This case study explores challenges and opportunities around purchasing foreclosed properties in bulk in order to transfer packages of these assets to cities and responsible developers.

The wave of foreclosures created by the subprime crisis and exacerbated by the current recession has swept through many cities like a hurricane — leading to vacancies, abandonment and economic decline. Although cities and community-based organizations have mounted an all-out response, the sheer scale of the problem has overwhelmed available resources. Many economists are predicting that foreclosures will continue at the current level for at least another year or two; their fallout will last much longer.

In many communities, growing numbers of vacant, foreclosed homes pose substantial threats to stability and quality of life for residents. These conditions create blight and drive down housing values in adjacent areas. Moreover, local governments face huge bills for maintaining vacant properties and removing hazards. In communities with only a few foreclosures and where real estate markets remain strong, buyers will often purchase distressed properties and return them to productive use. However, as the number of foreclosed and vacant properties grows, this becomes increasingly difficult, especially in cities where real estate markets have long been stagnant.

As the scale of the current foreclosure problem became apparent in 2008, many believed that the appropriate response would be a “bulk purchase:” Holders of foreclosed homes, also referred to as “real estate owned” (REO) properties, would transfer packages of these assets to cities and responsible developers. Unfortunately, several significant challenges, detailed later in this case study, have prevented bulk purchases from going forward in more than a handful of locations.

To address these challenges, four of the country’s largest affordable housing intermediaries — Local Initiatives Support Corporation, Enterprise Community Partners, Housing Partnership Network and NeighborWorks America — created the National Community Stabilization Trust (NCST). NCST was established to negotiate with REO holders at a national level, in order to create local opportunities for property acquisition, renovation and disposition.

NCST’s results so far are promising, according to the organizations interviewed for this report. “The scale and complexity of the REO problem far exceeds the capacity for nonprofits to handle them,” says Harold Simon, President of Community Asset Preservation Corporation, a New Jersey-based nonprofit that specializes in acquiring and rehabbing foreclosed and vacant properties. “However, NCST has done a great job of negotiating these deals and created a system that is beneficial to all players.”

While NCST provides one means to acquire REO properties, it is still evolving, and other strategies have emerged as well. In places with less severe concentrations of foreclosed properties, organizations are marketing homes, establishing mission-driven real estate brokerage operations and matching new homebuyers or landlord-investors directly with vacant properties. Some are lining up favorable financing for prospective buyers. Finally, some sites have been successful in acquiring properties in bulk when a package of loans is owned by a single lender.

This case study discusses these and other strategies for acquiring REO properties and examines the factors and conditions that influence cities’ and nonprofits’ success in REO acquisitions. Each approach presented below shares the goal of balancing publicly subsidized interventions and free-market forces. These strategies ideally will help other cities acquire properties successfully, maximizing their use of capital through sources such as the federal Neighborhood Stabilization Program