Property Investors: Solving or Contributing to Neighborhood Blight?

Two recent reports about investors who buy vacant and deteriorating homes and resell them quickly paint vastly different pictures of the effects such actions have on neighborhoods.

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A report released by the ""Federal Reserve Bank of Cleveland"":http://www.clevelandfed.org says many cities are being hurt by irresponsible behavior of investors who purchase homes at a low cost and sell them quickly at a small markup without regard for back taxes on the property that need to be paid.

Many investors pay cash for the transactions, meaning they can postpone paying off liens, past due taxes, and similar costs. But when those investors sell the properties again in short succession, those unpaid costs get passed along to the unsuspecting new owner, who will in many cases decide to abandon the property and will thus start the cycle over.

""As this cycle continues, the property remains vacant, falls into further disrepair, and becomes a nuisance to the entire neighborhood,"" says the report. The writers of the report advocate policy changes that would make it mandatory that all past-due taxes and code enforcement penalties be cleared before a property transfer can be declared official.

The Fed noted that some states, including Maryland, Minnesota, South Dakota, and Louisiana have laws that restrict transfers of tax-delinquent properties.

The report analyzed more than 16,000 property transactions in Cuyahoga County, Ohio, and grouped investors into three types: large, small, and individuals. Large investors purchased or sold 11 or more properties, and small investors purchased or sold four to 10 properties. Individuals purchased or sold three or fewer properties over a period of four years.

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The report shows that 31 percent of foreclosure properties bought by large investors from 2007 to 2009 were still vacant in June 2010. Not only that, 44 percent of properties purchased by large investors in 2009 were delinquent when analyzed again later, despite having been current the previous year, meaning the large investors bought the properties with no intention of ever paying the taxes.

But a report from ""Econohomes"":http://www.econohomes.com/, an Austin, Texas-based company that buys homes in bulk and sells them online at affordable prices, says that investors who play the game fairly are actually contributing to the growth and overall health of ailing neighborhoods and helping families at the same time.

The Federal Reserve report says that most investors who plan to flip the properties quickly at higher prices have an advantage over investors who plan to rehab the properties. Investors planning to flip the properties can bid higher and buy more properties because they won't need to take into account the cost of rehabilitating the properties or paying the back taxes.

However the Econohomes says most investors are new to the investing world, making less than $100,000 in household income and between 36 to 55 years of age. And these investors are overwhelmingly not interested in buying in bulk.

""Contrary to all the online chatter, most investors buy one property at a time within driving distances of their home,"" the report says.

These investors use ""their own money, sweat-equity, and local resources"" to improve and restore distressed homes and then resell the homes to owner occupiers or rent them out. The survey found that 57 percent intend to repair the properties they purchase before renting them out and only 21 percent plan to rent them without repairs.

Econohomes says these rehabbing investors are ""undoubtedly the bridge and backbone of this new housing economy.""

""They are overwhelmingly local, pouring needed capital and resources into their communities, and reducing widespread vacancies plaguing some of the hardest hit neighborhoods,"" the report said.

""[Local investors] are rapidly buying vacant, deteriorated, REO properties and turning them into homes for those displaced by the recession,"" it continued.