The end of the foreclosure process marks the beginning of a new set of problems that arise as a consequence of vacant and abandoned homes. Foreclosed properties are referred to as bank-owned or real estate owned (REO). Vacant property can have devastating effects in urban, suburban, and rural communities.
The number of vacant homes has skyrocketed as a result of the foreclosure crisis. Homes that housed families—sometimes for generations—are suddenly left empty. Neighbors wonder what is happening to the community as houses nearby are either boarded-up or vandalized. Local businesses close up shop as their customer base shrinks, taking jobs with them. And local governments experience a dramatic increase in demands for fire, police, and code enforcement services as the property tax base shrinks. Loss of tax revenues also hurts local schools. Homeowners still living in the neighborhood try to flee but find it more and more difficult to sell their houses even as their property values drop.
Community development organizations, like those in the NeighborWorks network worked hard, sometimes for decades, to reverse decline in low- and moderate-income neighborhoods. Now they are fighting to maintain their accomplishments and protect hundreds of millions of dollars of investment. Vacant properties can quickly undo what residents, city leaders, nonprofit organizations, and for-profit partners were able to achieve.
Although foreclosed properties present real challenges, they also present opportunities to:
- Rehabilitate housing to make it more energy efficient, healthier and safer;
- Create or preserve housing affordability;
- Encourage mixed-income communities;
- Promote sustainable homeownership and provide quality rental housing;
- Enhance neighborhood viability; and
- Selectively use demolition to create side-lots and green space.
One approach nonprofit community development organizations or local governments can take is to purchase REO property and rehabilitate it in order to return it to productive use through homeownership or quality rental housing. The large numbers of vacant homes and falling house prices mean a new, more affordable opportunity for organizations to take action to reverse the situation. Click here for more information.
Many banks and servicers offer special programs and incentives to encourage nonprofits to purchase REO property. Review current funding and transfer programs or search the REO listings of most major banks. Click here for more information.
Given the current strain on the housing market, a nonprofit organization or local government that has acquired a foreclosed property may not be able to immediately find an eligible homeowner and resell the property. The rapidly changing market makes absorption rates difficult to predict. Therefore, organizations must think creatively about how to reuse REO property if they are unable to sell. Strategies may include creating a land bank or land trust, converting the home to rental property, offering lease-purchase agreements, or selectively demolishing blighted properties.Click here for more information.
There are four key areas of risk in real estate development that should be anticipated and managed:
- Funding risk: What will you do if one of your target funding sources falls through?
- Site and property risk: Do you clearly understand the condition, ownership and costs associated with the property?
- Construction risk: Are you prepared to manage the construction process so that costs do not exceed the budget and all work is done competently and completely?
- Absorption risk: Will there be enough market demand to sell the property at the end of the process?
Community development organizations have an arsenal of time-tested community revitalization strategies available to them that have been adapted to various crises over the years. These strategies take advantage of the organizations’ strengths, which include bringing stakeholders to the table to find solutions, creating targeted revitalization plans, and preparing people for successful homeownership. Nonprofit organizations can use these same strategies to stabilize communities in the wake of the foreclosure crisis.
A list of non-acquisition strategies for community stabilization resembles a menu of a nonprofit community development organization’s typical programs. In the face of the crisis, it is critical to remember that nonprofit organizations have been revitalizing communities for decades, despite myriad challenges and ever-changing crises. Although acquisition and rehabilitation are particularly effective in the case of vacant and abandoned properties, even an acquisition/rehab strategy must be combined with complementary support programs as part of a comprehensive revitalization effort in order to be effective. A full range of strategies for stabilizing communities is presented on this site in Community Stabilization: Develop Strategies
A few of these important strategies are:
- Relocating foreclosed homeowners: Nonprofit organizations can provide support systems to homeowners who have gone through a foreclosure, helping them find emergency shelter and transition to appropriate rental housing, potentially into units that the organization owns or manages
- Homebuyer education and counseling: Homeownership is a primary strategy for stable communities, and nonprofit organizations can use their expertise in homebuyer education and counseling to match prepared, eligible homebuyers with vacant foreclosed properties for long-term sustainable homeownership
- Property rehabilitation: Some nonprofit organizations have expertise in rehabilitating properties but don’t have the capacity or desire to acquire and hold them. In some cases, these organizations partner with local intermediaries or CDCs to perform the rehab and manage the construction process while the properties are held by another agency until sale
- Property management: Similarly, many nonprofit organizations are skilled property managers but don’t have the capital required to hold rental properties over the long-term; these organizations may partner with multifamily property owners to manage rental units in a responsible manner that contributes to community stability
- Lease-purchase programs: Lease-purchase programs allow a tenant to rent a unit for a specified period while repairing their credit and receiving homebuyer education. After the rental period is complete, the renter purchases the property using a portion of the rental payments that have been escrowed as downpayment funds. Nonprofit organizations can partner with other nonprofit or local government agencies to provide the long-term credit and homeownership counseling and escrow management required in this type of arrangement.
- Purchase/rehabilitation loans: Nonprofit organizations with both lending and rehab management expertise can make loans to homebuyers for the purchase and rehab of foreclosed properties. The rehab funds are held in escrow and paid directly to an approved contractor while the nonprofit rehab specialist manages the rehab process, from writing specifications and soliciting bids to the final inspection and payout
- Real estate brokerage: Some nonprofit organizations have real estate brokers on staff to either sell REO properties that they’ve rehabbed, or contract with owners of foreclosed properties to sell their properties. This allows the nonprofit organization to earn the commission on the sale, some of which may be used for downpayment assistance or to cover closing costs for the new homeowner. This strategy can take advantage of the availability of homebuyers who have been counseled through the organization’s homeownership program
- Nonprofit mortgage brokerage: Nonprofit mortgage brokers can help new homebuyers qualify for loans to purchase REO properties. Through flexible loan products and homebuyer education, they can help people qualify for a loan in a tightening credit environment. A mission-oriented nonprofit mortgage broker can also ensure long-term stability and prevent future foreclosure
- Neighborhood clean-up: Neighborhood clean-up and neighborhood watch activities have always been a stabilizing force in communities; many are now turning their attention to maintaining vacant properties - parking cars in the driveway and mowing the lawns, and using more creative strategies to board up houses, like painting the plywood to look like doors and windows to give the appearance of occupancy. Nonprofit organizations can use their connection to community residents to organize these types of efforts