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Cascade: No. 73, Winter 2010

Strategies to Encourage Quality Rentals

Editor’s note: Based on research conducted by Karen Black and staff members of PolicyLink in Oakland, CA, for the Northwest Area Foundation in St. Paul, MN, this article explores the impact of high rates of investor ownership on low- and moderate-income neighborhoods in Minneapolis-St. Paul. The report will be available in early 2010 at www.may8consulting.com External Link and www.policylink.org. External Link

In the past five years, investors have purchased unprecedented numbers of foreclosed and vacant properties in neighborhoods across the country. Most of these properties will be used as rental properties until the real estate market recovers. Over the past five years, real estate investors bought more than one of every five homes for sale, and nearly 60 percent of these buyers bought single-family homes for the purpose of providing rental income.1

While some investors are maintaining and improving these properties to ensure long-term property appreciation and rental income, other investors are making only cosmetic repairs and then are reselling, renting, or holding the property without further investment until market prices rise dramatically. Municipalities are concerned that poorly maintained properties and the addition of a significant number of rental units will destabilize owner-occupied neighborhoods.

Municipalities can use three key strategies to encourage responsible ownership of distressed properties: (1) encourage homeowners or responsible investor owners to buy distressed properties; (2) strategically gain control of foreclosed properties when feasible; and (3) hold foreclosed property owners accountable for property conditions.

Strategy 1: Encourage homeowners or responsible investor owners to buy distressed properties. Interested homeowners are reporting that they are unable to compete for distressed properties that investors can purchase in cash and in bulk. In addition, homebuyers with good credit are having trouble obtaining a mortgage due to strict underwriting standards for purchasing a foreclosed property sold in “as is” condition.2 To overcome some of these challenges, interested homebuyers can learn more about government incentives. Government incentives can help interested local buyers to better compete with larger investor buyers in the following ways:

  • Help qualified homeowners to obtain mortgage financing. For example, the State of Arizona provides zero percent interest, forgivable loans to help buyers with incomes of 120 percent or less of the median income to purchase foreclosed homes.
  • Offer a grant or tax credit to encourage homeowners to occupy the properties. In 2009, Georgia offered a three-year $1,800 tax credit for homebuyers who purchased a single-family home.
  • Offer loans or grants to trusted developers to acquire and rehabilitate homes for low- and moderate-income homebuyers or renters. Sacramento, CA, offers no-interest loans and a $30,000 grant to developers who buy and rehabilitate vacant homes and then resell them to low- or moderate-income families.
  • Work with nonprofits to transform foreclosed properties into affordable housing. A Sarasota, FL, program, funded by HUD’s Neighborhood Stabilization Program, gives nonprofits $10,000 for every foreclosed home acquired, fixed, and sold or rented to income-eligible families.
  • Encourage nonprofits to offer lease-purchase agreements but regulate their terms to protect the buyers.

Strategy 2: Strategically gain control of foreclosed properties when feasible. Municipalities, in conjunction with local governmental authorities, community land trusts, and community development corporations, can put foreclosed properties in responsible hands by taking the following steps:

  • Purchase and rehabilitate individual properties and resell them to homeowners. In 2009, Los Angeles established a nonprofit holding company, Restore Neighborhoods LA, to swiftly acquire, rehabilitate, and sell properties; the company focused on single-family and small multifamily bank-owned properties with extensive rehabilitation needs.
  • Negotiate with lenders to obtain the first option to buy foreclosed properties. The National Community Stabilization Trust launched the “First Look” Program to coordinate the transfer of real estate owned properties from financial institutions, such as Citi and Fannie Mae, to local housing organizations and governments for an adjusted purchase price.
  • Establish or use an existing land bank to hold and maintain properties until responsible buyers can be identified. In May 2009, Cuyahoga County, OH, started a land bank to manage 35,000 unoccupied properties in Cleveland and the surrounding suburbs. Cleveland’s existing land bank is restricted to holding land without structures.
  • Establish or use an existing community land trust (CLT) to ensure that homes remain affordable for multiple generations. In July 2008, the Rhode Island Community Housing Land Trust and two community development corporation partners began to purchase and rehabilitate foreclosed properties in the city of Providence and place the properties into a CLT.
  • Encourage mortgage lenders and servicers to donate foreclosed properties that lack sufficient value to be profitable. In Cleveland and Chicago, Bank of America is evaluating properties for demolition and donation of the lots to the respective cities in exchange for waiver of any outstanding fees.

Strategy 3: Hold owners accountable for property conditions. Municipalities can take the following steps to prevent properties from being neglected:

  • Pursue vigilant proactive enforcement of the local property maintenance code. In St. Louis, MO, the Problem Properties Unit visits 4,000 distressed properties each month based on citizen complaints and then bills the owner $97 for each visit. When owners are unresponsive to citations, the city fixes the violations and bills the owner.
  • Require owners to register properties and set a rehabilitation timeline. The City of Chicago requires all vacant property owners to register within 30 days of the vacancy and provide the name of an authorized local agent. Minneapolis, MN, law requires an owner to pay a $2,000 deposit on a vacant property and obtain a rehabilitation permit within 60 days of purchasing a vacant property.
  • Encourage states and municipalities to pass laws that impose fines and criminal penalties for repeated property maintenance code offenses and work closely with prosecutors, municipal attorneys, and judges on enforcement. Pennsylvania made it a misdemeanor to fail to correct repeated property maintenance code violations.
  • Require sellers and buyers, as a condition of sale, to guarantee that vacant city buildings will be brought up to code and occupied. The City of Saint Paul, MN, imposes requirements for the sale of registered vacant buildings. Owners of vacant properties that are declared a nuisance must make improvements before they can sell the property. Owners of vacant properties that are secured but deemed uninhabitable must submit a code compliance inspection report, an estimate from a licensed building contractor for the code compliance repairs, a signed statement by the buyer giving a date or timeline for the completion of all code compliance work, and proof of financial capability to complete the required work.
  • Establish or use a housing court to hold unresponsive absentee owners accountable. Cleveland’s Housing Court fines absentee owners $1,000 a day if they fail to appear.
  • Raise vacant property owners’ property tax. Louisville, KY, requires owners to pay triple the amount of their normal property tax bill if buildings have been unoccupied for at least one year and are unsanitary, not properly boarded up, or unfit for human habitation.

Conclusion

Some investors are buying distressed properties at historically low prices largely for cash, are renting rather than immediately selling the properties, and are evaluating whether to perform needed rehabilitation to bring the properties up to code. Municipalities can take steps to protect their neighborhoods from the negative impact of negligent owners and provide incentives to attract responsible investors and renters to re-use vacant and foreclosed properties as low-cost housing.

For information, contact Karen L. Black at 610-891-8260 or kblack@may8consulting.com. E-Mail

  • 1Source: 2009 National Association of Realtors Investment and Vacation Home Buyers Survey; based on 1,924 responses.
  • 2See the 2009 Survey of California Home Buyers, California Association of Realtors press release, July 7, 2009, available at http://www.car.org/newsstand/newsreleases/.

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