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Frank Ford, Senior Policy Advisor Thriving Communities Institute Cleveland, Ohio April Hirsh, Research Assistant Center on Urban Poverty and Community Development November 1, 2013

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Harvard REO Study Case studies of: Atlanta Boston Cleveland Las Vegas

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Overview Data Analysis Interviews with Investors Rehab Modeling

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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.

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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

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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

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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

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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%

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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?

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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.

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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)

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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

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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

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Survival Analysis (50+)

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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.

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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

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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.

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Interviews 5 out-of-state investors 7 local investors 2 realtors 4 staff from community development corporations

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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.

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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

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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.

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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.

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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?

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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

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Strong Market Test Property Old Brooklyn Neighborhood

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Distressed Market Test Property Slavic Village Neighborhood

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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.

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Closing Recommendations To Change Bank and Investor REO practices To Recover Stabilization Costs To Move distressed properties to Beneficial Owners

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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.

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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).

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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.