to each individual builder to market and sell the homes it constructs in the development. However, each builder may utilize a realtor of its choice to facilitate the sale of the home.

“The builder can also identify a homeowner before they start construction, including the signing of the purchase agreement,” Powell said. “The builders will have a lot of freedom in this development, and this development is open for all local builders to build homes.”

According to Mike Bathke, taking on the cost of hiring a local realtor to help facilitate the sale of a home is not a cost-effective option.

“Under the way this is set up, contractors would have to cover all the construction costs, and hire a realtor who will get a percentage of the sale. That isn’t an attractive option,” Mike Bathke said.

According to Powell, a not-yet-identified team of people would review builders' RFP documents. A lot lottery system would then be implemented for interested builders to determine which contractors get to build a home, or several, within the development, Powell said, noting the RFP is not yet finalized and could be subject to change.

“I don’t see any situation where we would have one builder nominating the entire buildout of the development,” Powell said. “We are receiving input from the local contractors and builders to tweak the builders RFP. This is a great opportunity for local builders to get a lot for free to build a home on.”

Vaux said he is confident that Powell will make the project a success with all the responsibilities he is taking on. He emphasized the builders' RFP would allow every contractor and builder to buy a lot and build on it, should the development be approved.

“Every builder and developer in Mitchell can get a lot in this development. Everyone is invited,” Vaux said. “I’m certain that not all of them will partake, but that is a decision they have the freedom to make.”

The next step for the development proposal to move forward will take place Feb. 24 at the city Planning and Zoning Commission meeting, in which a recommendation of approval will be voted on. Vaux sits on the Planning Commission, but he has recused himself from the development proposal, citing a conflict of interest.

The Mitchell City Council will also have a vote on the development, and both the City Council and Planning Commission will also have a decision to make regarding the proposed tax-increment financing district planned for the area before it can be built.