Atlantic Cities

Who's Buying Foreclosed Homes and Why It's a Problem

Who's Buying Foreclosed Homes and Why It's a Problem
John Gress / Reuters

Foreclosed homes tend to be problems for cities. They sit there, empty, unkempt, just asking for someone to break in. What they need and what governments at basically every level want is someone to buy them. Own them. Love them. Live in them.

So when a foreclosed property gets sold, the problem’s solved, right? Well, not exactly. According to a new study published in the Journal of Planning Education and Research, property sales don’t lead to solutions because often the people buying foreclosed properties from banks are also investors looking to resell the property. But these predominantly small-time investors typically have fewer resources to spend on maintaining their homes as they sit on the market and wait for new buyers.

“A lot of them are being sold to an investor and staying vacant,” says Dan Immergluck, an urban planning professor at the Georgia Institute of Technology and the author of the study. “You have the same problem as before.”

Immergluck’s study focuses on Atlanta and Fulton County, looking specifically at what happened after a foreclosed property was sold. Immergluck analyzed all the property transfers recorded in Fulton County between January 2005 and April 2009, and by searching through the names of the entities buying properties he’s been able to determine that a large amount of foreclosures were bought up by small-time investors a handful at a time.

Of the 78,000 property sales in his study period, Immergluck’s report shows that more than 21,000 were foreclosures, often referred to as real-estate-owned or REO properties. Immergluck estimates that in each of the years of his study, small investors were responsible for between 39.4 percent and 43.6 percent of all REO sales.

The amount of REO sales also skyrocketed in 2008 with the implementation of the 2008 Housing and Economic Recovery Act and its Neighborhood Stabilization Program, which put $3.9 billion into the hands of local and state governments to help lenders clear REOs from their then-overloaded portfolios of foreclosures. As a result, 7,700 REO sales were recorded in Fulton County, more than a third of all REOs tracked in the study. But as Immergluck explains, the Neighborhood Stabilization Program vastly decreased what banks and lenders were willing to accept for their foreclosures, which allowed smaller investors to snatch up property at low prices. About 30 percent of the REO sales in 2008 sold for less than $30,000. This lowered the barrier to entry of homeownership, but also put homes needing maintenance in the hands of individual investors or small firms.

“It may actually be better for a bank to own these homes because it might be easier to force them to take care of them than small-time investors with fewer resources,” Immergluck says.

As a result, many of the vacant and foreclosed homes in Fulton County have simply shifted from one investor-owner – often major banks – to another, smaller investor-owner. This has left the same homes sitting empty on the same streets. Immergluck’s study only captured the story in Fulton County up to April 2009 but he says the situation is largely the same today. Many vacant houses, but fewer bank “For Sale” signs.

“If you just drive through the neighborhoods you see it going on. The windows are still boarded up,” Immergluck says.

The Neighborhood Stabilization Program didn’t anticipate this happening. Immergluck says the program was crafted under the assumption that banks were having trouble selling their REOs. But in reality the banks were always able to sell REOs. The Neighborhood Stabilization Program merely expanded their ability to do so.

“They need to turn that on its head,” says Immergluck. The focus should be on getting homes occupied or demolished, he says, rather than letting them sit on the market indefinitely. He argues that this study should convince cities that they need to take the lead.

“The sooner they gear up their tax foreclosure process and land banking process, the sooner they can clean things up and reduce the blight these homes create,” Immergluck says.

Land banking has been successfully adopted in various cities, including Cleveland, Baltimore and Atlanta, though Immergluck says Atlanta’s program didn’t really have any teeth until recently. As cities acquire foreclosures and gradually sell them off, they can fund the further acquisition of other problem properties – or pay for their demolition.

But is there a danger in cities buying up and bearing the financial brunt of all these foreclosed homes?

“What’s the alternative? I don’t see an alternative. If it’s abandoned, what do you do?” asks Immergluck. “There’s a cost to not intervening.”

Nate Berg is a freelance reporter and a former staff writer for The Atlantic Cities. He lives in Los Angeles. All posts »

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