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The Role of Property Preservation in Curing Community Blight

APR 1, 2014 11:07am ET
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Although the national outlook continues to improve as the worst of the housing crisis abates, foreclosures and real estate owned properties remain a concern for many markets throughout the country.

According to RealtyTrac, foreclosure filings increased 8% from December 2013 to January 2014—the largest month-over-month increase since mid-2012. The overall foreclosure numbers did decline 18% year-over-year, but this was the smallest annual decline since September 2012.

These troubled assets are causing issues for communities across the nation. In California, for example, foreclosure activity spiked 57% from January 2013 to this past January. New Jersey also saw a 40-month high in foreclosure activity this past January, according to RealtyTrac figures.

As these new foreclosures continue to come on the market, they add to the institutionally owned vacant properties already weighing on neighborhoods around the country.

As local markets struggle with the burden these homes put on their communities and the opportunity for blight they represent, those working within the industry must ask: How can loan servicers or securitization trustees best preserve and protect the value of these properties? And how can they best cure blight caused by such properties when it arises?

Property Conditions

Many homes that have been foreclosed upon are in a state of disrepair. Often times, properties have been damaged or stripped by the previous owners or tenants, but regardless of the issues on the interior of these homes, vacant houses may also suffer from general neglect. When driving down the street of the average American neighborhood, it is often easy to differentiate a vacant or abandoned home from one with owners that take pride in their home’s appearance.

The vacant home can offer a variety of unsightly issues for the neighborhood, including:

  • Tall grass or weeds
  • Tarps over roofs or other items in need of repair
  • Boarded or broken windows and doors
  • Overgrown landscaping, including shrubs or trees that impede the path into the home
  • Substantially worn or peeling paint or siding

As communities struggle with the problems these homes present, various laws have been passed throughout the country to try to address what exactly blight is and how it can be fixed. For example, in San Francisco, the Community Preservation and Blight Reduction Act defines a blighted property as “one that is under significant deterioration or disrepair.

It is a dilapidated building or an abandoned lot that is inadequately maintained and an eyesore in the neighborhood.” Laws such as this carry the weight of governmentally mandated work orders, potentially costly fines and even repairs carried out by the local government—and then billed to the owner of record, regardless of whether the owner caused the problems in the first place.

Blighted homes can be a larger problem than simply creating an eyesore, however. These properties can present a serious threat to nearby homeowners in a variety of ways. Problems range from the fairly simple nuisance level—overgrown landscaping encroaching on neighboring properties—to more complicated issues, like pest infestations that can spread and are difficult to contain without addressing the problem’s source. In the worst-case scenario, vacant properties can attract squatters, vagrants or other trespassers and may even be used for illegal activities.

In addition, these homes, when or if they can be sold, are often sold at a significant discount, lowering home values in the area. When they can’t be sold, their appearance may lower a neighboring home’s ability to be sold at a fair price, as potential homeowners won’t want to purchase a home next to or nearby a vacant house.

Another factor to consider with these homes is the role institutional investors are playing. Distressed sales have become popular with investors as they have been able to purchase homes at steep discounts and either flip them or rent them. In fact, institutional investors accounted for 5.2% of all U.S. residential property sales this past January, according to RealtyTrac.

These investment properties often become rentals, which may mean less stability than individual homeownership. Or the homes may simply remain vacant, as investors wait for the best time to sell.

Addressing Blight

How can community blight be cured? Is this a problem that requires government regulation? Do loan servicers have a role in remediating foreclosed homes under their purview?

Given the issues inherent to vacant homes, these questions extend not only from the benefit or harm possible to the surrounding community but also to the ultimate viability and value of the property itself. Working to preserve—and in many cases, repair—a property can protect the asset from further deteriorating in value. The time-tested idea of spending money now to save money later is particularly relevant for REOs or institutionally owned or managed homes.

If a vacant home is properly cared for by a property preservation team or other management entity, a variety of problems can be stopped before they lower a home’s potential value. For instance, if a roof leak is detected and repaired in a timely fashion, costly mold remediation can be avoided, as well as other cost-saving considerations—not the least of which is the notion that repairing a roof is almost always cheaper than replacing it.

Maintaining the property appropriately extends from simple things like lawn maintenance to more serious issues, like removing exterior trash or potential hazards from the lot. This kind of straightforward maintenance also helps property owners avoid costly municipal code violations.

In addition, a property that looks well-maintained—and regularly visited—discourages illegal entries and potential vandalism at the property. Keeping trespassers out of the property not only preserves a feeling of safety in the neighborhood, it helps preserve the home as well—if windows and doors remain closed and sealed, water and pest damage may be avoided. A home that appears cared for and occupied also will discourage squatters and vandals, while at the same time limiting liability for the investor or institution that owns the asset.

The Loan Servicer’s Role

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