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Grande Harbor Subdivision
(Jeff Keeling / Johnson City Press)

From unsold lots to foreclosures to liens, Grande Harbor faces continuous problems

By Jeff Keeling
Press Business Editor
jkeeling@johnsoncitypress.com

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The Tri-Cities is known for its conservatism, but the bubble mentality that gripped the nation during the housing boom may not have been completely absent here, and the Grande Harbor subdivision near Tri-Cities Regional Airport seems to provide a case in point.

It may have been a local case — with a heavy dose of involvement from outside investors — of what former Federal Reserve Chairman Alan Greenspan once referred to as “irrational exuberance,” a longtime local mortgage broker says.

“There was just a few of those projects that stood out in your mind a little bit, and that was one of them that seemed to be overpriced even at the height of the market,” says Steve Reed, who received several lot loan proposals for Grande Harbor property around the end of 2005.

“They (developers) have spent a ton of money and everybody’s in a good mood about the market, and then you might get a marketing company come in and say, ‘hey, I can sell your product for 30 percent more than you’re selling it for,’” Reed says.

Close to half the lots in the development — which remains barely 10 percent built out with homes — are owned by people from faraway places such as the Phoenix area, Maryland, California and even Alaska. Three such owners have told the Press they bought the lots as investment property.

Banks have foreclosed on dozens of other lots, there has been a dispute with nearby Tri-Cities Regional Airport over a runway, and the homeowners association has filed liens against dozens of lot owners for not paying their HOA fees.

It was to be an upscale haven on Boone Lake when co-developers Tim Carter and Jeff Booher unveiled plans to turn 206 acres of rolling land into a prestigious subdivision. Property records show the land was purchased March 31, 2004 from the Wagner family for $3,325,000.

Citizens Bank, a local community bank, financed that purchase, and public records appear to show the bank also provided an initial $2 million development line of credit that was expanded to $3 million, presumably for infrastructure costs. A bank official involved in the project didn’t respond to a request for comment, but this summer the bank took possession of 29 lots inside Grande Harbor.

The developers set about putting in extensive infrastructure, including underground utilities, one gated entrance, a clubhouse with swimming pool, and enough streets and sidewalks for about 200 lots. Eventually, the development was to include a private dock and boat slip area, walking trails, a community garden and a putting green, as well as several “pocket park” type common areas.

News releases from Grande Harbor LLC starting in April 2004 suggested the community would “add approximately $100 million in real estate tax base to the Sullivan County tax roll.” Carter, who declined comment for these articles, said the development would include 60 lakefront lots, 70 lakeview lots, and “multi-family Lake Villas and lake view condominiums.”

Six weeks later, the LLC claimed $2.3 million in lot sales, representing 35 percent of Phase I. In November 2005, the LLC announced the roads and other infrastructure was complete.

And by May 2006, a news release quoted Carter as saying the development was “unprecedented in Sullivan County” and that a projection of two members per household on 193 lots “would be the equivalent of bringing over 1,000 new factory jobs to the region — rivaling that of an entire workforce of a large manufacturing facility.”

The same release noted that Grande Harbor was “of particular to interest to investors outside the Tri-Cities region.”

It quoted Carter’s then-partner, Booher, as saying “approximately 75 percent of the individuals purchasing home sites at Grande Harbor are from urban metro areas like Chicago, New York, New Jersey, Detroit, Washington, D.C., Columbus, West Palm Beach and Miami.

“They are increasingly attracted to living in regions like Northeast Tennessee because of natural beauty, security and our mild climate with four distinct seasons, while our central location allows them to maintain convenient access to the urban services they have become accustomed to,” he (Booher) added.

Today, the neighborhood includes a smattering of occupied homes and more than 150 empty lots, many owned by those out-of-towners who bought in what one area banking executive has dismissed as a “flip scheme.” Along with the dozens of absentee owners, property records show extensive bank ownership, as some lots have gone through foreclosure. The homeowners association has filed liens against about 55 mostly absentee owners for non-payment of HOA assessments.

A recent drive through the subdivision showed that 15 homes were occupied and not for sale, while the other nine were for sale.

How it got there

A local mortgage broker who saw several loan proposals for Grande Harbor lots in late 2005 and early 2006 says he alerted the bank he was working for at the time that something in the deals gave him pause. While he thinks the lakefront lots in Grande Harbor will sell eventually, Steve Reed isn’t so sure about the dozens of “lakeview” lots in the development.

“I think that’s going to be a long-term process out there, particularly on the interior lots,” Reed says. “Most people will deal with the inconvenience of maybe not being as close to a grocery store if a lot is lakefront, but what I’ve seen won’t make that drive to be an interior lot in a lakefront subdivision. What scares me about that type of development is, where will the prices have to go to attract buyers? I’m looking at prices on those lots that are half or less what they were selling for back in 2005.”

Reed had sold a mortgage business in 2005 and was working for an area bank when a few loan proposals for lots in Grande Harbor reached his desk. A few things caught his eye, and Reed ultimately helped convince his bank to avoid taking on lot loans there.

“The first thing that caught my eye was, for interior lots the price seemed high,” Reed says. He says the “comps” (three comparative prices on sales that accompany any appraisal) seemed out of whack, and that they usually amounted to sales within the same subdivision.

Reed also noticed that most prospective buyers were from out of town — far out of town. Finally, Reed says, he saw within the paperwork “seller concessions” that involved the developer offering “to pay at least a minimum of 12 months payments ... in some cases I think 24 months. The developer didn’t really try to hide anything, it was just, ‘here it is.’”

Based on purely objective underwriting principles, Reed says, there was no reason for a bank not to take on the loans. The borrowers had very good credit and good debt-to-income ratios.

But Reed was familiar with what interior lots in nice Tri-Cities subdivisions were selling for, and it didn’t approach the Grande Harbor numbers.

“We were still getting interior lots in nice subdivisions selling anywhere from $30,000 to $70,000, and these came in most of them over $100,000, so there was a price discrepancy even then.”

While it wasn’t his duty to try and protect the buyers from overpaying, Reed says too many factors pointed to potential trouble down the road for the bank.

“If it’s raw land, it’s purely a speculative type investment for the borrower, and in the default cases that’s the highest risk. It’s not where he’s laying his head down at night.”

It doesn’t take many foreclosures, Reed says, to outweigh some performing loans.

“If you have a few of those and you lose $50,000 to $60,000 because you’ve got it as an REO (bank-repossessed), you lose that on one or two deals, that’s more than you’ll ever make on several deals that pay. So you’ve just shot yourself in the foot. One deal can kill a lot of deals.”

The bank Reed was working for had just started lending into Grande Harbor, and cut off lending fairly quickly. It didn’t come out unscathed, Reed says, but isn’t facing a major problem, and in hindsight, Reed stands by his recommendation to the bank.

“As lenders, it’s easy to see where we’ve made a lot of wrong calls on things, but that was absolutely the right call out there.”

Finding buyers a challenge

Even Grande Harbor’s lakefront property faces the same challenges today as all other higher-end projects. Those challenges include rising foreclosure rates among “top tier” homes, and a squeeze on the type of jumbo and other loans often needed to complete purchase of expensive homes.

The result could be a glut of higher-end homes and not as many families able to finance them.

“I think the market with those types of lots is going to be a custom homebuilding market more than a spec market (in which builders buy a few lots, construct homes and wait for them to sell),” Reed says.

Still, he says, the Tri-Cities did appear to be on the cusp of a housing growth spurt before the national market turned downward. Mention the word “halfbacker” to a real estate agent or anyone else involved in the local housing industry and they’ll be quick with a definition: someone who migrated to Florida or elsewhere in the Deep South and, for whatever reason, has discovered the charms of the “Mountain South” and is ready to move “halfway back” to their original home somewhere in the North.

A related creature is the person still in the Midwest or Northeast who is ready to retire to warmer climes, but has also discovered this area.

A strong turnaround in those markets could propel the local market and bring a return even to successful spec building, Reed says.

“I don’t see those folks right now, but I think they will come if the Florida markets and the Michigan markets improve and these people can dump some houses. I think there’s some pent-up demand and we’ll eventually get those folks back because this is such a desirable place to live.”

Meanwhile, Grande Harbor lots are being marketed for a wide range of prices. Two adjacent lots on Grande Harbor Way, purchased in early 2006 by a Wyoming investor for a total of $399,000, are on the market for $239,900 each. At that price ($480,000 total), the seller would have made a return of about 20 percent.

Another, purchased by a Phoenix-area buyer for $179,900 in August 2007, is on the market for $229,900, which would represent a 28 percent return.

On the other hand, a lot that sold for $159,800 in March 2006 then returned to bank ownership in 2008 was sold in June for $45,000 to a local buyer. Another that sold for $99,900 in October 2005 went for $35,750 just over a month ago.

“It’s still all about price, and I truly believe that anything will sell for the right price,” Reed says. He says both banks that have foreclosed and own lots, and investors, could come out okay if they have enough staying power “and say, ‘we’re going to hold this property until the market comes back around.’

“It comes down to how much tolerance for pain do you have.”