Agents of Change: Neighborhood Revitalization

Real estate professionals use market know-how to turn around neglected areas.

June 1, 2005

When Wayne Curtis, ABR®, sold a burned-out shell of a house in the once-grand Reservoir Hill neighborhood in Baltimore, he was helping city officials perform a public function—the revitalization of the central city.

The sale was a potent symbol of the growing realization among public officials that real estate practitioners can be partners in solving critical housing issues.

“Two to three years ago, there was a lot of skepticism about what value real estate professionals bring to revitalization efforts,” says Vito Simone, ABR®, owner of Simone Real Estate in Baltimore. In the last two year, he and Curtis, a salesperson with Long & Foster Real Estate, and a handful of other practitioners have been tapped by Baltimore officials to sell vacant city-owned property.

Officials in many cities have historically seen real estate commissions as a cost they can ill afford to pay on transactions that typically involve properties of marginal value. In Richmond, Va., for example, the city government spent years trying to operate its Neighborhoods in Bloom revitalization effort without the help of real estate professionals. Through the program, Richmond officials concentrate funds from various local, state, and federal assistance programs in a handful of targeted neighborhoods, with the hope that turning around whole communities will kick-start wider revitalization.

“The city just wanted to work through neighborhood nonprofit groups,” says Darlene Brent, a sales associate with Long & Foster Innsbrook Sales in Glen Allen, Va. “But the program was languishing. It was the nonprofits that finally got the city to get us involved because we have the expertise, we know what the properties are worth, and we have the buyers.”

Far from being a cost, practitioner involvement in such revitalization programs is helping to drive investment, thus spurring property appreciation in central city areas. Baltimore’s Reservoir Hill neighborhood is a case in point. In mid-2003 when the first city-owned properties came on the market under the practitioner-driven SCOPE program (Selling City Owned Properties Efficiently), burned-out properties like the one Curtis sold were fetching $15,000 to $50,000.

Today, many of these properties have been renovated and are selling for several hundred thousand dollars. The turnarounds have led to the renovation of nearby properties that aren’t in the program. “We’re seeing houses going for $400,000 as the streets are being repopulated,” says Curtis.

By contrast, another Baltimore program that launched at the same time as SCOPE and doesn’t involve practitioners has yet to see a single home placed on the market. In that program, developers responded to the city’s request for proposal and submitted plans for rehabilitating 23 properties in the same neighborhoods as the SCOPE properties.

“We think the city is doing the right thing by taking a multifaceted approach and not just relying on the SCOPE program,” says Simone. “But the difference in how quickly our properties attracted buyers and were rehabbed shows how practitioners can accelerate the process and harvest the energy of private investors.”

The difference an army makes

Baltimore owns or holds some 15,000 vacant properties, city data show. For years, it has done little to dispose of the inventory, because for each property—many abandoned or condemned by the city—officials must clear title before the property can go on the market. That’s a labor-intensive process, worth the effort only if there’s a reasonable assurance of buyer interest, say brokers.

Many of the properties are scarcely more than burned-out hulls, often on blocks with other such properties. The difficulty of selling them is compounded by the city’s traditional FSBO approach to disposition, a process too slow to give buyers a sense that a neighborhood is on the cusp of transformation, brokers say.

“You can’t get people investing in a neighborhood if you can’t sell enough properties quickly enough to create a feeling that you’ve reached a critical mass,” says Simone.

Momentum grows, however, when the city taps the “robust infrastructure” of the MLS and puts “an army of marketers in the real estate community to help sell properties,” says Joseph T. (Jody) Landers III, executive vice president of the Greater Baltimore Board of REALTORS®.

Thanks to the speed at which that army of marketers was able to sell the first batch of SCOPE properties—of 60 properties released by the city in September 2003, more than 80 percent were sold by the next July—escalating prices have easily offset commission costs to the city. What’s more, the sales have pumped more than $1 million in revenue, in the form of property taxes, into city coffers, say brokers. Under the SCOPE agreement with the city, practitioners are guaranteed an 8 percent commission or $2,500, whichever is higher.

The $2,500 minimum was designed to give practitioners an incentive to sell virtually worthless properties. In practice, thanks to a market response that’s pushed up prices, only a few properties early on sold at a price low enough to trigger the $2,500 minimum. “Properties are being bid up because the market is recognizing the value,” says Simone.

The same thing is happening in Richmond. City officials, frustrated with the slow pace of progress in its targeted neighborhoods, held a focus group in 2003 with nonprofits and real estate professionals on how to tap the real estate community in the marketing of properties. “Nonprofits were having trouble adequately marketing those properties they’d fixed up,” says Brent.

In the two years since the city approved a practitioner role, Brent has worked with nonprofits to sell more than a dozen properties, mainly in Richmond’s historic Church Hill neighborhood which, like Reservoir Hill in Baltimore, had once been grand. “The sale numbers there are better in the last two years than before,” says Brent.

The average sale price in Church Hill today is $125,000, says Brent, up from negligible values for many of the pre-renovated homes.

Affordable housing you want to live in

As challenging as revitalization projects such as SCOPE in Baltimore and Neighborhoods in Bloom in Richmond, Va., are, practitioners at least have the advantage of working with inventory that households are happy to snap up at market-rate prices once the neighborhood shows signs of turn around. But solving another serious housing challenge—adding to the affordable housing stock—can be trickier. Here too, cities are learning that practitioners, with their marketing savvy, can play a valuable role.

To many people, “affordable” is synonymous with plain or unattractive units, and therein lies the problem. “So much affordable housing is designed with little thought to how it fits into the neighborhood,” says Steven Chitwood, broker-owner of Realty Showcase in Winter Park, Fla., who has worked on affordable rental and for-sale housing projects.

Moderate-income households count on their starter home to generate the equity that can drive their rise up the homeownership ladder. “If the housing isn’t desirable from a market standpoint, would homeownership make sense for any household?” asks Chitwood.

With a program called Art in Architecture, launched in July 2003 and spearheaded by the Orlando (Fla.) Regional REALTOR® Association, low- and moderate-income households aren’t left to wonder whether their investment will hold up. The program is built on the idea that affordable housing can be a design leader.

Art in Architecture, which is targeted at first-time buyers with a household income of up to $65,640 for a family of four, is entering its third phase in the Orlando area and has piqued the interest of real estate professionals in other cities around the country, including those in Phoenix and Ft. Wayne, Ind. “We’re showing that it’s possible to build attractive single-family homes that would blend in anywhere and at a cost low enough to make them affordable to moderate-income households,” says Chitwood.

To ensure affordability, buyers are linked up with financing assistance, and construction costs are lowered through concessions from a number of parties in the real estate trade, including practitioners, builders, and architects. To learn how various groups contributed to affordable housing efforts in Orlando, see “Art in Architecture: step by step”.

In the first phase of the program, four houses were built and sold in an unincorporated part of Orange County southwest of downtown Orlando. The houses, each one a custom design, sold for between $112,000 and $126,000, in a metro area with a $217,000 average price.

In the second phase, practitioners are marketing 10 units in the west side of Winter Park. Construction will begin in the third quarter of this year.

Going forward, the Orlando association has launched a foundation and a land trust to oversee development. The third phase includes plans for 34 townhouses and 10 single-family homes to be built in Orlando on land donated by the city. And the association has contracted to buy lots in eight locations throughout the region for the development of an additional 60 townhouses.

“Architectural design and the craftsmanship that goes into construction are increasingly recognized as art forms,” says Chitwood. “This program celebrates that and also shows that art isn’t just for the well-to-do; it’s something that can be made accessible to everyone. And when accessibility expands, it can enrich lives and whole neighborhoods.”

Art in Architecture: Step by step

The Orlando (Fla.) Regional REALTOR® Association’s Art in Architecture program (see “Affordable housing you want to live in,”) provides a model for real estate professionals anywhere who want to help create starter homes in an area where “not-in-my-backyard” (NIMBY) neighborhood opposition is a factor. The way to overcome development opposition is to design houses that blend in well with the neighborhood while tapping concessions from private-sector developers and the real estate community to help keep the housing affordable. In Orlando, various groups contributed in these areas:

Lot acquisition. ORRA committed about $60,000 to buy four in-fill lots in a neighborhood targeted by Orange County for revitalization.

Home design. The program’s steering committee recruited the local American Institute of Architects chapter to be a charter program member. That group in turn recruited four architects to donate their time to furnish four custom home designs. To provide some economic return to the architects, their designs were compiled into a catalog. Builders can use the designs for a nominal ($500) royalty fee, which goes to the architect.

Home construction. The local home builders association recruited builders to construct houses for cost plus 10 percent overhead.

Purchase assistance. Buyers were able to tap assistance programs, including up to $20,000 in downpayment aid from the county, $10,000 in in-fill housing grant funds, a 50 percent waiver of the county’s $4,500 impact fee, and a 4.99 percent mortgage from the state-chartered Florida Housing Finance Corp. The resulting mortgage payments are less than the average rent on a two-bedroom apartment in the Orlando area, says Steven Chitwood, broker-owner of Realty Showcase in Winter Park, Fla.

Interior design. Four interior designers decorated the homes for a flat $2,500 fee each, relying to a large extent on second-hand and donated items.

Buyer identification. Local nonprofit housing groups provided homeownership counseling to eligible households and recommended buyers from that pool, giving priority to those already living in the targeted neighborhood.

Resale restrictions. These will vary, depending on the project. For the first phase of ORRA’s program, owners face no resale restrictions except those imposed by their public financing assistance program. That assistance includes a soft second mortgage that’s forgiven after 20 years. Owners selling before then face some repayment obligation.

In another ORRA project, in which the units are built on community land trust lots, homeowners realize a portion of the proceeds upon resale: 29 percent if they occupy the house for at least 20 years; 20 percent if at least 11 years; and 14 percent if at least five years. The remaining proceeds go to the program committee and are invested in additional lot acquisition for more housing development. In a land trust, the land is owned by a trustee while the beneficial interest of the land (the house) belongs to the beneficiary (the owner of the home on the lot).

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