MSN Money: Should we tear down foreclosures?

November 15, 2011

By John B. Saul

Let’s get rid of foreclosed homes. Demolish them. We’d be better off without them, and here’s why.

Many of them are vacant or abandoned, and those homes attract squatters, rodents and/or criminals. Such homes often get stripped of appliances, pipes, windows, doors and other materials.

They quickly become a visual blight on a neighborhood. They rapidly decline in value and require money to pay taxes and upkeep, which can outstrip the return from a potential sale.

As they go, so goes the neighborhood, with homes nearby also losing value. As the neighborhood goes, so goes the tax base, lessening the revenue to the municipality where these homes are.

And in today’s economy, there are plenty of unemployed Americans available to do the demolition.

The above might not apply to every home in foreclosure, but a familiar real-estate mantra can be the guide to choosing which homes to demolish: location, location, location.

Add one more thing to the chant: condition.

“Two main considerations go into the decision to bulldoze a property: market condition and property condition,” said Rick Sharga, who was the senior vice president at RealtyTrac, an online marketplace of foreclosure properties, before he recently left to become the executive vice president at Carrington Mortgage, a financial-management company.

Help for those facing foreclosure

“If you are located in a down market where there has been a loss of jobs, population or both, then there is no one to buy the properties,” Sharga said.

RealtyTrac began posting foreclosure records in 2005, and Sharga estimated that of the 800,000 properties still on lenders’ books, less than 10% of them would eventually be bulldozed.

“If the property is in extreme disrepair, where it is a blight on the neighborhood or a safety hazard, demolishing it can be seen as an improvement to the neighborhood, like pulling a bad tooth to save the rest of them,” Sharga said.

Demolition can be done for between $5,000 and $30,000, depending on the size and type of the structure. Fixing up a blighted home for resale can reach into five or six figures, and when taxes, maintenance and liability costs add up to a continuing loss on a property, the most cost-effective means of disposal is the bulldozer.

“Homes that we demolished are at times listed at values of $5,000, but to bring them up to code and make them habitable could cost $50,000 to repair,” said Jumana Bauwens, a spokeswoman for Bank of America Home Loans.

Cities proceeding with demolitions

Demolition of foreclosed homes and other abandoned structures is happening in several U.S. cities. Detroit has a goal of demolishing 10,000 structures by the end of 2013. So far, almost 4,000 properties have been identified, at least 95% of them residential. The properties come into the city’s possession through donation, because of delinquent taxes or failure to respond to nuisance-abatement procedures.

Bank of America has said it would identify 100 properties for demolition in Detroit. Rick Simon, a spokesman for Bank of America Home Loans, said homes designated for demolition are donated to public agencies and “generally would require prohibitive costs to make them habitable.”

He said the properties are usually under $15,000 in value, costly to maintain or to prepare for sale and are often in areas with many vacant properties, creating blight and hurting surrounding property values.

What happens to the properties after demolition is being left up to the agencies receiving them. The bank will contribute to the cost of demolition or complete the demolitions before donating the properties.

Chicago last year contracted out demolition of 509 properties at a cost of more than $12 million, an average of $23,854 a structure. So far this year, the city has contracted for the demolition of 335 buildings at an average cost of $22,800.

A city ordinance was introduced last month to reduce the time it takes for foreclosure to six months, down from the two years now allowed. The goal is to work with banks to pass statewide legislation to speed up the foreclosure process and return the properties to the market.

Gus Frangos, the president of the Cuyahoga Land Bank in Cleveland, says Ohio has reduced the time it can take to get clear title on a property to 45 days. One key change came in the redemption process, which no longer lets a homeowner pay taxes and other costs at the last minute of a foreclosure and take back the property.

The redemption process had hung over what could be done, Frangos said, delaying loans, permits and the rehabilitation of declining properties.

The 2-year-old Cuyahoga Land Bank, a nonprofit, gets funding from penalties and interest paid on delinquent property taxes. It has demolished 500 homes, has 1,000 in its inventory and has disposed of an additional 1,500 properties by turning them over to neighbors or churches, or to contractors to rehabilitate. Frangos estimated there are 15,000 homes in Ohio’s Cuyahoga County that could be considered for demolition.

There’s plenty of help to do the demolition work, but Frangos said what his group does is “not a wonderful job program that will last forever.”

“Demolitions were a couple of hundred a year and now could be more than a thousand,” he said, “so there has been some increase in employment.” But he considers demolition regressive spending, as opposed to building something that would continue to produce work.

Foreclosures’ cost to families

The Center for Responsible Lending estimated that foreclosures in 2009 would cause 69.5 million nearby homes to fall in value an average of $7,200 each, for a total loss of $502 billion. The center projected that from 2009 to 2012, about 92 million U.S. families would lose an average of $20,300 in home value — about $1.9 trillion in all — all because of nearby foreclosures.

The center said its projections represent only property value declines caused by nearby foreclosures, not price drops associated with short sales or the slowdown in local housing markets. The projections are based on data from Credit Suisse, Moody’s and the Mortgage Bankers Association.

The Center for Responsible Lending was founded in 2002 by the Self-Help Credit Union, a nonprofit community-development lender, and is supported by several charitable foundations. Its goal is to protect “homeownership and family wealth by working to eliminate abusive financial practices.”

Not everyone is 100% behind the idea of demolishing foreclosed homes.

“Demolition is not ideal,” said Julie Dworkin, the director of policy at the Chicago Coalition for the Homeless. “It’s preferable to rehab homes and get people back into them.”

To that end, Dworkin said, the banks could do two things: make it easier to buy foreclosed homes and donate properties that are still in good shape.

Those views are echoed in Cleveland, where Brian Davis, the director of community organizing with the Northeast Ohio Coalition for the Homeless, said homes should be donated when they first come on the market. “After six to eight months, they have been stripped and aren’t worth saving,” he said.

Davis acknowledged that neighbors want blighted homes taken down, “but having someone staying in the home, keeping criminals away and trying to improve it would not be a bad thing.”

He would like to see a program where homes could be saved in exchange for sweat equity by homeless people. His organization’s plan would be to have teams of four with various skills work on the homes, with a team member moving in when it was finished. The team would continue to work until all four members had homes.

Why houses are being torn down when homelessness is going up is a question that comes up often in meetings Davis has with the homeless. But he acknowledges that there are many homes in Cleveland not worth saving.

That’s the same case in Detroit, where Dean Simmer often writes about homelessness issues on his blog.

“There are homes so blighted — burned out, second floor falling in — that no one should live in a home like that,” said Simmer, who teaches at Detroit Cristo Rey High School and runs the school’s information technology department.

Simmer sees many obstacles to any process of turning foreclosed or abandoned properties over to the homeless. “There are all kinds of issues — crime, squatters, injury, liability — not things banks want to get involved in,” he said.

In fact, the best thing for the banks would be to have the property owners keep paying the mortgages and stay in the homes.

As part of its program to donate homes for demolition in Detroit, Cleveland and Chicago, Bank of America has held sessions for homeowners to meet with mortgage-modification specialists. Five hundred customers showed up in Cleveland, 1,600 in Chicago and 1,400 in Detroit.

Chase Bank has set up a down-payment assistance program for Detroit city employees to move into vacant homes in designated areas, and CitiMortgage held events in several cities last summer where 1,000 homeowners met with officials about mortgage problems. Nine hundred of those homeowners were at least 60 days behind on their mortgage payments, and 300 were in foreclosure. In September, Citi announced that 600 had met qualifications for loan modifications.

But even with help, many homeowners haven’t been able to keep up with payments.

Rebecca Mairone, the national mortgage outreach executive for Bank of America Home Loans, said homeowners faced with economic hardships have moved into other housing and “in many cases have walked away from their homes, leaving behind vacant and deteriorating properties that can cause neighborhood blight.”

Reselling the properties would be the next-best course of action for the banks. But remember location, location, location? The homes are in areas with dwindling populations and few buyers.

“Detroit covers 129 square miles, was built for 2.2 million people but loses 50,000 a year and now has just over 700,000 people,” said local activist Jeff DeBruyn.

He has been an advocate for the homeless, a community organizer who helped reopen an abandoned apartment complex and most recently a self-described “entrepreneur” of The Imagination Station, a nonprofit whose ultimate goal is to construct “a creative campus in Detroit built on community, technology, sustainability and the arts

But first it is cleaning up two blighted homes across from Detroit’s historic, long-closed Michigan Central Station.

DeBruyn said that if a foreclosed home is the only one in an area and is in good condition, it probably should be saved. But he cautioned that “you can’t leave property abandoned for a minute” before bad things start to happen.

“If homes are in foreclosure, it might be better to make way for a different use,” said DeBruyn, who noted that many properties in Detroit fell into public hands after landlords ignored nuisance-abatement procedures.

DeBruyn said he “cheers internally” and hears from happy neighbors when boarded-up homes come down. “I get emails saying, ‘I was going to leave Detroit, but now I’m staying, and thanks for that.’