Friday, August 14, 2020

A new housing crisis is hitting Cleveland, anonymously


Anonymous buyers, hidden even more during the pandemic
by social distancing requirements, are snapping up houses
in Cleveland and some of its suburbs at a growing rate.
That has many community development officials worri-
ed about a repeat of the housing crisis of a dozen years
ago that devastated some neighborhoods (file photo).

At first blush, it sounded like such a rosy story.

The headline in the June 8 Wall Street Journal read "Cleveland Is a House-Flipping Hot Spot, and Covid Adds Fuel." Its central theme was that Greater Cleveland has become one of the most profitable places in the country to flip houses and own rentals. Investors have been redirecting their dollars from pricey coastal real estate markets and investing them in Cleveland. A happy story, right?

Not at all, say city officials and those at Community Development Corporations (CDCs -- which serve as neighborhood-level city halls).

Many CDC officials are worried about a potential repeat of the housing crisis that preceded the Great Recession of 2008-10. While the concern isn't so much about subprime lending, collateralized debt obligations and a collapse of international credit markets, there is a concern about a return of absentee landlords milking properties for rent income and leaving hundreds of houses rotting in city neighborhoods that just emerged from the worst of the last housing crisis.

That concern is the result of research by Cleveland Neighborhood Progress Inc. which compiled data on real estate transfers from May 1 to July 15 in the City of Cleveland. Of 451 arms-length residential sales/transfers at $50,000 or less during that period, 60.5 percent were to Limited Liability Corporations (LLCs). Approximately 280 were out-of-state LLCs although a hard number is difficult to know for certain because the actual owners are sometimes hidden.

An arms-length transaction is when a seller and buyer have no pre-existing relationship and negotiate a deal. Those deals, when done with an LLC buyer, often put properties in voids of information and accountability. But Cleveland Neighborhood Progress is trying to at least fill some of the information gap.

"We are keeping a close eye on it," said Joel Ratner, president and CEO of Cleveland Neighborhood Progress.

The pandemic, the health-related dangers of travel and social-distancing requirements have made the situation even more dire, local officials say.

The reason is that many buyers are acquiring properties without ever visiting them and, in some cases, they are relying only on photographs before making their purchases. The photographs may be old or don't show the correct property. So the property may need significant maintenance, which assumes the new homeowner has the resources or desire to make major repairs.

Vacant houses and vacant lots are the results of unscrupulous
landlords whose only desire is to milk properties for all of their
worth. Many are out-of-state buyers who remain anonymous
behind limited liability corporations and their lawyers (Google). 

And once more, Cleveland's most vulnerable neighborhoods are again in the crosshairs, including Slavic Village which was devastated by the housing crisis a dozen years ago.

"My team here has been troubled by the increase in out-of-state investment," said Chris Alvarado, executive director of Slavic Village Development. "While we welcome legitimate investment from actors who make substantial improvements to properties, we aren’t seeing the same level of property improvements that local investors are willing to make."

Worse, he said he is seeing evidence that some of the transactions by LLCs are for suspected money-laundering activities. He noted one buyer in particular that was extremely active in Greater Cleveland, using shell companies to sell properties to other shell companies.

"I can't name the companies due to an investigation that's underway," he said. "But they take their names from Caribbean names. All of those entities purchased and sold 300 parcels in Cleveland and nearby suburbs. The money laundering is not something we saw in the late-2000s."

Even without the possibility that some LLC's activities are masking money-laundering or other criminal activities, there is great concern.

"This is a very worrisome trend and I fear it will get worse as tax sales and others move to online formats due to the pandemic," said Jamar Doyle, executive director at Greater Collinwood Development Corp.

For example, Cuyahoga County Sheriff David G. Schilling Jr. will reportedly begin offering online auctions in response to the pandemic.

When houses and other assets are seized by court orders due to criminal activity, tax delinquencies, foreclosures or other defaults, the sheriff's department sells them through regular auctions. The foreclosure auctions are held weekly.

Until the pandemic hit, the sheriff's department required potential buyers or their representatives to meet in a conference room at the Justice Center, show a driver license or other government-issued idenitification, pay a deposit and the sheriff's department would follow up with the buyer. Social distancing makes that undesirable, however.

Many Cleveland neighborhoods, especially on the East Side, are
riddled with empty lots and boarded-up houses. They are remind-
ers of different types of neighborhood-killing real estate abuses
over the decades, including block-busting, red-lining, no-growth
sprawl, sub-prime lending and absentee landlords (Google).

A state law, House Bill 390 that took effect Sept. 28, 2016, makes it easier and faster to get foreclosed, AKA "zombie" properties out of the courts and back into the hands of private owners. On the down side, it allows properties to be sold for as little as $1, creating opportunities for unscrupulous buyers to scoop up properties and not take care of them.

The 2016 law also stipulates the creation of a public sheriff’s sale Web site to allow the online sale of properties. It too was intended to get foreclosed properties out of the crowded court dockets, yet it also aids unscrupulous buyers, allowing them to operate with greater anonymity and less accountability. 

Cuyahoga County spokesperson Marie Louise Madigan said she would provide to NEOtrans an answer regarding the concerns surrounding online sheriff sales but hadn't as of publication. When an answer is provided, this part of the article will be updated.

The Vacant and Abandoned Property Action Council (VAPAC), chaired by Cleveland Neighborhood Progress, has been urging Schilling and other county officials to reconsider the online property sales.

In contrast, some counties have suspended their sheriff sales, including Summit County which includes Akron. It has suspended all sheriff sales during the pandemic until at least Oct. 1, 2020. Other counties are continuing their sheriff sales through a third-party vendor that lists Cuyahoga County properties.The procedure for buying properties through the third-party vendor is very easy.

"There is a huge concern of these out-of-state buyers right now," said Cleveland's Ward 12 Councilman Tony Brancatelli whose ward includes Slavic Village. He served on council for 15 years, during the foreclosure crisis more than a decade ago. "The numbers have skyrocketed beyond reason. Out-of-state owners buying scattered-site homes at what appears to be above market-rate acquisitions given the conditions of the homes scares me."

He said he has been dealing with a number of out-of-state owners who don't know how to manage a property in Cleveland's market. The owners, he said, end up hiring property management companies that don't do a good job of oversight and contractors who disappear and don't finish repair work.

"Then when tenants move in there is very little oversight," Brancatelli said. "I suspect there will be a point where they divest and it devolves down to the lowest denominator property owner, which then goes to foreclosure."

While most Cleveland neighborhoods and inner-ring suburbs are targeted by out-of-state LLC home-buyers, downtown Cleveland, Ohio City and University Circle have been largely untouched. Officials at their CDCs speculate that a lack of available for-sale housing inventory is restraining out-of-state buying in those areas.

This is the fate of all real estate abuses -- demolition. Reduced
population density reduces tax bases, making it more difficult
for cities to afford the same level of services to the remaining
population. Property values fall which makes the surviving
housing stock vulnerable to future scam artists looking to
make a quick buck when the market improves (KJP). 

And, those neighborhoods also have the highest real estate prices in the city, reducing the profitability of renting. According to the Wall Street Journal article mentioned earlier, monthly rents collected need to meet the landlord's ideal of at least 1 percent of the purchase price. That's often not possible when a house sells for upwards of $300,000 -- a common price in downtown, Ohio City and University Circle.

That's not the case in the less-pricey area covered by the Westown Community Development Corp. That CDC covers everything from Cudell south to near Brooklyn, an area popular with many new immigrants including Latinos, Middle Easterners and Eastern Europeans who aren't familiar with American laws, may not trust the authorities and might be taken advantage of by unscrupulous landlords.

"Having a boatload of out-of-state landlords is a community development nightmare," said Rose Zitiello, executive director of the Westown CDC. 

The reason, according to Peggy Kearsey, real estate and housing manager at Greater Collinwood Development Corp., is because CDCs don't have the time, staff or money to track down the true identities of all the out-of-state buyers and follow-up with them on maintenance issues and building code violations.

"We're seeing buyers in our area (Collinwood, Glenville, East Cleveland) coming from Wyoming, Nevada, Flordia, North Carolina, Maryland, California, Massachusetts, to name a few," Kearsey said. "They could be very lovely and nice people but they're all LLCs. We also have some local buyers but, in theory, I can go find them and beat up on them if they don't maintain their properties. When they're out of state, none of us have the time or resources to track down all of them."

Most hide behind law firms as their LLC's statutory agents of record. Notices of code violations are sent to their agents of record which can be changed from one attorney to another. Taxpayer identification information can also be hidden with third-party accounting firms which may ultimately be affiliated with the lawyers or have taxes paid through funds set up by lawyers. That's assuming that taxes are even being paid. Many times they aren't.

Some LLC home buyers aren't even renting out the houses to residents. Instead, they're using them as AirBnB-type short-term rentals such as for vacations, temporary housing or worse, for wild parties. That happened in October 2019 in which a Bay Village mansion hosted a 400-person party through AirBnB.

"Over the past five years there has been a proliferation of full-time investor-owned short-term rentals in the city," said Mark Raymond, owner of The Cleveland Hostel in Ohio City. "I have learned that quite a few of them are owned by out-of-state entities."

He said almost all of them are not in compliance with the ordinance regulating short-term rentals and they have not gone through the neighborhood's block club, the local CDC, the city's Board of Zoning Appeals or another local approval process before opening up. They also do not have any licensing or inspection requirements.

"Competition is great as long as it is legal and fair," Raymond said.

The goal for every densely developed urban neighborhood is to
have well-kept housing stock with a high-percentage of owner-
occupied homes. For homes that aren't owner-occupied, com-
munities need to know where to contact the owners to address
emergencies, nuisances and code violations. But that's easier
said than done in a nation where an individual's privacy is
often valued more than the health of a community (KJP).

The city is working on updating its short-term rental ordinance that would help track the owners of these properties. Brancatelli is working on it along with Ward 3 Councilman Kerry McCormack whose ward includes Ohio City, Downtown and Tremont.

"These LLCs have been a problem for a long time," McCormack said. "Our limited lodging amendments are not directly intended to address" the disclosure of ownership of the LLCs in residential property ownership.

In fact, the city may not have the legal authority to compel disclosure of ownership due to private property rights protected by the Constitution. The state government has also protected LLC property owners and ignored Home Rule by blocking municipal efforts to compel the disclosure of more detailed ownership information. But there are some potential solutions out there according to officials interviewed for this article.

The first solution is to make sellers aware that LLCs are buying properties and to urge sellers to avoid them if possible. If sellers negotiate with them, they could demand more information about the potential buyer and include that information in the title transfer documents if for no other reason than to protect the seller.

Another is to limit online sales. Not only does that protect neighborhoods, it protects sellers and buyers. Some people buying "flips" from LLCs may be getting wrong information about the properties and don't realize that they're buying a troubled property. In some rare cases, the LLC seller doesn't actually have clear title to the property in the first place. Buyers need to do their research.

CDCs are also going after signs on poles saying "we buy houses." Officials point out that signs on poles are illegal without permits.

"We call them and tell them they (the signs) are illegal and to remove them or we'll prosecute them," Kearsey said.

With a supportive councilperson behind them, CDCs can have much input in who buys city or county land bank properties but that's not the case on the open market. CDCs will work with trusted third-party investors to acquire properties on the land bank and state forfeiture lists. Or the CDCs will reach out to buyers they can identify to see if they intend to be owner-occupants.

Under current laws, however, there's only so much CDCs and the cities can do to force disclosure of anonymous out-of-state buyers so they can be compelled to maintain their properties according to building codes. Until that happens, Greater Cleveland may not be able to escape what leaves it most vulnerable to unscrupulous landlords -- a feedback loop that begins and ends with its low real estate prices.

"It takes years before a property becomes tax delinquent, then it spends years in court, then it's sold through a sheriff's sale," Kearsey said. "We're going to have a court backlog from this latest problem (of out-of-state buyers). It will take five years to get a property productive again. It's sad because we pretty much just got things cleaned up from 2008 and now this is happening." 


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