Economists say irresponsible property investors contribute to urban blight
Some investors are causing urban blight by flipping inner-city properties without first paying off existing tax liens and making home repairs, says Fed Bank of Cleveland researchers Thomas Fitzpatrick and O. Emre Ergungor in a new study. Since banks require all liens to be paid off prior to the closing of a property sale, the non-bank route that speculators take is dangerous for the welfare of distressed communities, the researchers claim. Investors are filling the mortgage origination space with "cash" buyers flooding into America's cities, looking to buy low and sell high. In their report, Fitzpatrick and Ergungor say "speculative home purchase transactions are not always funded through the banking system. If investors pay cash or secure non-bank seller financing, they can postpone paying off liens, past due taxes, and housing code assessments against the property, often for many years." The end result is a situation where the home is flipped and sold to another unsuspecting buyer who later learns the tax liens are worth more than the property itself. That buyer then loses interest in the home, abandoning it and allowing the cycle of distressed real estate to continue, the researchers claim. "Indeed some speculative purchases can add liquidity to a distressed market and help heal distressed neighborhoods when properties are purchased for rehabilitation," the research team concluded in the report. "But if speculators fail to keep up with maintenance and taxes, allowing properties to sit empty and in disrepair, the opposite happens." The report says this is one of the trends hitting urban areas like Cleveland. Ergungor and Fitzpatrick advocate for legislation that will cut down on this never-ending cycle. "One potential solution would require that all past-due taxes and code enforcement penalties be cleared before county recorders declare a property transfer official. This change would target the speculative activity that destabilizes weak housing markets," the researchers wrote. They also suggest tracking repeat offenders, or investors who flip properties without paying off liens first, to ensure the same perpetrators are not allowed to keep buying homes and selling them in the same manner. While the researchers approve of keeping investors interested in the distressed market, they are wary of this new "disinterested investor." "We consider speculation harmful when the buyer has no intention of improving or maintaining the property or paying its taxes—but expects to resell as much of its stock as possible quickly, "as is," and at a small markup," the report concludes. Write to Kerri Panchuk.