The Role of Investors in Acquiring Foreclosed Properties in Low- and Moderate-Income Neighborhoods: A Review of Findings from Four Case Studies

1 The Role of Investors in Acquiring Foreclosed Properties in Low- and Moderate-Income Neighborhoods: A Review of Findings from Four Case Studies Christopher E. Herbert Irene Lew Rocio Sanchez-Moyano 2 Joint Center for Housing Studies Harvard University The Role of Investors in Acquiring Foreclosed Properties in Low- and Moderate-Income Neighborhoods: A Review of Findings from Four Case Studies Christopher E. Herbert, Irene Lew, and Rocio Sanchez-Moyano October 2013 3 Contents Acknowledgments ......................................................................................................................................... 4 1. Introduction .............................................................................................................................................. 5 2. Market Comparisons ................................................................................................................................. 6 Housing Characteristics and Market Conditions ....................................................................................... 6 House Prices—the Bubble and Bust ......................................................................................................... 7 Foreclosure Incidence and Delinquency Rates ......................................................................................... 9 Summary ................................................................................................................................................. 11 3. Key Findings from Case Studies .............................................................................................................. 11 A) Investor Characteristics ...................................................................................................................... 11 Geographic Patterns of Foreclosure Investors ................................................................................... 14 B) Investor Strategies .............................................................................................................................. 16 C) Investor Support Networks ................................................................................................................. 19 D) Rental Property Management Challenges ......................................................................................... 20 E) Rehab Activity ..................................................................................................................................... 22 Rehab Costs ......................................................................................................................................... 23 Higher Levels of Rehab Generally Unsustainable Without Public Subsidy ......................................... 24 Rehab Strategies Vary Between Out‐of‐State and Local Investors ..................................................... 24 Impact of Housing Choice Vouchers on Level of Rehab ..................................................................... 25 F) Financing Sources ................................................................................................................................ 25 Hard Money Loans .............................................................................................................................. 26 Role of Bank Financing ........................................................................................................................ 26 Institutional Capital and Other Alternative Forms of Financing ......................................................... 27 G) Impact of Policy Interventions ........................................................................................................... 27 Changes to Foreclosure Laws .............................................................................................................. 28 Experience with the Neighborhood Stabilization Program ................................................................ 28 Code Enforcement .............................................................................................................................. 29 4. Conclusions ............................................................................................................................................. 29 Policy Implications .................................................................................................................................. 32 Implications for Research ....................................................................................................................... 33 References .................................................................................................................................................. 36 4 Acknowledgments We would like to thank our colleagues (Lauren Lambie‐Hanson, Frank Ford, Dan Immergluck, and Alan Mallach) in the larger multi‐ci