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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2012

Getting Creative with Foreclosed Properties

Add value to your clients’ lots and to your business

Some mortgage professionals believe that higher housing-start figures are the scourge of a housing recovery — not a harbinger of better times. America has an oversupply of housing, and it seems sensible to believe that building more will only drive values lower.

The best way to improve prices is by tearing down the bottom rung of the housing ladder. Many foreclosed homes are beyond repair. After even a few months without heat or air conditioning, mold and decay can make these structures worth less than the sum of their parts.  Arguably, there’s a significant amount of housing stock that’s already past its useful life. Why not take advantage of it in some shape or form?

Eliminating derelict or otherwise undesirable houses will, in turn, increase other houses’ respective values. Entire neighborhoods could benefit from the disappearance of nearby empty homes. Interest rates are still not spurring home sales, even if those rates are lower than they’ve been in the past. If demand is going to be sufficiently stimulated, it’s time for a more creative elimination of undesirable houses.

Recycling old and decaying housing stock can make way for new land use. Consider how a foreclosed 60-by-120 suburban lot could reduce the number of vacant homes if neighbors were encouraged to reverse-split the foreclosed home between them, allowing each neighbor to expand to a 90-by-120 lot. Bigger lots equal higher values.

Yet most homeowners lack the skills or finances to recycle the derelict property next door. Banks should provide this financing and, as industry participants, mortgage professionals can encourage these types of loan programs.

Mortgage professionals working with banks that hold real estate owned (REO) properties should approach these hypothetical borrowers with payment plans to buy a REO property and reverse-split the lot. Would you buy the lot next door for $100 extra each month if it meant that you could rid your neighborhood of a derelict house while also increasing your back and side yards? The multiplier effect on your home’s value would be two-fold: your home would improve in value and dimension while the derelict property next door would be eliminated from supply.

Similarly, condominium associations with significant REO percentages should be funded to purchase these REO units for rental purposes; any newfound income could be used to offset association dues. Community banks can be approached to fund the Home Owners Association (HOA) with a mortgage obligated by the HOA or, alternately, these banks could encourage individual two-bedroom condominium owners to reconfigure their unit into a four-bedroom using a renovation mortgage. Just like individual homeowners, condominium associations need to be empowered to take back control of their neighborhoods.

Some municipalities have used Neighborhood Stabilization Program (NSP) loans to build new housing or repair existing properties, for fear of the reduced tax revenues that would result if a housing unit becomes vacant green space. But this short-sighted view of taxable values is part of the problem; oversupply reduces aggregate taxable value. NSP funds need to be used to reduce supply, not increase it.

In short, today’s crisis is a buying opportunity for communities with a long-term vision to develop greener, more livable communities, which, in turn, will increase in value and tax revenue. With a little effort and creative thinking, mortgage brokers can work with these communities while also bolstering their own business. Nothing excites buyers to pay higher prices quite like the image of a city or a neighborhood that’s deeply committed to the quality, value and supply of its own future.


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