The late 2000s was a dark period for homeownership in America. Viewing the real estate bust as an opportunity to rethink affordable housing, childhood friends Jason Bordainick and Andrew Cavaluzzi pooled their entrepreneurial backgrounds and real estate experience to create the Hudson Valley Property Group.
The New York-based business works with property owners to rehabilitate blighted developments to improve the lives of existing residents and the surrounding community. Avoiding the types of projects that other real estate developers rush towards, HVPG builds upon existing infrastructure, utilizing investors with long-term financial goals.
See this unique public-private funding model in action by watching the video above.
Tag: Real Estate
Battling Blight With … Plastic?
Just one boarded-up home can disfigure an entire city block. Studies have shown that crime rates shoot up by 19 percent within 250 feet of a vacant foreclosure, while surrounding property values plummet by $7,386 — a huge blow to weakened housing markets. Perhaps worst of all, these unoccupied, unmaintained buildings can sever neighborhood ties, driving more residents to move out.
In May 2014, officials in Durham, N.C., tested out a novel idea to battle blight. The college town, home to Duke University, couldn’t afford drastic changes, like bulldozing every vacancy or subsidizing new home ownership. But they could disguise the eyesores. To do so, the city banned all plywood boarding on abandoned homes. Instead, they turned to clear, hard plastic.
“We’ve found that it makes an enormous difference for the feel and health of the neighborhood,” says Faith Gardner, a housing code administrator who enforces the ordinance. “It tends to let housing prices stabilize, even with a number of vacancies. We’re not seeing the same drop in real estate prices and increases in crime.”
To date, a construction company contracted by the city has installed the see-through, sturdy plastic sheets on 64 properties. (The high-density plastic, known as polycarbonate, is also used for eyeglasses, airplane windows and motorcycle windshields.) According to officials, the change to plastic has helped sell more of these vacant buildings. Back in 2011, when the city began targeting blight, there were nearly 500 boarded-up homes; as of the new year, the city has cleaned up 90 percent of the problem. Only 56 abandoned buildings remain.
The trend has also taken off in other cities, becoming official policy in Phoenix and Fort Lauderdale, Fla. This month, Ohio became the first to mandate “clear-boarding” statewide.
Back in Durham, officials hope that the new material will deter vandalism, prostitution and drug use in the empty structures. Durham’s police department did not respond to a request for the latest stats, but the reasons why public safety might improve are clear. For one, it’s harder for a wrongdoer to pick out which lots might make a good hideout. “You can look at a certain angle, and you might get a reflection [from the plastic] that clues you in. But, really, you have to look hard to figure it out,” says Gardner. Police, meanwhile, can easily look through the transparent plastic to check for illegal activity.
The new material is also far harder to break. Previously, “they’d rip off the back door and go in,” Gardner adds. But “you can hit the [polycarbonate] with a baseball bat, and it won’t shatter.”
The one downside? Polycarbonate doesn’t come cheap. A 4-by-8-foot sheet of plywood costs around $11, while a plastic window cover the same size runs closer to $115. A door with several locks boosts the price by another $395. But to Gardner, the benefit to homeowners is “immeasurable.” She only has one regret about how Durham has implemented the change: “We really wish we had done it sooner.”
Continue reading “Battling Blight With … Plastic?”
Want A Stake in Your Neighborhood’s Next Development?
Real estate is considered a venture for the wealthy, often leaving out the voices of those living next door to new developments. But that doesn’t have to be the case.
With the help of crowdfunding, two brothers have set out to change that dynamic.
In 2010, Ben and Daniel Miller created Fundrise, a crowdfunding platform that allows residents to invest in a project with as little as $100, giving communities a stake in shaping what projects pop up next in their neighborhood. The company officially launched in August of 2012, following the legalization of crowdfunding in the JOBS Acts, according to the New York Times.
Large-scale, institutional investors are often removed from projects in which they pool their cash into, which can lead to a commercial project being a bad fit for a community. So who better to know what an area needs than its locals? If more residents are invested in their community, that could spur more economic growth as well as help determine the best fit for commercial projects.
The Fundrise concept is simple: Developers list projects on the site and investors can invest as much or as little as they want, generating income from rent, if the development is leased or any proceeds or appreciation if a property is sold. The company estimates its investors see a return of 12 to 14 percent after fees.
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More than 300 developers have listed on the site over the past several months, financing an estimated $15 million worth of projects in New York, Washington, D.C., Philadelphia and Los Angeles, according to Fortune. The new flush of funding will help the site expand to the Seattle and San Francisco markets as well as help the platform scale it’s quickly rapid pace of raising around $1 million per week, according to Ben Miller.
While the company was founded to break down the monopoly big investors have on the market, the Millers are not ruling on enlisting the wealthy for help.
“We found that if you have 1,000 or 2,000 investors, that [will add up to] a few million, but if the project is $10 million, you need $8 million more,” Miller told the Times. “You need to get the scale.”
The company contends that institutional investors will embrace the idea of social capital, working with community members who could help with the exhaustive processes and permits required for urban buildings.
Regardless of how large an investment is, the stakes are high in real estate. But if more neighborhoods begin to work together to determine the future of their community, the investment is priceless.
Troubled by Urban Blight? What Other Cities Can Learn From Philadelphia
Abandoned buildings and vacant space in U.S. cities is nothing new. In fact, these problems have plagued cities across the U.S. for decades. In the wake of the housing crash, however, some urban initiatives have gotten creative: Painting boarded up windows and doors to blend in with other buildings in the area. But Philadelphia is taking a hard line on cracking down on property negligent owners.
A window and doors ordinance established in Philadelphia in 2011 prohibits buildings from having the hallmark of vacancy — plywood covering windows and doors. Property owners with boarded-up openings are fined $300 per day, per window or door. In turn, the ordinance has generated $2.2 million more in transfer tax receipts and Philadelphia has increased home values throughout the city by $74 million, the Los Angeles Times reports.
City officials use software used by the IRS to track down owners to take them to Blight Court, which was established along with the ordinance. The new policy even allows the city to attach liens to a property owner’s other property, which incentivizes owners to solve the problem quickly.
As a result, property prices have shot up 31 percent in the last four years. That’s in sharp contrast to the meager 1 percent rise in similar areas, according to a study by Ira Goldstein of the Reinvestment Fund, a community development financial institution.
Rebecca Swanson, who directs the city’s vacant building strategy, said the City of Brotherly Love had already spent millions in demolition to tear down abandon properties, to no avail. Instead, officials decided to take preemptive action by fining owners for “blighting influences.” “That was the whole point, to catch them early, cite them for doors and windows, and hopefully that incentivizes the owner to come out of the woodwork and do something,” Swanson said.
Philadelphia real estate lawyer Richard Vanderslice agreed the ordinance is making a difference. Vanderslice represents many of the landlords, and although they’re griping about the fines, many end up spending more money to develop property.
“They say, ‘How do I fight this?’ and I say, ‘Fix it. It’s going to cost you more to fight it, and by the way, why not just replace the door, rent it out and make some money from it?’ And sometimes a light bulb goes off,” he said.
The new code is working. Inspectors have probed 13,000 vacant properties and cited 9,000 of them for being in violation of city code. Property tax collection has increased in the areas investigated and the city is receiving more permit and licensing fees as building owners are starting to pay more attention, Swanson said. Owners are tearing down dilapidated property or selling it to developers rather than paying the fines. Philadelphia, which has lost more than a half million people since its peak of 2 million residents, has seen a slight uptick to 1.5 million in recent years.
As more cities cut back on budgets and look for new ways to revitalize blighted areas, Philly’s example reveals that sometimes all it takes is a little incentive.
Can’t Afford a Down Payment? Let Investors Help You Buy Your Home
During the buildup to the great housing bubble of the 2000s, I watched the dream of owning a home slip from my grasp. Prices were growing more unreasonable by the day, and I knew I’d collapse under the wacky mortgage plans available to a reporter, on a reporter’s salary, possessing neither the discipline nor the extra scratch to scrape together a down payment.
Thankfully, the bubble eventually burst, prices plummeted and I wriggled my way into the market. But there are millions of other aspiring homeowners in America who are still shackled to their landlords because they either don’t have the money for a down payment or can’t afford a mortgage in situations where the loan can represent up to 97 percent of the purchase price.
Enter PRIMARQ, the world’s first residential real-estate equity exchange — a soon-to-launch venture of San Francisco entrepreneur Steve Cinelli. Can’t afford a down payment? Let investors put together the capital you can’t, without relinquishing all your clout as a homeowner. By letting “co-owners” buy shares in your home, you’re able to put down a bigger down payment, which means you end up carrying less debt and can get a loan free of mortgage insurance, which is commonly tacked on for down payments of less than 20 percent. “I think the market is overly dependent on mortgage-debt financing,” Cinelli says. “The application of debt has gone way too far.”
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Investors can bet on housing without having to deal with the actual house. They’ll get their money back (plus profits if there are any), under one of several circumstances: when you sell your home, when you decide to buy back your shares, or when the investor sells his shares back to the PRIMARQ exchange itself, which offers a “liquidity guaranteed” 90 percent of their value. So, if an investor puts up $10,000, and then wants to cash out for any reason before you sell your home, they’ll walk away with no less than $9,000 (unless the home price drops) — and it doesn’t affect you either way.
Not all homebuyers and not all houses can qualify for PRIMARQ funding. If there’s a mortgage involved, the buyer has to meet strict credit-score criteria, and the home has to have a certain expected price appreciation — meaning it’s got to be a decent property in a good location. That doesn’t necessarily rule out homes in lower-income neighborhoods, but it does stand to reason that unless those neighborhoods are deemed “up-and-coming,” the homes there might not qualify for PRIMARQ.
But once those burdens are met, the company has designed a program that Cinelli says complies with existing regulations and is working to convince banks that more equity in the mix makes a better-quality loan — and that it’s not necessarily a risk for borrowers to invest less of their own money in their home. If mainstream lenders get on board, it should mean more people have greater access to the housing market, which has only in the past year or so begun to rebound from the Great Recession it helped cause.
So how does this work, exactly? Without getting too deep in the weeds, PRIMARQ has created investment units, or shares, known as “Q’s”; each one is valued at $10,000. Through a broker, you, the potential homeowner, would list shares for sale in your desired property. Investors then make bids for them (minimum $25,000), based on a variety of factors, including the amount of equity capital being sought versus ownership to be shared, and how much the property is expected to appreciate in value. Then, PRIMARQ works with you to apply those funds to your purchase, and provides quarterly portfolio management reports to the investors.
Q’s are bought and sold just like shares on the Nasdaq, so investors can trade them anytime during your ownership. Once you sell, you hand over your investors’ share of the profits and pocket the rest. Or, if you sell your home at a loss, investors take their share of the hit as well.
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Cinelli hopes this kind of “liquidity in a historically illiquid market” will not only beef up America’s less-than-impressive rate of home ownership (65 percent) but also help prevent the next crash, by deleveraging some of the many debt-crushed mortgages out there. Back before the New Deal in the 1930s, buyers put 50 percent down on a house and paid the rest of it in two years. But in a push to expand ownership to more Americans, President Franklin D. Roosevelt established the Federal Home Loan Bank System, government-backed banks that paved the way for the onslaught of home lending that commenced in the coming decades. This worked fine, until the frenzy that was the housing bubble of the 2000s came along. Global investors flooded the market with easy cash. Complicit lawmakers, mortgage brokers and real estate agents rammed exorbitant home loans down the throats of hapless (or irresponsible) Americans who by that time had grown so comfortable with borrowing up to their eyeballs that many didn’t stop to consider how they’d actually make the payments on a half-million-dollar house in the ’burbs. The crash was both inevitable and colossal. “We saw the result of the overleveraged problem, over the last handful of years,” Cinelli says. It got him thinking, “Why is housing devoid of [outside] equity?”
To be sure, the PRIMARQ model involves risks for both investors and homeowners — not the least of which is a gaming of the system by nefarious investors, says David Reiss, a professor of law at Brooklyn Law School in New York who researches and writes about the American housing-finance sector. While Reiss calls PRIMARQ a “supercool idea” for all the aforementioned reasons, he could imagine various ways for unsophisticated homeowners to get fleeced without proper consumer protection regulations (the program has not yet been reviewed by a government regulatory agency). Unscrupulous investors could demand fees or increased equity in exchange for agreeing to help fund a second mortgage, for example. By participating in PRIMARQ as a homeowner, “you are not the master of your own destiny,” Reiss says.
Indeed, PRIMARQ homeowners aren’t exactly as free as they would be on their own. For one thing, they’re generally not allowed to rent out their place. Certain kinds of refinancing would also require the sign-off of the investors. They also get some say in the choice of homeowner’s insurance, how the property is marketed for sale, and the final sales price that is accepted. Investors further have the right of first refusal for a home at market value, which may discourage a seller who thinks he or she can get more than that. (Homeowners, too, have rights of first refusal for the equity.) Beyond that, there are ample ways for the deal not to pan out for either party. The homeowner could trash the place or fail to fix the leaky roof, tanking the value of the property (which PRIMARQ’s contract would label a “default” of the agreement). Or the market could again take a dive, which means investors take a loss just as if they’d bought Facebook stock.
But the system also provides a way for investors to get in on what can be a hugely lucrative bet, without taking on the same level of risk involved in actually purchasing a home. Investors don’t have to pay insurance, property taxes, homeowner dues or repair costs. Instead, they’re “passively” partnering with the owner-occupant, who — in theory — has a vested interest in keeping the property in good shape.
At this point, PRIMARQ’s entry into the $17 trillion market is too small to make much of a dent. There are currently some 350 to 400 investors on the platform and about 30 transactions in progress about a month out from the company’s formal launch. If it grows substantially, Cinelli sees the equity-over-borrowing model becoming a stabilizing force, helping homeowners avoid getting sucked into big mortgages, making them less likely to wind up in foreclosure, should financial problems arise. “Our goal is to really change the overall paradigm of housing finance,” Cinelli says. “The fundamental problem is that with debt as the only third-party capital available, lenders overlend.”
There is inherent value in bringing outside capital into an arrangement now monopolized by the banking industry, Cinelli says. It spreads out the players and the risks and those with stakes in the game, which at least in principle should strengthen the whole system.
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