Friday, October 30, 2009

House Flipping:: A Strategy to Reverse Neighborhood Decline

When we think of "House Flipping" we instantly picture those "Get rich quick in Real Estate" infomercials. Where some slick real estate guy is talking about how you are going to make millions in Real Estate, by buying low and selling high. As anyone familiar with Urban neighborhoods knows, that doesn't 'just happen".
However "House Flipping", done with a purpose can in fact turn around a neighborhood when done in a competent manner and with strings attached. Take for example the highly successful FLIP program of Historic Landmarks of Indiana. The idea of this program was simple. Take old houses that were down on their luck, in neighborhoods that were down on their luck, buy them, stabilize the outside so they are no longer eyesores and resell them with what is known as restrictive covenants to people willing to finish the interiors. These are not "grand mansions" although some have been, but rather the everyday houses of the Victorian era, houses in neighborhoods you might not notice a few years ago but today with rising gas costs, long commute times, these once forgotten neighborhoods, close to downtown are experiencing a renaissance.
Here is an example of a typical FLIP House. This home was a neighborhood eyesore, the 'worst of the worst'. Vacant for a long time, it was magnet for illegal activity. Utilizing the FLIP program the house was made 'good as new' on the outside. the siding was restored, a new roof was put on, the lot cleaned up. This house which was missing everything inside was gutted to the studs. The new buyer will agree to a protective covenant that says any exterior work must be done to historic preservation standards and the house must be completed with an 18 month period. The program realizes that most buyers put a lot of "sweat equity" into the property therefore the rehab time is long enough for them to get the house livable. Buyers must demonstrate that they have the financial resources to restore the house. Prospective buyer may be directed to local banks that have "adopted' neighborhood and are willing to make 'non traditional" loans to rehab property. Sometimes neighborhood groups have low interest rehab loan programs as well. That protective covenant is enforced however and houses have been "taken back' when the buyer doesn't go through with the work required.
The properties are also secured. Windows are completely boarded and painted complimentary color to the house. The lots are kept clean and mowed. This house less than a 10 minute drive from the downtown business district will no doubt find favor with someone who wants to be close to the downtown bustle but at an affordable price. This particular house is offered at only 34,900. Similar houses just a few blocks closer to town would cost 100K with restored homes in the 175-250K range, so 'buying nearby ' in a neighborhood "not there yet" makes good economic sense.

The impact? Well its amazing, when a home is stabilized one will notice that suddenly yards are kept up. Neighbors actually keep watch on the house to see that no one vandalizes it. Often the city will come in and help neighbors set up a community crime watch program and infrastructure projects like new curbs and sidewalks. Nearby slumlords have asoptlight shined on them. Building Inspectors are in the neighborhood. It becomes more difficult for them to get away with "halfway" fixes and often they are the first to leave, or sell to the FLIP program.
Expensive? Not really. The cost of new roof, painting the exterior is often LESS than the cost of demolition. The advantages to the tax base are significant because unlike demolition which leaves a vacant lot which has little property tax value, the finished house often has increased the tax value by 2-3 times. Monies from the sale are usually put right back into the next house. It usually only takes a few of these flip projects in neighborhood before others come in and start buying and restoring. This program and others like it have been responsible for the turn around of many neighborhoods, not only in Indianapolis, but other parts of the country as well.

In fact, city owned properties are often placed in this program and turned around. It is interesting to note that the FLIP program is not government funded but was begun through private endowments and donations.
Why can't we do this in Cincinnati? Well there is no reason why we can't. There are several approaches that could accomplish this.

1.) The City of Cincinnati could start their own program and use CDGB or other funding to stabilize rather than Demolish nuisance properties. Either via a receivership program OR the actually filing of liens for emergency repairs like boarding and going to court to get a deed in lieu of judgement. When you consider that distressed properties are often sold for as little as 500-1000.00 dollars the city would not have to expend huge sums of money on acquisition. In fact the city could partner with neighborhood groups who could provide much of the volunteer labor for clean up.

2.) Cincinnati Preservation Association (CPA) could seek corporate or private donations to start a program or perhaps property could even be donated to CPA.

3) Local neighborhood groups could start an "adopt a neighborhood/FLIP" program and seek donations from a corporate sponsor to acquire problem properties. In fact this is a common approach where neighbors volunteer along with corporate volunteers to help clean up and paint and the more skilled work is contracted. These projects are often combined with neighborhood clean up days. Often Corporations who have 'adopted a neighborhood' may offer incentives to their employees to buy a house in that neighborhood.

4) Grass root partnerships: Several neighbors chip in a thousand dollars buy a slum property fix up the outside and put in back on the market with restrictive covenants that it be single family and owner occupied.

Our city government's current "fix it with a bulldozer' approach is not working. It is time to turn the page on this disastrous policy that destroys neighborhoods, devalues properties, and fill up our landfills.

(photos courtesy Historic Landmarks of Indiana website)


Karen Anne said...

Brilliant idea. I don't know why this isn't more widely known about.

A very nice eye for color, too, although I'm not sure I would have painted the shingles in stripes.

Paul Wilham said...

A big part of the concept of FLIP is a "hey look at me, I am a restored house, things are going on in the neighborhood."

Sort of like the "painted ladies" approach that took off in San Francisco when homes were brightly painted to draw attenttion to them and get people to "really look" at them and appreciate all their detail.

I purposely went with "stronger" colors on our restoration , much for the same reason.

Quim said...

Do the "restrictive covenants" get challenged in court ?

Paul Wilham said...

Courts have typically held that the purchase of a house with restrictive and/or conditional covenants is a legally binding contractural agreement between the seller and buyer.

Covenants can be time limited or open ended and go with the house in other words if the house is re-sold those covenants continue with the house

It is no different than say buying a historic registered house in a Historic District with protective covenants. Or when you by a condo and you have bylaws of a condo association.

As long as the protective covenant is clearly defined and reasonable, clearly listed as a condition of purchase,non discriminatory, and is recorded with the deed it is legal and binding. Many people view the protective covenant as "plus' as it assures the home will be maintained to a certain standard.

matt said...

Not sure why this couldn't work. I know Clean Up Cincinnati is currently funding some abandoned building beautification by way of painting the borded up areas. Their hq is on Main Street (somewhere in the 1300 block I think), called "bloom studio". Why not just do the work on the rest of the place, a la that big paint event they do every year, except more often and in concentrated historic places held by the city looking to sell.

Paul Wilham said...

Matt it's interesting to note that this is what a "mothballed' property is supposed to look like. New roof exterior painted and properly secured.

This would be the real end result if the VBML program in Cincinnatti actually worked, IF, the city actually held the property owner to the letter of the law of teh municipal code.

We wouldnt have demolition, because if properties were maintained to thsi standard, people would readily invest and move into neighborhoods.

The key point is we spend 10-20 K in demo of a structure and if we spent those same dollars on stabilization instead and then took the property owner to court to then enforce the city "mechanics lien, those properties could then go into a land bank, sold with protective covenants to qualified people.

Niya said...

What a great idea!!

photoshop restoration and retouching