Buy Foreclosed Home for $1,000. Sell for $70,000. Repeat

Back when the storm clouds of the Great Recession were still gathering, an old Cleveland neighborhood called Slavic Village was branded as the epicenter of the foreclosure crisis

Buy Foreclosed Home for $1,000. Sell for $70,000. Repeat

by Patrick Clark

Back when the storm clouds of the Great Recession were still gathering, an old Cleveland neighborhood called Slavic Village was branded as the epicenter of the foreclosure crisis. The reputation stuck, and over the past nine years the neighborhood has become a symbol for journalists and policymakers trying to understand what went wrong or to gauge the progress of the housing recovery.

Now, as the Republican National Convention plays out in a city where home prices are still near bust-era lows, local officials and nonprofit groups are facing a decision: Should neighborhoods such as Slavic Village be saved or torn down?

“At the height of the meltdown, we were losing two houses a day to foreclosure,” said Tony Brancatelli, who represents the East Side neighborhood on Cleveland’s City Council. “It was just catastrophic.”

Slavic Village's predicament isn't unique. Former industrial hubs from New Orleans to Philadelphia, where the Democratic Party will hold its presidential convention next week, are grappling with problems that began when manufacturing jobs moved overseas and middle class families took flight for the suburbs. The housing bust didn’t help.

As part of its foreclosure relief program, the Treasury Department has allocated hundreds of millions of dollars to tearing down vacant houses in Indianapolis and Memphis, among other cities, on the theory that knocking down abandoned homes can help stabilize neighborhoods and prevent more foreclosures. Vacant homes can drag down property values, making it more likely that struggling homeowners will walk away from their mortgages. 

In 2014, a couple of Cleveland nonprofits teamed up with two for-profit partners and launched an experiment in urban renewal. Called the Slavic Village Recovery Project, the group started out with $450,000 from the two private-sector partners, Cleveland-based developer Forest City Enterprises and Community Blight Solutions, a company that sells a polyethylene alternative to boarded-up windows. It started buying abandoned homes, fixing them up, and selling them for a small profit. The idea is to plow the sales revenue back into more neighborhood homes and—with a little luck—into neighborhoods across the beleaguered city.

The group buys homes, often for less than $1,000, from the Cuyahoga Land Bank, a nonprofit that acquires homes through tax foreclosures or in bulk purchases from Fannie Mae and Freddie Mac, the mortgage-finance giants. Then it does a basic renovation, making sure the plumbing and electrical systems work and putting a fresh polish on hardwood floors 

“The key is not how high can we sell homes, it’s about how efficiently can we do the rehab,” said Jeff Kipp, director of neighborhood marketing at Cleveland Neighborhood Progress, one of the nonprofit developers involved in the project.

The group has sold 34 homes, with an additional 20 currently under renovation. Recently the homes have been selling for about $70,000, a modest amount that Kipp views as an achievement. Because there were very few transactions in Slavic Village after the housing bust, it can be hard to sell buyers on the neighborhood, and it's hard for buyers to convince banks to make mortgage loans. Ultimately, Kipp said, the group hopes to fix and flip about 500 homes and then try to export the model elsewhere.

In Cleveland, plenty of neighborhoods could use the boost. The city’s median home price peaked at $85,900 in March 2006. By the next summer, Cleveland had four entries among the 21 U.S. zip codes with the most foreclosure filings. Slavic Village was first.

In May, a full seven years into the nation’s economic recovery, the city’s median home price was $51,200. Even that figure, the second-lowest among the 150 largest U.S. cities, fails to convey the desperate condition of the local housing market, which includes thousands of homes that are effectively worthless—foreclosed, abandoned, and slated for demolition. 

From a strictly economic standpoint, many homes aren’t worth saving. Some are factory-built abodes constructed as short-term housing for local mill workers; they weren’t built to last a century. Others have been vacant for too long to fix up, or are in neighborhoods that would be better off starting from scratch. The county land bank has acquired 6,400 properties over the past seven years, said Bill Whitney, its chief operating officer. It has demolished 4,300 of them.

Jeremy Grove, 26, a teacher at a public high school in downtown Cleveland, was lured to the neighborhood by affordable housing and a sense of community. He and his wife, Heather, a massage therapist, closed on a three-bedroom home recently rehabilitated by the program. The couple were attracted to the home’s old woodwork and modern amenities, and about 30 families from their church live in the neighborhood. A monthly mortgage payment of less than $500 didn’t hurt.

“We plan on raising a family here,” Jeremy said.

Bloomberg News

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