The Role of Investors in The One-To-Three Family REO Market: The Case of Cleveland

Frank Ford, April Hirsh

W13-12: This paper examines the practices of investors who purchased 1-3 family residential real estate in Cuyahoga County, Ohio from financial institutions that acquired property following mortgage foreclosure. This examination was motivated by concerns of community development practitioners and civic leaders in Cleveland over massive abandonment and market-crippling blight associated with the sale of, and subsequent trading in, properties coming out of the “real estate owned” or “REO” inventories of foreclosing financial institutions. Our paper is framed around two key objectives:

  1. First, we wanted to understand the practices, trends and business models of investors who purchase and trade in REO property, and from that understanding make recommendations for policies, laws, regulations or programs that would discourage illegal and irresponsible behavior.
  2. Second, we wanted to identify beneficial investor behavior, and more specifically, explore models of renovating abandoned property that would provide a cost effective alternative to demolition in a weak housing market burdened with a surplus of distressed low-value housing.

Our examination utilized a number of research tools and approaches and the organization of our paper follows those approaches. 

  1. We analyzed data from 73,035 post-foreclosure transactions on 38,931 properties in Cuyahoga County between 2000 and 2012.
  2. We conducted investigative research to identify business connections between nearly two hundred investors doing business in Cuyahoga County during the study period.
  3. We conducted interviews with eighteen (18) informants, including investors, realtors, community development practitioners and financial institutions.
  4. We conducted an assessment of sample vacant homes in 6 neighborhoods and from this assessment developed a template for determining the feasibility of housing renovation in different market types.