Creative destruction

The average cost for demolishing a dilapidated house ranges between $7,500 and $10,000, but neighbors often pay Douglas Fernbacher and his crews with pizza.

The Chicagoan with a Miami tan has spent 14 years tearing down everything from single-family homes to Kmarts. In years past, when a house came down, a larger one took its place soon after. He brought in dirt from nearby developments to fill the foundation hole his crew excavated.

But today there are no nearby developments. Since the housing crash in 2007, there is no clearer physical representation of the busted housing bubble and the remains of its artificially inflated structure than a demolition site.

Fernbacher’s company GSPS is a contractor for several property preservation firms. All they do is tear down homes. They are the last resort for many communities all over the country overrun with blight.

Starting in 2011, however, cities made the first tentative steps toward clearing away the excess. There were more than 18.7 million vacant homes in the U.S. last year, according to the Census Bureau, down from more than 18.9 million in 2010.

But much more will need to be done to address the problem of blight. Vacant properties increased every year over the last decade from the 13.6 million empty homes counted in 2000. Between 2005 and 2008, as the real estate market began to overheat and record-level foreclosures left many properties abandoned, vacancies jumped from 15.8 million to 18.7 million homes.

In 2011, nearly 76% of these properties were considered vacant year-round.

“I think there’s a collective conscious coming here, and I think that people are starting to realize that we have to get serious about this,” Fernbacher says. “We have to move these houses. And the only way to do this is to remove them.”

One of Fernbacher’s clients is Safeguard Properties, the Ohio-based property preservation firm. Its founder Robert Klein is taking Fernbacher around the country this year from conference to conference on a demolition crusade, to convince cities to pursue the clean slate their hardest hit communities crave.

“Every single city, I don’t care where it’s at, has these blighted communities,” Klein said. “They are a cancer.”

Their first opportunity is a quiet place left even more silent after the housing downturn. In Slavic Village, a community located in Cleveland, Ohio, home prices plummeted from nearly $150,000 during the housing boom to roughly $39,000 today, according to data from Altos Research.

The 29 properties sold there in early March spent an average 550 days on the market, Altos said.

Safeguard and GSPS will start a pilot program this year to demolish 2,200 Slavic Village homes that are considered beyond saving. But it isn’t as simple as that.

TEARING DOWN THE STIGMA

Slavic Village was spotlighted in the Alyssa Katz book “Our Lot” as a prime example of subprime predatory lending practices.

Barbara Anderson was one of the first black homebuyers in Slavic Village. According to her Senate testimony in 2007, a broker approached her with a refinancing proposal and approved her for a loan at 8.5% through the now-defunct Conti Mortgage. Within four years, the rate jumped to 14.5%, pushing her monthly payment higher by nearly 60%. Her loan was sold 15 times over that time. Today, the result is apparent. Slavic Village is a ghost town.

Klein with community leaders and the local city council president in February with their solution.

Safeguard placed all Slavic Village properties into three categories. Owner-occupied homes fall into the first category, homes in need of rehabilitation but vacant are the second category, and the third category consists of ones that need to come down.

Most of the properties sit in either of the first two categories, but any progress waits on tearing down the ones in category three.

“No developer will come in when you have five occupied properties, five vacant properties and one that needs to be demolished. Those five properties are affordable, and can be rehabbed fairly cheaply. But nobody will come in until you’ve demolished that one property,” Klein said. “What we’re doing now is we’re putting together a model to make this thing work in Slavic Village. If it works in Slavic Village, we can do this anywhere in the country.”

THE DEMOLITION

You can tell Fernbacher enjoys what he does more than attending the conferences. His joy for tearing down buildings is like that of a kid playing with Tonka trucks in his backyard. And when he talks about the array of hurdles that keep him from doing what he loves, he sounds like that same kid grudgingly doing his homework before going outside.

When a demolition crew first arrives, it checks for environmental problems. A contractor is hired to assess the property for lead-based paint, asbestos, oil tanks and other problems. Fernbacher says the vast majority of the homes built in the mid-1970s have something potentially toxic about them.

“Back then, a company called Armstrong Flooring thought it would be a good idea to use this wonderful invention called asbestos,” Fernbacher says. “But usually you can get these problems taken care of quickly. If banks or servicers or cities want to get it done, it could take 30 days. It just depends. Actually getting the work done doesn’t take that long. Taking out asbestos flooring can take a few days and you’re done.”

But then demolition contractors have to get the permit from the city. Depending on what city a crew is operating in, the process can be relatively easy or a nightmare. In Chicago, it’s a nightmare.

Tearing down a home in the city costs the servicer an automatic $2,300 charge to disconnect the water and sewer services at the street level. Fernbacher says fees easily exceed $5,000 there, and the permit process can take several months. On top of that, servicers have to pay any outstanding bills owed to the city.

“We had a situation where my client had to pay a $5,000 water bill before we could demolish it. The servicer had to pay that. Yeah, it was a shock to them,” Fernbacher says.

He takes a deep breath though and sits forward. “Then comes the fun part,” he says.

Demolition crews that finally secure a permit put up a security fence first, drop off their fuel tanks and the hydraulic excavator. There’s a barbaric sort of grace to how it’s done. The excavator starts at the top and begins peeling the property away. The crew then separates the debris into piles of brick, stone, metal, pipes, the HVAC and wood. A surprising amount of it can be recycled.

In times past, when nice homes were being torn down for McMansions to take their place, contractors would often salvage things like doors, stained glass, even door knobs. Fernbacher says he would make anywhere from $1,500 to $2,000 salvaging through the piles and another couple of thousand reselling metals. These days, though, the pickings are slim.

He’s sure some of the McMansions built over previous demolition sites have been torn down since as well.

Down to the foundation, the excavator digs out the brick, concrete and stone, which is also separated and recycled.

“You’re basically left with a hole in the ground,” Fernbacher says.

About 12 trucks of dirt come rumbling down the street next. It’s packed in and leveled out.

“Then, you’re essentially ready to lay sod and lay seed and bring the community back,” Fernbacher says. “The neighbors thank us. They say, ‘Thank you for taking care of this blight. Now, I don’t have to worry about people coming out of these properties at 2 in the morning and I have two small children.’ It’s such a good feeling knowing that you’re making a difference in these neighborhoods even if it’s one house at a time. We get pizzas delivered a couple of times. That did happen once or twice, because we took down the ugliest most dilapidated house on the block. Most neighbors with a $300,000 house, they don’t want the $30,000 eyesore. It’s hurting their life savings.”

Gus Frangos is the president and general counsel for the Cuyahoga Land Bank in Cleveland. Since ramping up its operations in 2011, it has knocked down close to 800 homes in the county, most of them in the Cleveland area. It has another 700 planned this year.

“When we go and demolish properties, people come out and, literally, they’re crying they’re so happy,” Frangos says and pauses.

It seems so feeble for these neighbors of his. An overwhelming amount of people are current on their mortgage but have also funded underwhelming government programs, millions in executive bonuses, billions in bailouts to Wall Street firms, billions more to Fannie Mae and Freddie Mac, trillions more in no-interest loans from the Federal Reserve to banks considered more systemically important than the people forking over the money.

And when a city or local government manages the $7,500 to tear down a property that had gone ignored and neglected for years, they weep and throw pizza parties. The stigma of demolition’s finality is lifted, and in its place is a clean slate. Rarely is a larger home put in its place.

Frangos says their challenge is to figure out what to put there. Often it’s a park or community playground, even a church parking lot. Anything, but a house.

“You’re stabilizing property values when you do this,” Frangos says. “Who’s going to buy a house next to some of these homes? You could have gold-plated countertops, but if you live next to that, they’re not going to buy in your neighborhood. Period.”

MORE TO COME

The kind of homes landing in the Cuyahoga County Land Bank is shifting. When it first launched in 2009, the primary pipeline of roughly 100 properties coming in were about 40 from Fannie Mae, another 40 from the Department of Housing and Urban Development and the rest were sent from banks and local cities.

As the robo-signing scandal brought the foreclosure process to a standstill in many states, the tax foreclosure system has been rejuvenated, precisely because of the land banks. When a local government forecloses on a property for delinquent taxes, that money becomes a “phantom receivable,” according to Frangos. No one bids on the property. The state and city lose the tax revenue owed. With budgets already tight, rehabbing the property or tearing it down is simply too expensive and so the blight remains untreated.

“That’s why the process was scaled back,” Frangos says. “The government has to be somewhat careful about how much they’re foreclosing.”

With the development of local land banks, the process rebooted, and in Cuyahoga County there is a big influx of city and state-owned properties that have been donated to the land bank. Meanwhile, Fannie Mae incoming properties dropped to 15 per month because of the robo-signing slow down.

Several state attorneys general have tentative plans in place to use some of the $25 billion foreclosure settlement to help fund expensive demolition projects. Ohio AG Mike DeWine set aside $75 million of the roughly $385 million the state plans to receive.

According to Frangos, the money will likely be distributed on a match basis, according to preliminary meetings he attended. The Cuyahoga County Land Bank and the city of Cleveland assembled a $14 million pool to ask for a match.

“Hopefully, we’ll have $30 million to throw at it,” he says.

More federal money is coming too, with some of that specifically for demolition. HUD allocated $6.8 billion through three rounds of Neighborhood Stabilization Program grantees. Local community groups, nonprofits and governments are using the money to acquire and rehab properties.

But the city of Cleveland felt it wasn’t allowed to spend enough of the NSP 3 money specifically for much-needed demolition. According to its third quarter NSP progress report, the city will spend $18 million on rehab projects, but only 10% of NSP 3 funding could be used for demolition.

“For this reason, Cleveland is requesting a waiver of the 10% cap on NSP 3 funds for demolition, up to 41% of the total NSP 3 allocation for a total demolition allocation of $2.8 million,” according to the report.

George Gonzalez, a spokesman for HUD, says the waiver on the cap was granted, and the city was allowed to spend 41% of its NSP 3 funds on demolition.

“Nationally, including Cleveland, HUD has granted 20 waivers for the demolition cap for use of NSP 3,” Gonzalez says.

Chicago, Atlanta and other cities around the country are installing programs to demolish more homes. The largest may be Detroit, where the mayor pledged to tear down 10,000 vacant homes by the end of 2013. The city assigned 4,074 structures to contractors, and 3,629 of these properties are now gone, according to the latest data.

LATEST EFFORT

Sen. Jack Reed, D-R.I., introduced a bill in March that would provide another $15 billion to states, cities and nonprofits for rehab and demolition projects. Roughly $10 billion would be granted using a model based on the NSP, and $5 billion will be distributed through new competitive grants. It would also provide more support to local land banks.

“This initiative will provide a flexible source of funding to help local communities leverage federal dollars to effectively address vacant and blighted properties in their areas,” Reed says.

Slavic Village could be the launching pad for a national program, where rehab investors, demolition crews, servicers, property preservation companies and the city are partnering to rip down properties and attract private capital to then rejuvenate the house next door.

“It’s still in the implementation stage,” Klein says. “This has never been done. We’re figuring out the concept.”

Rick Sharga, executive vice president of Carrington Mortgage Services, believes there will be more land bank projects this year.

“One of the reasons we haven’t seen much of this activity to date probably comes down to budgetary issues — many cities across the country are running deficits and simply don’t have the funds to pay the demolition costs, even if the property owners were willing to give them the properties,” Sharga says. “The fact that certain Ohio counties have decided to use funds from the AG settlement drew some complaints from consumer groups, but is really a smart way to pay for clearing away properties that are safety hazards, and which are likely dragging down the property values of adjacent homes.”

The key to more enthusiasm for a broader effort is the early success of these pilots, which Sharga said is inevitable.

“There may be a psychological barrier to the demolition strategy as well; bulldozing a home is a permanent action, and indicates that everything else has failed,” Sharga says. “I think once we see positive results in some of the communities that take this action first, you’ll start to see it happen in other areas which were either egregiously overbuilt during the housing boom, or fell into disrepair during the recession.”

Caroline Reaves, CEO of property preservation firm Mortgage Contracting Services, says some servicers are beginning to change their own policies to encourage more demolition. Cities like Chicago are beginning to enforce code violations and force the banks to pay for the demolition.

There were 18,320 vacant Chicago properties as of September 2010, according to the most recent study from the Woodstock Institute. Nearly 70% were tied to foreclosure filings began between 2006 and the first half of 2010.

“Neighborhood blight has been one factor contributing to drastically depreciated home values,” Reaves says. “To prevent its spread, some banks and servicers themselves are re-evaluating certain vacant properties and proactively demolishing abandoned, condemned and/or dilapidated properties to result in nice, manicured lots.”

In early March, Bank of America donated another 75 homes to Kansas City and provided up to $875,000 to rehab or demolish them. Last year, it donated another 100 to the city of Detroit.

Still, with costs so high and timelines so long for taking down a home, forecasting how much of the excess inventory will be torn down is nearly impossible.

“It is challenging to forecast an exact volume of demolition initiatives that will be carried out this year, but we are seeing a high level of collaboration between all the parties involved in this process to ensure a positive solution that helps stabilize our nation’s communities and reduces neighborhood blight,” Reaves says.

Fernbacher, too, believes cost is the largest issue that is keeping more projects on hold. But, he says dollar-for-dollar, demolition could be one of the best solutions for the housing market once carrying costs, insurance, safety and liability costs for homes stalled in a jammed foreclosure process are factored in.

He’s already seeing a growing interest. Based on his models, GSPS business is set to quadruple from last year — in just the first four months of 2012. He has 21 full-time employees and 230 independent subcontractors, many laid-off construction workers who once built nearby homes.

But unlike demolition causes in the past, there will be a lot more green space this time around, he says.

“It’s completely come full circle,” he says. “Where it became about excess before, it’s about becoming a minimalist and reducing the inventory now.”

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