Using Data to Address the Challenge of Irresponsible Investors in Neighborhoods
Most of the housing stock in America's low- and moderate-income neighborhoods is owned by investors.1 As the foreclosure crisis and its after-effects continue and more homeowners lose their homes, many of these neighborhoods are seeing increases--sometimes dramatic ones--in the number of investor-owned properties. Many of these are multifamily buildings that are rented out to tenants. Investor activity can be an asset to a neighborhood, helping to revitalize and stabilize communities when properties are rehabilitated and returned to productive (re)use. However, the rise in investor purchases has also led to an increase in the number of investor-owners whose decisions about property repair and tenant selection can harm community well-being.
Investor Actions Can Affect Neighborhood Stability
The "challenge" of dealing with property investors, as this article's title has it, is not with investors per se. Rental units are the most frequently encountered housing solution in lower-income neighborhoods, and most of these units were produced for the market by investors responding to market incentives. Although there are many areas of the country where rental units are unaffordable, for the most part, the low-income rental housing stock in the United States meets minimum quality standards.2
However, some investor behaviors do in fact pose a challenge and a risk to already destabilized communities. We consider irresponsible investors those who "milk" properties--buying them with no intention of maintaining them--or "flip" properties by selling them immediately after purchase and some cosmetic repairs to disguise defects. Addressing the problem of irresponsible investor behaviors is vastly complicated by the dispersed nature of rental property. In the typical low-income neighborhood, most rental units are in small buildings--more often than not, single-family homes. The U.S. Census shows that 51 percent of rental units are in single-family buildings (those with four units or fewer); 40 percent are in buildings with only one or two units.3
Not only are rental housing units relatively dispersed, but most investors own relatively few units. In addition, investors who purchase single-family rental units in low-income neighborhoods typically have lower incomes than their counterparts in higher-income neighborhoods, just as their tenants do. In other words, community and city officials' efforts to "manage" this marketplace for community benefit must contend with large numbers of rental properties owned typically by small-scale investors with presumably limited resources. Efforts to confront this issue are also complicated by the lack of good data on the volume of investor purchases, patterns of property ownership, and assessments of property condition.
Identifying Problem Properties and Owners
But there are sources of information that can be used to identify problem rental properties and their owners. This article highlights several of those sources and examines how the data they provide can be used to help shape regulatory and financial penalties and rewards that discourage irresponsible investors and encourage responsible ones, and thereby help to foster healthy, stable neighborhoods.
Sources of Data to Track Investor Activity Volume
Any given property is owned by an investor or a homeowner and occupied by a renter or the homeowner. (By definition, investors do not reside in the unit they own, but rent it to others; homeowners, also called owner-occupants, reside in the unit they own. In certain instances, a homeowner may be an investor as well, as when single-family owners who reside on the premises rent out one to three units of a single-family dwelling.) The basic data collection and analysis task is to identify which units are owned by investors and which are not. And any given property can change its occupancy status with a change in ownership. Often in rising markets, rental properties are bought by buyers who choose to live in the unit (or units--sometimes buyers combine two or more units to create a single larger one). Often in declining markets, owner-occupied properties are bought by investors who aim to rent the unit, and who often divide large single-family homes into smaller units.
The shift toward more investors and fewer homeowners--characteristic of declining markets--appears to have accelerated with the rapid increase in the numbers of foreclosed homes for sale. In March of 2011, according to the National Association of Realtors, investors made 17 percent of all home purchases;4 however, this figure appears to be much higher at the lower end of the housing market, where distressed properties make up a large part of the market. Nationally, distressed properties--foreclosures and short sales--accounted for 40 percent of all sales, and strong home sales at the lower end of the market reflect all-cash transactions by investors: the share of investment property sales that involved all-cash purchases jumped from 17 percent in 2004 to 59 percent in 2011. (Conversely, fewer than 20 percent of homeowner purchases were all-cash sales.) One source put the all-cash share of investor distressed-property purchases at 98 percent.5
Basic figures on investor and homeowner transactions are generally rough estimates when reported at the county or city level; they are even more difficult to produce at the neighborhood level. Similarly, surveys that produce data at national and countywide geographies do not resolve to small areas, like neighborhoods. But policymakers and practitioners have a strong interest in knowing whether neighborhood housing markets are shifting dramatically toward rental housing. They are even more concerned about who these new property owners might be, a topic covered in the next section of this article. One way to get a good handle on the level of investor activity at the neighborhood level--although it cannot be used to identify individual transactions--is by comparing total sales transactions with mortgages. These data are available at the census tract level, an area that typically contains between 600 and 2,000 housing units. Most neighborhoods comprise at least several census tracts. Both types of data--sales data from Boxwood Means and Home Mortgage Disclosure Act (HMDA) data on purchase mortgages--can be procured from PolicyMap, a web-based data source.6
This comparison works because, as mentioned, the great majority of homebuyers obtain a mortgage, which is recorded in HMDA data, but only a very small percentage of investor-buyers obtain a HMDA-recorded mortgage.7 As a result, the ratio between the two, although not a precise measure, is a highly reliable approximation of the extent to which buying in a particular area is being done by homebuyers or investors. As a rule of thumb, a ratio of two sales or fewer for every mortgage suggests that the greater part of buying is by homebuyers, while ratios significantly higher than three sales for every mortgage indicate increasing investor activity. Many inner-city neighborhoods will show sales-to-mortgage ratios of 10 to 1 or higher, indicating that in those areas--for all practical purposes--the only buyers in the market are investors.
The sales/mortgage comparison offers researchers a quick way of identifying overall trends and directions in investor activity at the census tract level. To develop a more refined analysis using locality-specific data, users can turn to the sources of data available to track the volume of investor activity, presented in table 1.8 But it's important to state: all of these measures are imprecise. Nevertheless, they can be creatively combined to enable administrators, practitioners, and planners to make more strategic decisions about neighborhood investments.
|Type of record||Indicators of possible investor activity||Public source|
||Recorder of deeds|
||Tax assessor's office, office of the city auditor, department of finance|
||Department of regulatory affairs|
The sources below are linked to the purposes for which the data are collected. Records from the recorder of deeds, for example, are designed to track legal ownership of property; however, any recorded intended use of the property, as reported by the buyer, is often incomplete or in error. Records from the tax assessor's office are designed to enable efficient collection of property taxes owed, but because rental property is often taxed at a higher rate than owner-occupied properties, investors have an incentive to misreport. But together with one or more other indicators often (but not completely) associated with investor purchases--a distressed property, an all-cash purchase (without a lien), an owner of multiple properties--researchers can usually back into an estimate of the number of investor purchases.
Because real estate is typically the largest source of local government revenue, tax records are a high-quality source of property information--though again, they must be used in conjunction with other data to produce good estimates. For example, investors usually live at a different address from their rental unit; therefore, a tax bill mailed to an address that differs from the subject property's is a potential sign that the property is owned by an investor. A failure to claim the homestead exemption that lowers an owner-occupant's tax rate or caps his or her property's assessed value may also indicate investor ownership. (That said, examples are legion of investors who fraudulently claim the exemption and have the tax bill sent to their rental property.)
Some jurisdictions require landlords to register their rental properties. Those that do are, presumably, investors. Most jurisdictions require a certificate of occupancy for any unit that is rented. Those landlords that obtain such certificates are, presumably, also investors. But again, many rental property owners fail to register as required or bother with getting a certificate of occupancy. Some city officials interviewed for this article estimate that as few as one-third of the rental properties in their cities are registered.
Analyzing Linked Volume Indicators
Because no single indicator is definitive, there is a real payoff to linking data from various sources, then creating an algorithm to determine whether any given property is, in fact, owned by an investor. For example, the legal records may not signal an investor purchase, but the regulatory agency records may show a certificate of occupancy. Considered together, these data could lead one to safely conclude the property was a rental. Alternatively, a property that has no certificate of occupancy, but the tax address differs from the home address, a homestead exemption was not claimed, and the property was purchased with all cash is, very likely, a rental property.
Fortunately, many jurisdictions have created systems where parcel numbers can be matched across databases, or where parcel-to-address correspondence files can be used to link records from different municipal sources. In addition, data warehouses in a growing number of cities link these databases and make their contents available to researchers and others. Some of these systems, such as the Northeast Ohio Community and Neighborhood Data for Organizing (commonly known as NEO CANDO) in Cleveland, the Pittsburgh Neighborhood and Community Information System, and the Providence Property Mapper in Rhode Island, have become quite sophisticated.9
Data on Characteristic Market Responses and Investor Behaviors
Different markets produce different investor behaviors. In markets where rental property owners make money--because rents are strong or properties are likely to appreciate in value--owners generally behave responsibly, trying to select good tenants and maintaining their properties in good condition. If they do not act responsibly, they are still likely to respond to local pressures to do so: in the final analysis, they want to hold onto their property and protect the value of their investment. In markets where rents are soft and property values have declined, investors may be less likely to check tenant references or take other actions to ensure that renters will be good neighbors. They may also forgo investments in property maintenance and fail to pay property taxes. One of the authors of this article has constructed a typology of investor responses to varying market conditions.10 These types are summarized in table 2. Our concern is with Investor Types B and C.
|Category||Strategy||Investment goal||Time horizon|
|Investor Type A ("Rehabber")||Buy properties in poor condition, rehabilitate them, and sell them in good condition to home buyers or other investors||Appreciation generated through ability to realize greater increase in value than the cost of rehab||Short (usually 1 year or less)|
|Investor Type B ("Flipper")||Buy properties in poor condition and sell quickly (flip) to buyers in as-is or similar condition, perhaps using unethical or illegal practices||Appreciation generated by taking advantage of buyer ignorance, providing misleading information or misrepresentation, or collusion with others||Short (usually 1 year or less)|
|Investor Type C ("Milker")||Buy properties in poor condition for very low prices and rent them out in as-is or similar condition with minimal maintenance, perhaps to problem tenants||Cash flow generated through disparity between low acquisition and maintenance costs and relatively high market rents; no expectation of property appreciation||Short to medium (usually 1 to 3 years)|
|Investor Type D ("Holder")||Buy properties and rent them out in fair to good condition, usually following responsible maintenance and tenant-selection practices||Sum of cash flow during holding period from rental income combined with long-term property appreciation||Medium to long (usually 5 to 8 years)|
Source: Mallach, Meeting the Challenge.
Market Response Indicators
If we assume that investors respond to markets in predictable ways, one (relatively) easy way to address investor activity and distinguish neighborhoods where policy interventions make the most sense is to first identify distressed markets--those where values are falling and, in particular, foreclosures are rising--and then isolate those where a substantial amount of activity appears to be investor-driven, using the methods already described.
Researchers at the Local Initiatives Support Corporation (LISC) and the Urban Institute have created a neighborhood stabilization analysis methodology that enables policymakers and practitioners to diagnose neighborhood housing market health. Visitors to Foreclosure-Response.org can find a neighborhood market-analysis matrix, which matches degrees of foreclosure distress with degrees of housing market strength.11 (The data used to power the matrix can be downloaded.) Once users have identified the combinations of foreclosure distress and housing market strength that are of most interest to them, they can further screen for those neighborhoods where investor activity is either low or high, using the sales to mortgages comparison as a starting point, along with the data found in table 1.
This method works best at the high and low ends of the market. At the high end, investors face strong economic incentives to behave responsibly; at the low end, they face incentives to behave less than responsibly. But the "battleground" markets--where investors of both types may be encountered--lie somewhere in between. These are markets where rents are soft (but not collapsed) and their future direction somewhat in doubt. One way to identify these in-between markets is to screen for neighborhoods that fall in the middle ranges of market strength in the matrix just described.
Investor Behavior Indicators
Another method is to use data that describe actual investor behaviors. Table 3 suggests a method for doing this, based on post-purchase evidence of property sale, rehabilitation activity, and evidence of compliance or noncompliance with legal requirements pertaining to certificates of occupancy, building condition, resident behaviors, or tax payments. Several of these indicators use cut-off points that are somewhat arbitrary, but they can be pegged at whatever value makes sense locally. In the table, property resale within 12 months is one marker of a "flipper," or Investor Type B, as is a resale price that is more than 50 percent higher than the previous purchase price.
|Investor type||Market calculus||Possible indicators|
|Investor Type A ("Rehabber")||Buy low, upgrade, and sell high in relatively short time frame||
|Investor Type B ("Flipper")||Buy low and sell high to unwary buyers||
|Investor Type C ("Milker")||Buy low and extract maximum rent in shortest period of time before property abandonment||
|Investor Type D ("Holder")||Earn positive rates of return on equity invested in rental property over medium- to long-term based on cash flow and appreciation||
Most of the indicators used in table 3 have already been described in conjunction with table 1. Table 4 shows additional indicators--in this case, pertaining to certain legal requirements--which can be found in a variety of places. These data sources, while they exist in virtually every local government, are often not available online. In some instances, they may be available only in files on individual properties, either electronically or in hard copy, thus requiring a prospective user to gain physical access to the data itself from the agency responsible for maintaining it.
|Evidence of building permit for major systems||Municipal housing, neighborhood services, or inspection department|
|Certificate of occupancy||Department of regulatory affairs or building department|
|Evidence of code violation||Building inspection department, court records|
|Multiple emergency-response callsEvidence of citizen complaints||Police department, 911, and 311 records|
|Evidence of tax delinquency||Tax collector's office, city auditor, or department of finance|
Note: While these functions are common to nearly all local governments, the names of the departments or agencies where this information can be found varies widely. The table illustrates some of the commonly found names.
Strategies to Address the Negative Effects of Investors
States, cities, and counties throughout the United States have devised programs and policies to deter investors from engaging in irresponsible behaviors and to punish those who do. Most of these strategies pre-date the advent of the foreclosure crisis, although many have been adapted or strengthened to meet the extraordinary demands of the housing market collapse.
The strategies listed in table 5 form a rough sequence of steps from simple identification of investor-owned properties and those entering and exiting the foreclosure process, to establishing standards for property condition and tenant behavior, to imposition of penalties for noncompliance with property registration and property standards. Space limits preclude a full description of these strategies, which are amply described in the literature.
|Keep track of landlords and properties||Rental registration||Landlords register with city and provide contact information|
|Notice requirements during foreclosure||Foreclosing entities provide city with notice when initiating foreclosure, taking property at foreclosure sale, and conveying properties|
|Finding rental properties||City works with citizens and other entities to identify unregistered properties|
|Identifying "bad apples"||City establishes systems to identify and target remedies toward problem landlords and properties|
|Establish minimum property standards||Rental licensing||Combine registration with health and safety inspection at regular intervals|
|Certificate of occupancy inspections||Require inspection and certificate of occupancy on change of ownership/occupancy|
|Disclosure of findings||Require disclosure of repair needs and code violations prior to conveyance of property taken through foreclosure|
|Code enforcement||Target code-enforcement resources and work with community groups to identify violations|
|Nuisance abatement||Establish program to abate nuisance conditions and recapture funds|
|Landlord security deposit||Landlords provide city with security deposit used for emergency repairs|
|Impose penalties||Impose penalty on owners for failure to comply with notice or substantive regulations|
Source: Mallach, Meeting the Challenge.
Three recent developments in the application of these strategies are worth emphasizing. First is the increasing prominence of efforts to engage community organizations and residents in the strategy implementation, primarily to monitor property code violations and nuisance conditions. Second is the role of data intermediaries as important participants in neighborhood stabilization response, especially as it pertains to identification of neighborhood concentrations of specific problem properties or those at high risk of vacancy and abandonment. Third is the introduction of new judicial venues such as housing courts, or the creation of administrative remedies, to increase and expedite sanctions against problem properties.
Strategies to Discourage Irresponsible Investor Activity
The best solution to the challenge of irresponsible investors is to prevent problems from arising in the first place. There are essentially two kinds of preventive strategies. The first strategy involves increasing the costs and consequences of problem investor behaviors and reducing the costs of responsible ownership; the second involves either reducing the number of tenure shifts from owner to renter as properties change hands, or keeping previous owners in their units.
Several of the strategies identified in table 5 are, in fact, preventive as well as responsive. For example, landlords that expect periodic rental property inspections, coupled with penalties for failure to maintain housing to code, have an incentive to behave responsibly. Indeed, cities that establish a clear and consistently enforced regulatory regime that includes many of these response strategies can create a climate of responsible behavior that discourages more problematic actions.
|Support for responsible property management||Training programs||Training on property management and legal compliance|
|Multifaceted programs||Programs that (1) require multiple landlord actions and (2) offer "package" of incentives or rewards|
|Incentives for property acquisition and improvement||Direct financial assistance||Financial assistance to investors for purchase and rehabilitation of properties|
|Tax incentives||Tax abatements for rental property improvements|
Source: Mallach, Meeting the Challenge.
Of particular note are incentives for property acquisition and improvement. Some cities have created programs that couple increased and more aggressive enforcement of building codes with broadened availability of financial subsidies or other incentives to assist with property repairs and rehabilitation. Baltimore's Vacants to Value program, described by Janes and Davis in the fifth article in this publication, is an example of this, whereby aggressive code enforcement on targeted blocks with multiple vacants in "transitional" markets is linked to prearranged bulk purchases by private developers. As currently envisioned, these purchases will not require subsidy. But in markets where future rents do not cover the added costs of bringing properties up to par, pairing of enforcement and financial incentives is crucial. Programs that encourage and reward investors who act responsibly with the right incentives will help crowd out investors with less salutary motives.
Availability of financial incentives for homeowners to buy and rehabilitate properties can have a similar crowding-out effect, reducing the influx of investors likely to "flip" or "milk" properties. These incentives work best where markets have some prospect of recovery--the same markets where responsible investors can operate profitably--and where government agencies or community organizations play a role in acquiring at-risk properties and marketing them to prospective buyers.
Use of data and information on investor behaviors to prevent or respond to problem properties is best embedded within an overall public-private strategy for neighborhood stabilization; that is, in conjunction with many of the other strategies described in this compilation. There is no substitute for a well-organized and cooperative framework for community consultation and action. Success depends on marshalling the political leadership to meet these challenges with a long-term strategy (not a one-term election strategy) to achieve measurable outcomes, and a willingness to chart a course in accordance with what the data show. Data providers and analysts should be core participants in this effort.
About the Authors
Chris Walker is director of research and assessment for the Local Initiatives Support Corporation (LISC), the nation's largest community development intermediary. He is responsible for assembling, conducting, sponsoring, and disseminating high-quality research on community development's contributions to the well-being of individuals, families, and communities. Prior to joining LISC in 2005, he was nearly 20 years at the Urban Institute, researching housing, community development, and arts and cultural issues.
Alan Mallach is a non-resident senior fellow at the Metropolitan Policy Program of the Brookings Institution in Washington, DC, and a visiting scholar at the Federal Reserve Bank of Philadelphia. A widely recognized authority on housing, land use, urban affairs, and community development, he has been engaged as practitioner, advocate, and scholar in those and related fields for over 40 years.
1. Census 2010 SF1 estimates aggregated by Local Initiatives Support Corporation Research and Assessment. Return to text
2. A new measure of housing inadequacy puts an estimated 89 percent of rental households in units that are physically adequate. See Paul Emrath and Heather Taylor (2011), "Housing Value, Costs, and Measures of Physical Adequacy," prepared for the American Housing Survey User Conference, Washington, DC, March 8, www.huduser.org/portal/pdf/Emrath.pdf . Return to text
3. U.S. Census Bureau, American FactFinder; generated on October 17, 2011, by Local Initiatives Support Corporation from "2005-2009 American Community Survey 5-Year Estimates," available at http://factfinder.census.gov. Return to text
4. National Association of Realtors Investment and Vacation Home Buyers Survey, 2011; and National Association of Realtors (2011), "Existing-Home Sales Rise in March," press release, April 20, www.realtor.org/press_room/news_releases/2011/04/rise_march . Return to text
5. Guy Cecala, publisher of Inside Mortgage Finance, as reported in the Seattle Times, January 24, 2010. Note that some homebuyers intending to live in their units do, in fact, pay cash; Neighborhood Stabilization Program buyers may be considered "cash" buyers as may those engaged in non-arms-length transactions. Return to text
6. PolicyMap (www.policymap.com), owned and maintained by The Reinvestment Fund, a Philadelphia-based community development financial institution, is a valuable source of data on cities and neighborhoods. Although access to their data is by subscription, the costs are reasonable enough to be within the means of many local governments or community development corporations. Return to text
7. According to data from Campbell/Inside Mortgage Finance HousingPulse Tracking Survey for February 2011, 75 percent of investor home purchases are all-cash transactions. Federal Housing Administration, Fannie Mae/Freddie Mac, and Veterans Administration mortgages in toto amount to only 7 percent of investor purchases, while 18 percent of transactions use some other type of financing, most of which is unlikely to be subject to reporting under HMDA. Return to text
8. See the compendium of indicators and data sources compiled under the auspices of the National Neighborhood Indicators Partnership. See also Claudia J. Coulton (2008), Catalog of Administrative Data Sources for Neighborhood Indicators (Washington, DC: The Urban Institute, January), www.urban.org/UploadedPDF/411605_administrative_data_sources.pdf . Return to text
9. Descriptions of these systems can be found on the corresponding websites at www.neocando.org, www.ucsur.pitt.edu/pncis.php , and http://provplan.org/data-and-information/interactive-data-portals-entry/legacy-mappers . These data systems can also be accessed through the Urban Institute's National Neighborhood Indicators Partnership website at www.urban.org/NNIP . Return to text
10. Allan Mallach (2010), Meeting the Challenge of Distressed Property Investors in America's Neighborhoods (New York: Local Initiatives Support Corporation, November.) Return to text
11. Foreclosure distress is measured by an index constructed from the number and percent of mortgages that are 30 days delinquent, the number and percent of mortgages in foreclosure, and the vacancy rate; data are from Applied Analytics, a proprietary data provider, as adjusted by LISC for estimated loan undercount. Housing strength is measured by first-lien mortgage values, the ratio of owner mortgages to investor mortgages, the ratio of owner mortgages to single-family units, the ratio of investor mortgages to single-family units and the percent of loans that are high cost; data are reported under HMDA. See Center for Housing Policy, LISC, and Urban Institute partnership at www.foreclosure-response.org . Return to text
12. For further details on these and other investor programs and strategies, see Mallach, Meeting the Challenge, where they are described in detail, along with information on how to access additional materials if desired. Return to text