As homeowners lost millions of properties during the 2007 mortgage crisis, the ranks of private property investors swelled as they bought “real-estate owned” (REO) and other distressed properties. Responsible investors and landlords can provide much-needed rental housing and add value and sustainability to neighborhoods; irresponsible ones can produce long-lasting destabilizing effects. In a new report titled The Challenge of Distressed Property Investors in America’s Neighborhood, Alan Mallach, senior fellow at the Center for Community Progress, explores the impact of market conditions and investor activities on local communities.
Mallach delineates four types of distressed property investors -“rehabbers,” “flippers,” “milkers,” and “holders” - and their real estate strategies and investment goals. Rehabbers and holders seek long-term property value appreciation and practice neighborhood-friendly strategies. In contrast, flippers and milkers seek short-term cash gain often through unethical practices and have little interest in preserving or enhancing property values.
Comparing market conditions and investor activities in two cities, Phoenix, AZ and New Haven, CT, Mallach found that both experienced a sharp recession and collapsed housing market. However, the Phoenix market has attracted more responsible investors due to its potential for future property price appreciation. Investors have played an important role in purchasing oversupplied housing units, which helps to stabilize prices and eliminate vacancies. In New Haven, incentives have been limited for investors to act responsibly due to high maintenance costs of older housing stock, property taxes and lower appreciation expectations.
Mallach writes that a robust local regulatory climate and organized support system can promote positive investments and strengthen affordable housing in cities like New Haven. He recommends that local governments and non-profit community development corporations work together to encourage responsible investor and landlord behavior. The first step is to establish a firm and clear regulatory regime to govern the use of rental property by tracking landlords, establishing minimum maintenance standards, enforcing property standards, covering regulatory costs, and imposing penalties for failing to comply. The second step is to organize a support system that ensures responsible property management and encourages property acquisition and improvements through direct financial assistance and tax incentives.
To read Meeting the Challenge of Distressed Property Investors in America’s Neighborhood, go to: http://www.lisc.org/content/publications/detail/18811