Frank Ford, Senior Policy Advisor Thriving Communities Institute Cleveland, Ohio April Hirsh,...
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REO Investor Activity In Distressed Neighborhoods in Cleveland, Ohio Frank Ford, Senior Policy Advisor Thriving Communities Institute Cleveland, Ohio April Hirsh, Research Assistant Center on Urban Poverty and Community Development November 1, 2013
Frank Ford, Senior Policy Advisor Thriving Communities Institute Cleveland, Ohio April Hirsh, Research Assistant Center on Urban Poverty and Community
Frank Ford, Senior Policy Advisor Thriving Communities
Institute Cleveland, Ohio April Hirsh, Research Assistant Center on
Urban Poverty and Community Development November 1, 2013
Slide 2
Harvard REO Study Case studies of: Atlanta Boston Cleveland Las
Vegas
Slide 3
Overview Data Analysis Interviews with Investors Rehab
Modeling
Slide 4
Reasons for the Study Understand the impact of investors buying
REO property. Slow or stop the churning of distressed property
between investors and increase the flow of distressed property to
beneficial owners. Identify a cost effective rehab model as an
alternative to demolition.
Slide 5
Data Research Question To what extent does the type of investor
drive negative outcome? Local versus out-of-state? Investor volume
(large, medium, small) For-profit versus non-profit, government and
land banks
Slide 6
Data Analysis Scope 13 years of data: 2000 2012 foreclosure
sales (2000 March 2013 property transactions) Standardized buyers
42,565 sheriff sales 38,931 unduplicated properties 72,954
subsequent post-REO transfers through March 2013
Slide 7
Slide 8
Successful Foreclosure Judgment Successful Foreclosure Sale
Foreclosure Filing Case dismissed Sale to Bank/GSE/Financial
Institution (into REO) No Foreclosure Sale Subsequent Sale (Out of
REO) Purchased by individual or investor Not sold out of REO
Included in Study NOT Included in Study
Slide 9
Slide 10
Slide 11
Whos buying REO property? Number of Post-REO Purchasers by
Number and Year of Transaction, All Types of Purchasers, 2000-2013
Purchaser Classificati on by Number of Transactio ns
2000-20132000-20042005-20082009-20102011-2013 N%N%N%N%N% 1-3
37,61294% 6,06491% 15,16193% 8,86995% 7,51897% 4-9 1,8915% 4587%
8835% 3414% 2093% 10-24 4181% 1152% 1741% 901% 391% 25-49 740% 240%
210% 190% 100% 50-99 370% 160% 140% 4 3 100+ 210% 5 8 6 2 Total
40,053100% 6,682100% 16,261100% 9,329100% 7,781100%
Slide 12
Number of Post-REO Purchases by Number and Year of Transaction,
All Types of Purchasers, 2000-2013 Purchaser Classificati on by
Number of Transactio ns
2000-20132000-20042005-20082009-20102011-2013 N%N%N%N%N% 1-3
44,93062% 6,88565% 18,32461% 10,61160% 9,11064% 4-9 10,12614%
1,45714% 4,66815% 2,29213% 1,70912% 10-24 6,0178% 8008% 2,6319%
1,6699% 9176% 25-49 2,5143% 3533% 9053% 7784% 4783% 50-99 2,4913%
3323% 1,1464% 7434% 2702% 100+ 6,8769% 7757% 2,5148% 1,73110%
1,85613% Total 72,954100% 10,602100% 30,188100% 17,824100%
14,340100% How much are they buying?
Slide 13
Top Post-REO Purchasers by Number of Transactions, Purchasers
with 100+, 2000-2013 Number of Post-REO Transactions Percent of All
Post-REO Transactions CUYAHOGA LAND BANK*1,1881.6 CLEVELAND HOUSING
NETWORK*8621.2 CLEVELAND LAND BANK*688.9 TOMASI410.6 THOMAS
REAVES343.5 DESTINY VENTURES339.5 STONECREST304.4 STATE
FORFEITURE**295.4 MCCANDLES, MICHAEL J.285.4 BLAINE MURPHY277.4
BLUE SPRUCE249.3 CREST HAVEN DEVELOPMENT235.3 REAL ASSET FUND226.3
KASTANES218.3 ECONOHOMES196.3 GO INVEST WISELY171.2 CLEVELAND
RESTORATION GROUP142.2 STARK GROUP117.2 NATIONAL ASSET MANAGAMENT
GROUP116.2 REO NATIONWIDE, LLC.111.2 EZ ACCESS104.1 *Governmental,
quasi-governmental, and nonprofit entities. **State forfeiture
occurs when a property goes through tax foreclosure and is not sold
multiple times for want of bidders.
Slide 14
Number of Investor and Non-Investor Transactions by Purchaser
Classification and Purchase Year, 2000-2013 Purchaser Classificat
ion 2000-20132000-20042005-20082009-20102011-2013 Investor Non-
InvestorInvestor Non- InvestorInvestor Non- InvestorInvestor Non-
InvestorInvestor Non- Investor 1-3 44,747 183 6,865 20 18,270 54
10,561 50 9,051 59 4-9 10,055 71 1,446 11 4,646 22 2,272 20 1,691
18 10-24 5,727 290 794 6 2,595 36 1,520 149 818 99 25-49 2,268 246
349 4 808 97 695 83 416 62 50-99 2,050 441 319 13 1,005 141 546 197
180 90 100+ 3,843 3,033 284 491 2,292 222 1,074 657 193 1,663
Investors vs. Non-Investors Most large purchases are investors
(esp. before 2010)
Slide 15
Slide 16
Outcomes by Investor Size Largest investors generally higher
rates of vacancy than other investors (especially in 2005-2010)
Much higher rates of board-up than other investors 64% in 2005-2008
63% in 2009-2012 Generally higher rates of certified delinquent
taxes
Slide 17
Outcomes by Investor Size More rigorous examination of
outcomes- Survival analysis Watches a property until failure
Failure = condemnation, demolition, or transfer of ownership to
rescuing entity (nonprofit, government, land bank) Properties
touched by large investors (50+) in 2010 are nearly 5 times more
likely to fail than properties purchased by other investors
Slide 18
Survival Analysis (50+)
Slide 19
Outcome By Investor Type Properties acquired by non-profits,
land banks or government were three times more likely to succeed
than those acquired by all private investors.
Slide 20
Outcomes by Purchaser Location Number and Percent of
Transactions by Out-of-State Buyers, by Purchaser Classification
and Purchase Year, Investor Owners Only, 2000-2013 Purchaser
Classification by Number of Transactions
2000-20132000-20042005-20082009-20102011-2013 N%N%N%N%N% 25-49
68030% 165% 25532% 28241% 12731% 50-99 45722% -0% 13313% 25246%
7240% 100+ 2,83874% 104% 1,77978% 92386% 12665% Examined location
for investors with 25+ purchases High percent of investors in later
years are out-of-state
Slide 21
Outcomes by Purchaser Location The number of out-of-state
investors was small from 2000 to 2004. The number increased 4-5
fold between 2005 to 2010; decreased between 2011 and 2013.
Cross-tabs: Out-of-state investors have generally higher rates of
vacancy Similar rates of housing code violations Generally higher
rates of board up Out-of-state investors show consistently higher
rates of tax delinquency (2005 on) The failure rate for properties
acquired by out-of- state investors was double that for Ohio
investors.
Slide 22
Slide 23
Interviews 5 out-of-state investors 7 local investors 2
realtors 4 staff from community development corporations
Slide 24
Business Models Out-of-State Buy in bulk Buy sight unseen
Little or no renovation Sell on website postings, Ebay, etc. Not
interested in long-term holding If we have to bring these
properties up to code, our business model wont work.
Slide 25
Business Models. Local Investors No bulk buying Property more
likely to be inspected before buying (at minimum a drive-by) More
likely to do some renovation and may do substantial renovation
(depending on market conditions) Generally for-sale, but some
rental
Slide 26
View of the Cleveland Market Local: More likely to appreciate
market realities. Out-of-State: Admitted they misjudged the
Cleveland market Seemed shocked to be held accountable for code
violations Resentment toward Cleveland Housing Court The word is
out among our colleagues stay out of Cleveland.
Slide 27
Financing All investors said bank credit is impossible to
obtain. All use hard money private capital Responsible local
investor/rehabbers used NSP$ when it was available, doing
substantial gut rehab. Responsible rehabbers moved out of
distressed neighborhoods now that NSP is gone.
Slide 28
Rehab Modeling Challenge: In present market conditions,
substantial rehab cannot be done in distressed neighborhoods
without significant subsidy ($60-90K per house) Demolition requires
subsidy of $10K per house Question: Can a model of vacant house
rehab be developed that requires either no subsidy or no more
subsidy than demolition?
Slide 29
Rehab Method of Inquiry Identify 6 different Neighborhood
Markets Identify a test house in each market Develop full specs and
pro formas for five different rehab levels Develop both For-Sale
and Rental scenarios Rehab is Feasible if gap is less than or equal
to $10,000
Slide 30
Strong Market Test Property Old Brooklyn Neighborhood
Slide 31
Slide 32
Distressed Market Test Property Slavic Village
Neighborhood
Slide 33
Slide 34
Rehab Modeling Summary Gut Rehab: Does not work in any of the
neighborhoods we studied, including Old Brooklyn. Mod Rehab: Only
worked in the stronger Old Brooklyn neighborhood. Code Plus: Also
only worked in the stronger Old Brooklyn neighborhood. Code-Only:
Is feasible but offers little sustainability, and does not provide
for green standards. $10,000 Gap: On a case-by-case basis,
re-engineering Code-Only spec to arrive at a $10K gap does permit
significant upgrades.
Slide 35
Closing Recommendations To Change Bank and Investor REO
practices To Recover Stabilization Costs To Move distressed
properties to Beneficial Owners
Slide 36
Recommendations Sheriff Sales: list code violations and
condemnations with properties for sale. County Recorder: refuse to
file deeds if taxes delinquent, or if investor is not registered
with Secretary of State. Cities: inspect properties coming out of
Sheriff Sale, condemn during bank ownership before bank dumps
them.
Slide 37
Recommendations.. Enact municipal ordinance holding prior
owners accountable for costs, if conditions were documented during
prior ownership (Cleveland has recently done this). Require
foreclosing lenders to post a $10,000 bond to compensate city if
demo is required (Youngstown, Canton, Warren).
Slide 38
Recommendations - Rehab Re-think traditional notions of an
acceptable rehab standard. Re-think regulations that mandate green
standards or other amenities not feasible in the current market.
Consider limiting rehab subsidy to no more than demo subsidy,
unless case is made for strategic importance. Engage banks in
discussion about a loan product for rehab projects; alternatively,
consider spreading risk among several banks pooling funds thru a
CDFI.