Newswise — Nearly one out of every three Cleveland homes sold by banks after mortgage foreclosures end up condemned, abandoned, boarded up or demolished, and a unique “hazard-rate” analysis shows that the failure rate for these transactions is five times higher for larger investors and out-of-state buyers than for small investors, according to a new study by local housing and urban planning experts.
On the other hand, properties that ended up in the hands of land banks, community development corporations and governments, when compared to small investors, were three times more likely to succeed, the study said.
The study was commissioned by the Joint Center for Housing Studies at Harvard University and was undertaken by a Cleveland research team which included staff and faculty from Case Western Reserve University (CWRU). The study is the first to take a long-term look at the impact of foreclosure in Cuyahoga County. “We analyzed data from more than 73,000 post- foreclosure transactions in the County between 2000 and 2012,” stated April Hirsh, Research
Assistant at CWRU. The study found that the manner in which foreclosed houses were disposed and traded compounded the problem of blighted homes, resulting in $46 million in uncollected property taxes and creating a “disproportionately negative impact” on African- American neighborhoods.
The study also found that while it will cost $83 million to demolish Cleveland’s approximately 8,300 condemned houses, traditional renovation approaches would require even greater subsidization with tax dollars. Other less inclusive approaches to renovation, such as only bringing the property up to code, can require less subsidy than demolition in most neighborhoods in the short run, but, as the study points out this alternative “offers little extended life to the structure and thus the structure could be at risk of future disrepair”.
Lead author Frank Ford, senior policy advisor for Western Reserve Land Conservancy’s Thriving Communities Institute and chairman of the Cleveland Vacant and Abandoned Properties Council, said the study sought to understand the business practices of those investing in mortgage-foreclosed homes so regulators could act to discourage irresponsible practices and identify cost-effective means of renovation.
To determine whether the type of investor impacted the “success” or “failure” of a property, the study employed a unique “survival” analysis that was designed by Professor Robin Dubin, PhD., of the Weatherhead School of Management at CWRU. Using this method the study found significant differences among investor types. “By 2008, properties purchased by out-of- state large investors were almost five times as likely to fail as those purchased by small investors,” stated Professor Dubin.
Ford said the study shows aggressive code enforcement works and has chased bad actors out of Ohio. Meanwhile, responsible investors have found that traditional bank financing has been difficult or impossible to obtain for inner city home renovation.
The study found that traditional renovation approaches are no longer financially viable in most distressed Cleveland neighborhoods, and, until market conditions improve, demolition will likely be the most viable tool for market recovery. “A Catch-22 dilemma exists: In distressed neighborhoods blighted homes can’t be renovated until the market improves, but the market can’t improve until blighted homes are removed,” explained Ford. The only viable alternative to demolition in more distressed neighborhoods is minimal rehabilitation that does not provide long-term sustainability for the home.
The study makes several key recommendations:
• Suspend “green” rehabilitation standards in distressed neighborhoods until the market improves;
• Refuse to record deeds for investors that don’t pay taxes or fail to register with the
Secretary of State;
• Mandate city inspection of properties coming out of Sheriff’s Sale; Require foreclosing lenders to post a bond at foreclosure filing;
• Limit rehabilitation subsidy to the approximate demolition subsidy and exceed it only on
case-by-case basis; and
• Mount stronger campaigns to stop theft and stripping of materials from homes, which could cut rehabilitation expenses by $10,000-$15,000.
The full text of the study is available here.
The study was conducted by Ford, who joined Thriving Communities in 2013; April Hirsh of the Jack, Joseph and Morton Mandel School of Applied Social Sciences at Case Western Reserve University (CWRU); Kathryn Clover, J.D. of Cleveland Marshall College of Law, Cleveland State University; Jeffrey A. Marks of Marks Housing Consultants, LLC; Robin Dubin, Ph. D. of CWRU’s Weatherhead School of Management; Michael Schramm of CWRU’s Mandel School of Applied Social Sciences and the Cuyahoga County Land Reutilization Corporation; and Tsui Chan, Nina Lalich, Andrew Loucky and Natalia Cabrera of CWRU.
In addition to support from Harvard University, local support for the study was provided by
Cleveland Neighborhood Progress and the Thriving Communities Institute.
The Land Conservancy formed Thriving Communities Institute in 2011 in response to the foreclosure crisis that has left tens of thousands of vacant and abandoned homes across Ohio. Thriving Communities, which is headed by former Cuyahoga County Treasurer Jim Rokakis, has helped establish county land banks throughout the state and has secured more than $182 million in demolition funding for communities.
From the countryside to the city, the Land Conservancy provides northeast Ohio with natural places that nourish and support vibrant and prosperous communities by identifying, preserving, restoring and maintaining essential assets like clean water, working farms, wildlife areas, and parks. The Land Conservancy is based in Moreland Hills and has field offices in Cleveland, Akron, Medina, Oberlin, Orrville and Chardon.
To date, the Land Conservancy has preserved 533 properties and 38,494 acres.