One woman’s travail is a cautionary tale

In mid-January, retired nurse Glenna Osborne filed a Chapter 7 bankruptcy petition.
Osborne lives in an $82,000 home in Churchville, has declared income of less than $30,000 a year-and amassed $2.2 million in debt.
Virtually all of her debt stems from a single source: a portfolio of 54 single-family and multiple-unit rental properties in the city of Rochester, all of which are under foreclosure.
The large batch of foreclosures at one time has seldom been matched in the city, said Bret Garwood, Rochester director of development services.
Osborne owns some of the rental properties in her own name, filings with the Western District of New York U.S. Bankruptcy Court’s Rochester office show. Others are held in the name of Osborne Development Strategies Inc., a company in which she is the sole shareholder.
Few would take Osborne, a slightly built gray-haired woman of grandmotherly age with a shy smile, for a major real estate investor.
Osborne is a far cry from Donald Trump. She was not looking to get rich, but had hoped her real estate investments would buoy her comfortably through retirement, said her son, Alan Osborne, who until recently managed his mother’s rental properties.
His duties as his mother’s property manager fell off sharply beginning in 2006, he said. That spring, having decided her real estate venture was no longer sustainable, his mother stopped advertising for tenants. It was a bitter pill to swallow for both of them, Alan Osborne said, because for several years the enterprise had showed every sign of being on solid footing.
Glenna Osborne states in bankruptcy papers her remaining income is a $725 monthly pension and a Social Security check. The pension and Social Security payments bring in $2,160 a month, $406.60 less than her current monthly expenses, her filing states.
Last week at a hearing in a small room on the Kenneth B. Keating Federal Building’s sixth floor, Glenna Osborne faced Chapter 7 trustee Lucien Morin II.
A partner of McConville, Considine, Cooman & Morin P.C., Morin is one of a pool of local private-practice bankruptcy attorneys the U.S. Trustee assigns to oversee debtors’ Chapter 7 asset liquidations. Mother and son exchanged swift glances as Morin, surveying a dozen or so debtors waiting to be examined by him, announced, “Because of its complexity, I will take the Osborne case last.”
After noting he expected to find no meaningful assets other than foreclosed properties among Glenna Osborne’s possessions, Morin, seeming genuinely puzzled, asked her: Given the modest income detailed in her filing, how did she convince lenders to write more than $2 million worth of mortgage loans on 54 investment properties? And once she had amassed the small real estate empire, how did she come to lose it?
Some dozen large national lenders, including Citimortgage Inc., Wells Fargo Bank N.A., Countrywide Home Loans Inc., Household Finance Realty Corp. and ABN AMRO Mortgage Co. are listed in Osborne’s bankruptcy filing as having written first mortgages on the rental properties she owned in her own or corporate names.
Alan Osborne sees his mother partly as a victim of the recently pricked U.S. real estate bubble, but only indirectly. Lenders did not tempt Glenna Osborne into overextending herself and neither was she counting on the skyrocketing value of her properties to indemnify her real property investments. Rental income was supposed to keep the enterprise going, her son said. But the recent overheated housing market dried up the local tenant pool.

Borrowing to buy

Helped by her son, Osborne started buy-ing city rental properties in 1997 and continued adding to her portfolio until 2005. She bought all of the investment properties at foreclosure sales. To acquire the houses, Osborne borrowed sums from a Rochester-area man named Edward Berlinski, who privately makes short-term bridge loans to local entrepreneurs.
Berlinski did not respond to a request to comment.
Neither of the Osbornes sees Berlinski as bearing any blame for the collapse of her real estate venture.
“He’s a nice guy,” Alan Osborne said. “We got to be pretty good friends.”
Typically, Alan Osborne said, his mother borrowed from Berlinski at rates around 16 percent. Alan Osborne would spend several months rehabbing a property. When it was in good shape and rented to a tenant, Glenna Osborne would go to a mortgage broker, get a loan on the property from a national lender at a more favorable rate and pay off the Berlinski loan.
Osborne said she arranged mortgages through a variety of local mortgage brokers and that securing the loans that financed her growing portfolio had not been hard.
Though an elderly retiree on a modest fixed income might at first blush appear to have been an unlikely real estate mogul, it had not been unreasonable for lenders to extend more than $2 million in credit to Osborne, Morin concluded. In each case, she was asking for loans on recently rehabbed and tenanted properties to which she already had title, he said. And for several years, her system worked.
“When we first started doing it, it was going great,” Alan Osborne said.
Glenna Osborne agreed. “People were lining up to rent my houses,” she said.

Turn for the worse

Things started to go wrong around 2003, Alan Osborne said. As interest rates fell, many of his mother’s best tenants took advantage of looser lending standards and low interest rates to become homeowners. Meanwhile, other tenants were thrown out of work as mainstay employers such Eastman Kodak Co. continually downsized. Tenants who found new jobs often did not make as much as they had before. And some pulled up stakes, departing for Sunbelt regions where they had secured jobs or saw better prospects. Others stayed but did not find new work and stopped paying rent.
“We had to start evicting people,” Alan Osborne said. “It got worse and worse. One year we had to do 10 evictions.”
For a landlord with problem tenants, eviction is often less than an ideal solution, he said. Procedures are costly. Legal fees and court costs mount but no rent comes in. As the eviction rate climbed among Glenna Osborne’s properties, it became harder and harder to find reliable replacement tenants. By 2005, the balance in her portfolio had tipped in the wrong direction. It was costing more to maintain properties and service the mortgages than the properties could bring in.
As his mother’s rental houses emptied, Osborne’s property management load lightened.
“I guess I’m out of work now,” he said last week.
Actually, Alan Osborne conceded, he is not exactly unemployed. He and his wife own and manage 18 still-viable rental properties in the city. He declined to speculate on the long-term prospects of his real estate holdings. Being a landlord in the city is neither an easy nor a certain job, he said.
As her properties’ outlook worsened, Glenna Osborne said, she managed to sell some of her portfolio, finding buyers for a dozen homes and managing to reap a profit on some. But the sales did not stave off disaster.
“The capital gains taxes killed me,” she said.
By 2006, it became clear that her only solution was to walk away. Though she admits to some embarrassment over her predicament, Osborne also shows flashes of black humor.
To Morin’s query-one among a laundry list of standard questions trustees are required to ask of Chapter 7 petitioners-as to whether she knew of any inheritance she might come into in coming months, Osborne quickly shot back a wry riposte.
“At my age,” she said, smiling, “there’s not really much of anybody left around to leave me anything.”

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02/22/08 (C) Rochester Business Journal