While many housing and community activists have long intuited that well-financed "vacant property speculators" were wreaking havoc in their communities -- driving down prices, prolonging vacancies and spreading blight -- a new study by the Cleveland Fed both substantiates their suspicions and opens up the discussion about thoughtful solutions.
The Cleveland Fed's study documents that the majority of vacant homes that are bought from private owners or at tax sales by individuals or small operators are eventually bought and their taxes paid. On the other hand, properties bought by "speculators" -- those who make a business of buying and flipping vacant homes -- much more frequently remain vacant, unmaintained and tax delinquent, causing distress and blight for neighbors and governments alike.
In a study of vacant properties sold in Cuyahoga County between 2007 and 2010, the Fed found that only 15% of the properties bought by individuals remained vacant in 2010 -- but a full 31% of those properties bought by large-scale investors remained vacant. More distressing is the fact that while the delinquent taxes on properties bought by individuals almost always get paid, professional 'flippers' resolved tax delinquency on only 13% of their properties resolved their tax delinquency -- extending the period of time in which government loses revenue and houses stand vacant.
While the 'evil-doers' may be the large land speculators, the Cleveland Fed points out that it is the system of property transfers itself that is fundamentally at fault and that must be fixed. Today, there is no "downside" or cost to large-scale speculation. In most locales -- and especially in very depressed housing markets -- so-called "investors" can purchase property for as little as a few hundred dollars and sell this property to a third party for hundreds or thousands of dollars more, in a sale that is recorded as legitimate by the relevant county -- without any requirement that the seller/speculator pay past due taxes or maintained the property to even minimum standards. In rare instances, the third party buyer who finds that he or she owes thousands of dollars in delinquent taxes actually pays up -- but all too often the buyer simply walks away. For speculators, it's a great system -- they have little risk, no responsibility and the potential of great reward.
However, for those of us concerned with the well-being of our communities and the sustainability of our local governments, there is great risk and changing the system is a necessity. The Cleveland Fed suggests two paths of action -- both of which the Center for Community Progress has long championed. They call for changes in state laws that require payment of all delinquent taxes and liens BEFORE a property transfer can be completed and certified by the various County Recorders of Deed. This makes obvious sense -- it would encourage legitimate buyers and discourage quick-buck speculators, since they would have to pay up before getting paid off.
The Fed also suggests creating and utilizing land banks -- locally managed entities to which property buyers or owners could relinquish properties that they cannot financially support -- ensuring that the property can then be positioned for productive reuse by a responsible party. The land bank in Cuyahoga County and the one I established in Genesee County Michigan already play that role, and have restored thousands of properties to productive use -- and up-to-date tax payments.
In addition, I would counsel the replication of ordinances such as those recently passed in Illinois, both by the City of Chicago and the Cook County Board of Commissioners. These ordinances, like those in place in communities across the country, require that any purchaser, owner or servicer of a vacant property register that property and take responsibility for the property's maintenance, security, taxes and insurance -- creating a cost to the neglect that typically accompanies irresponsible speculation where there was none before.
If we are going to make progress in stabilizing neighborhoods and rebuilding the housing market, we cannot allow reckless and often willfully irresponsible speculation to continue -- with short-term profiteers ditching their maintenance expenses on taxpayers while they reap the profits of a system that falls short in encouraging responsible re-use. By reforming the process of land sales for distressed properties, by holding owners and mortgagees accountable for the condition of their abandoned houses, and by creating land banks as an alternative to low-end speculation, America's cities and towns may not be able to stop greed and unethical speculation, but at least those who prey on weak markets won't have an ally in City Hall.
Dan Kildee is President of the Center for Community Progress and the former Treasure of Genesee County Michigan where he initiated one of the country's first and most effective land banks.