Acquisition Strategies

Foreclosed properties can be acquired at different junctures after they have been vacated. Most will be acquired when they become part of an REO inventory.

1. Acquire properties at auction.
2. Acquire REO properties for rehabilitation and resale.
3. Acquire properties through donation.
4. Establish or expand a community land trust to create permanently affordable housing.   
5. Acquire properties using tax foreclosure.
6. Rehabilitate nuisance properties using receivership. 
7. Increase foreclosed property owner costs to encourage sale.

1. Acquire properties at auction. Buying a property at a foreclosure auction is one of the most expensive and risky methods of purchasing foreclosed property, and it is rarely used. Foreclosure sales begin with a minimum bid that includes the loan balance, any accrued interest, attorney's fees and any costs associated with the foreclosure process. In order to bid at a foreclosure auction, a prospective buyer must have a cashier's check in hand for the full amount of the bid. Since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale. In the event that there is, the successful bidder receives the property in "as is" condition, which may include someone still living on the property, or liens against the property, leaving open the possibility that the former owner or the IRS will exercise their right of redemption.
2. Acquire REO properties for rehabilitation and resale. When a property fails to sell at auction, it "reverts" to the bank and becomes an REO, or "real estate owned," property. Ninety-seven percent of properties that go to foreclosure auction end up in REO inventories (up from an average of 70 percent of properties that did not sell at auction prior to 2007). Properties are particularly concentrated in inner city communities – where they average 9.2 REO per square mile – and this large inventory puts tremendous downward pressure on local real estate values.
   
   

   The Rise of REO Properties.

   In 2007, four out of every 1,000 homes in the U.S. became REO. Wells Fargo, alone, held more than $900 million in foreclosed property nationwide in December 2008.
   Lenders typically lose a significant part of their investment when foreclosures occur. Several independent studies have found that lenders tend to lose approximately $50,000 per foreclosed home, or between 30 to 60 percent of the outstanding loan balance (see this report). Nonetheless, lenders are usually unable to sell at bargain prices because of their fiduciary responsibility to provide the highest investment returns possible.
   
   There are several steps to negotiating with servicers or lenders:
   • Determine what properties the lender owns and whether they fall within a targeted area.
     
   • Identify the department or individual responsible for disposition, whether it is a servicer or REO broker.
     
   • Determine the value of the property. To negotiate purchase terms, it is best to begin with the property valuing formula discussed in Getting Started, but it may also be helpful to prepare a market analysis. It is common for lenders to have little knowledge of market values, neighborhood conditions, or even the condition of the properties they own.

   Acquisition Challenges in Massachusetts

   In early 2008, Massachusetts created a $20 million revolving loan fund for the purchase of REO properties, but by September of 2008 had only purchased 14 properties. This slow pace was due in part to the time-consuming research undertaken to identify disposition contacts. But the larger factor was lenders’ disinterest in either bulk sales or short sales. Their estimates of market value were well above those of communities trying to buy. See the report here.
   • Negotiate a discounted price. Sec. 2301(d)1 of HERA specifically provides that: “Any purchase of a foreclosed upon home or residential property under this section shall be at a discount from the current market appraised value of the home or property, taking into account its current condition, and such discount shall ensure that purchasers are paying below-market value for the home or property.” The discount price requirement makes it more difficult to negotiate a purchase and to compete with speculators. As pressure from the federal government continues or increases, new innovations appear (such as the nonprofit National Community Stabilization Fund), and costs to lenders mount each month they hold a property, this acquisition timeframe is likely to shorten.
   
   HUD is a promising source for REO properties. The agency has no responsibility to private investors or profits and is taking aggressive steps to transfer the properties to municipalities and nonprofits. Every year HUD obtains thousands of residential properties when loans issued under FHA, VA and other government-insured lending programs are foreclosed upon. HUD has historically sold more than half of its REO properties to new owner-occupants or to nonprofits. HUD’s three key programs for foreclosed property recovery are:
   
   
   • Dollar Home Program - HUD sells some of its most troubled REO properties to local governments for a nominal price.
   • 602 Nonprofit Disposition Program - nonprofits or local governments purchase and redevelop for affordable re-sale all HUD-owned REO homes in a designated area, called an Asset Control Area (ACA).
   • Good Neighbor Next Door Program - HUD sells homes in designated areas to law enforcement officers, pre-kindergarten through 12th grade teachers, firefighters and emergency medical technicians at a 50 percent discount, provided they live in the home for three years.
3. Acquire properties through donation. This method obviously stretches limited resources, but to date, few owners have been willing to donate. The exception is Fannie Mae. In December, 2007 Fannie Mae transferred 182 foreclosed homes, most of them in Detroit, to the Michigan State Housing Development Authority and the Michigan Land Bank Fast Track Authority. The agencies paid $32,000 for the entire group of 182 homes - enough to cover title-processing charges on each home. Once the titles were cleared, the agencies donated the properties, which range in value from $5,000 to $70,000, to Michigan municipalities, charities and housing programs. A bank that agrees to donate properties will receive Community Revitalization Act consideration for an in-kind donation that represents the difference between the fair market value (based on a recent, independent appraisal) and the discounted sales price of the property. If the bank donates the property outright, the property's fair market value will represent the in-kind donation for CRA purposes.
4. Establish or expand a community land trust to create permanently affordable housing. A Community Land Trust is a mechanism for the acquisition, disposition and stewardship of foreclosed properties. See a complete description in the Stewardship section below.
5. Acquire properties using tax foreclosure. Cities or counties across the United States have the legal right to seize tax delinquent properties for unpaid taxes, if the owner has been delinquent for the period of time specified in the local tax lien statute. The municipalities’ property tax lien has priority over the lender’s claims. This allows a municipality to use tax foreclosure to ensure a property is held in its control rather than the lenders’ control. The ability of municipalities to use tax delinquency to obtain properties, however, is complicated by the fact that many jurisdictions have bundled and sold tax liens for unpaid property tax revenues and no longer control the lien they originally placed on the properties. In addition, if the city does use tax foreclosure, lenders may recover the property by paying the delinquent property taxes. (Note: Lenders are also responsible to pay delinquent taxes while the property is held in their REO inventory.) Tax foreclosure may prove to be a far more important tool over the next few years as speculators who acquired REO properties fall behind on paying their taxes and violate property maintenance regulations.
6. Rehabilitate nuisance properties using receivership.

   Baltimore

   Balitmore has used its broad receivership powers to rehabilitate vacant properties. Once repairs are complete, the city manages and rents out the property for up to two years to recoup money spent on operating and construction costs.
   Receivership, while not an acquisition tool, is an effective method for gaining control of vacant buildings that are neighborhood blights. Receivership laws differ, but typically, local authorities issue a citation, ordering the owner to bring the property up to code. If the owner fails to comply, the local government asks the court to appoint a receiver – often either the local government itself or a CDC or management firm – to restore the property to code. The receiver restores the property and places a lien on the building to pay for the repairs. Since there must be sufficient equity in the property to pay back the lien at sale, receivership works best in moderate or strong markets.
7. Increase foreclosed property owner costs to encourage sale. Cities across the country are passing ordinances to tax or fine owners of foreclosed properties. The goal is to encourage the owner either to maintain the foreclosed properties or to quickly sell them to a responsible owner. The goal of the fines is to make it cheaper to sell a foreclosed property at a loss than to wait for better times and continue to incur taxes and fines. Many of these ordinances are so new that their effectiveness is yet unclear, although legal penalties are certainly a tool worth considering. Critics of the fines predict that the fines, added to back taxes, repairs and legal costs, may cause lenders to walk away from low-value foreclosed properties, stopping foreclosure efforts and leaving the ownership of the property in limbo. These orphaned properties would deteriorate quickly.
   
   Cities that have imposed fines or requirements on foreclosed property owners include:
   
   • Providence, Rhode Island, where Mayor David Cicilline submitted an ordinance to the city council that would fine the owner 10 percent of a building's value if it remained vacant a year after receiving a warning from the city.
   • Louisville, Kentucky, passed an Abandoned Urban Property Tax requiring owners of tax-delinquent or code-violating vacant properties to pay property taxes three times the normal tax rate. (See Providence and Louisville case studies here)
   • Buffalo, New York, where lenders are sanctioned in housing court. Under the state property maintenance code, not just owners but those who have "control" over the premises are liable for code violations. Housing Court Judge Henry Nowak contends that foreclosure notices are evidence that lenders assert some measure of control over the property. When banks ignored summonses for code violations, Nowak entered default judgments against them, imposing fines of up to $15,000. A lien was placed on the property for the fine amount and the lien’s existence prevented the lender from buying or selling properties in the area or seeking the court’s assistance to evict tenants.
     
   • Trying a more cooperative approach, Boston’s Mayor Thomas Menino negotiated agreements with several of the largest mortgage companies to improve maintenance of foreclosed properties and work with the City on selling those buildings as soon as possible. During the summer of 2008, the Federal Deposit Insurance Corporation sent a letter warning banks to maintain their foreclosed properties and to continue paying taxes on them.