NYC Foreclosure Rehab Project Worth Watching

New York City mayor Michael Bloomberg announced Wednesday that the city will use $24 million in federal funds to fix up and sell 115 foreclosed properties in and around Manhattan. The properties, which have all failed to sell at foreclosure auction, are being marked for rehab in order to prevent them from becoming a blight on NYC neighborhoods and driving down property values all around.

The city will not aquire the blighted properties directly, but rather will pay a third party, a nonprofit group called the Restored Homes Housing Development Fund Corporation, to rehab the homes and put them up for sale at a better price.

One of the least publicized but most serious problems facing American cities today is the ever-growing glut of vacant foreclosed homes that now sit in formerly healthy neighborhoods driving down surrounding property values and falling into disrepair. Vacant homes are also a prime target for squatters, meth labs, and vandalism.

"Scrappers'--usually homeless or out of work men who vandalize vacant homes and buildings by pulling out scrap copper, iron, and aluminum and selling it to companies that melt the scrap down for reuse--have become a plague in many residential neighborhoods and are the greatest fear of homeowners forced to leave a vacant home on the market to take work in a distant city. Many a homeowner has returned to find all the copper plumbing stripped and even sometimes all the copper wiring, rendering the house unsaleable without major repair.

In South Bend Indiana two elderly men were recently found dead and stuffed into a manhole not far from a scrap metal yard, causing local speculation about serial killers and the like, only to find out (and fairly quickly) that the two men were scrappers killed by other scrappers for their metal as they waited in line to claim their cash. The value of the metal the two dead men were carrying was about $120.

That kind of thing is bad for neighborhoods.

Adding to the general problem of deflation is the problem of loss of revenue for cities through the erosion of the property tax base. When people stop paying their mortgages, they abandon their homes and abandon their tax bills too. Mortgage companies sometimes pick up those bills when they foreclose, but more often unsold foreclosed homes end up seized by cities and auctioned off for pennies on the dollar, just to recoup some of the lost tax revenue.

Meanwhile, the value of the surrounding homes is driven down and the city gets less tax revenue for those homes as well. To make matter worse, investors who buy vacant properties at tax sales often do not do anything with the properties the buy--They don't fix them up, they don't rent them, they just let them sit while they wait for the economy to rebound enough to put them up for resale at a profit. In South Bend (the city where the dead scrappers were found) there are now block and blocks of vacant homes bought up at tax sale, some not yet on the auction block but waiting for their day, just sitting there, rotting.

This cycle is devastating to the health of American cities: It's precisely what killed Flint MI and inner Detroit, and now it is spreading through the U.S. like a metropolitan cancer. If the Bloomberg foreclosure rehab project succeeds in using federal funds to turn that disease around, that single approach could have a dramatic effect on jump-starting  the stalled United States property market.

Restored Homes Housing will hold title to the properties during the rehabilitation and then sell them at prices affordable to families making roughly $80,000 to $90,000 a year.So not only will the homes be back in play, they will be sold to families, which can only strengthen the areas in which they are located.

That is, if the plan works.

From the standpoint of foreign investment, the experiment bears watching. Restored Homes Housing has already had some limited success in the rehab and resale of uninhabitable city properties, even before being hired by the city of New York. If the Bloomberg project goes well, a careful investor might consider doing likewise, for profit, in carefully chosen United States markets.

Key to the success of such a strategy would be 1) choosing the right parts of the country in which to buy, and 2) buying at the lowest possible price (i.e. at tax sale or foreclosure auction). The potential for profit if the timing and the properties themselves are right is quite enormous.

In New York City alone there were 7,000 foreclosures in 2005, 15,000 foreclosures in 2007, and an expected 20,000 foreclosures for the coming year 2009. New York City has been hit much less severely by the foreclosure crisis than most other U.S. major metropolitan areas.

For more general information on investing in United States real estate, check our article United States Real Estate Prospects for 2009.