to repair them inside and out to make them habitable to rent them to responsible tenants as temporary occu- . to return the properties to the sales market at a rate suited to market conditions. These techniques are expected to: improve the appearance of the entire subdivision or provide a measure of security for neighboring owners reduce sales competition for those owners who have increase the stock of good housing; and reduce the amount of crime and the expense of high Renovated properties in the subdivision or neighborhood are rented to qualified families at prices that reflect the recovered, stabilized market. Freshly painted, well landscaped, occupied homes foster buyer appeal and a stronger sales market for present owners and reduce the probability of additional defaults and abandonments. It is hoped that the restoration of the supply-demand balance will preserve and even enhance equity and that appreciation will be realized through increased real estate sales prices. Background Taylor, Michigan, is a community located approximately 13 miles southwest of Detroit. Dover Estates is a subdivision of 411 singlefamily homes built in 1969-70 under Federal Housing Administration (FHA) supervision, using Section 235 as the main financing vehicle. Section 235 is a subsidy program designed to assist low and moderate income families to purchase homes. The first signs of distress appeared in 1971, when five properties were foreclosed and eventually acquired by HUD. By the middle of 1976, a total of 141 properties (35 percent of all units in the subdivision) were either in default, in foreclosure, or acquired by HUD. The original sales prices of homes in Dover Estates were $21,000 for a three-bedroom house and $24,000 for a four-bedroom house. In 1974, FHA appraised typical three- and four-bedroom houses in the subdivision at $19,000 and $20, 500 respectively, while the Veterans Administration (VA) appraised them at $17,500 and $18,500. Thus the original property owners would suffer severe financial losses if they attempted to sell their properties. In 1975, HUD found no clear evidence of a sales market for the homes it could repair in the subdivision, because of the increasing blight, the tight mortgage market, and the depressed economy. As a result, continued attempts to sell to individuals or developers were not a reasonable course of action. However, examination of the rental market in the vicinity suggested that fully restored properties in Dover Estates could be rented with little difficulty and without subsidy. Results of the Community Stabilization Program After assessing the situation, HUD formulated the Community Stabilization Program and, together with the city of Taylor, put it into operation in March 1975. HUD and the city signed agreements delineating their responsibilities, and the city established the Neighborhood Development Commission to manage the properties. The results have been encouraging. By December 31, 1976, 144 Dover Estates units were under area management or lease agreement; 121 had been fully rehabilitated and 114 of them were sublet to tenants. The photographs in Exhibit 1 show the positive effects of this rehabilitation effort. The private real estate sales market in Dover Estates has improved measurably and homeowners are beginning to receive the benefits of restored property values. Most of the owner-occupant to owner-occupant sales over the past six years occurred after the start of the demonstration, with sales prices ranging from $20,000 to $24,000. Studies show that the homeowners themselves have perceived improvements resulting from the program, particularly in physical aspects such as the improved condition of the neighborhood and the availability of day care programs. Problems relating to social behavior--vandalism, litter, teenage gangs, and noise--have diminished. HOW DOES THE PROGRAM WORK? The Community Stabilization Program can be undertaken jointly by HUD, your local government, and an entity that you may create and sponsor to manage the acquired properties. You or your management authority or commission would serve as manager for the neighborhood or subdivision project and as landlord for the properties under lease from HUD. These functions should not be contracted to third parties, since the visible presence of your government providing increased services in the neighborhood can serve as a significant stabilizing influence which is essential to the program's success. The first step is to reach a cooperation agreement, similar to the one shown in Appendix A, between HUD and your government. HUD, as owner, agrees to put certain properties under your management and to finance their renovation to return them to "as new" or "better than new" condition. You must agree to try to improve the socioeconomic conditions of the area, to emphasize the performance of municipal functions and recreational programs, to encourage municipal employees to live in the subdivision, and to improve the security, services, and facilities of the neighborhood. A formal area management contract and a master lease must be drawn up to specify the obligations of you and HUD to each other. Examples of these two documents are provided in Appendix B and Appendix C, respectively. Under the area management contract, you will agree to maintain and protect the HUD-owned vacant properties in the affected subdivision. HUD will reimburse you for these services. This contract will remain in effect until all the vacant units have been renovated and rented. Among your responsibilities under this contract are inspection of the repair work to ensure that it complies with your local codes and certification to HUD that those repairs are of acceptable quality and standards and that they fully comply with the rehabilitation specifications you have agreed upon. After the houses have been repaired and occupied, they will be transferred from the area management contract to the master lease agreement. This agreement permits you to lease the renovated properties from HUD, and to sublease them to qualified tenants who will have the option to buy after a specified period of occupancy (a model sublease is shown in Appendix D). Under the master lease and sublease, you may sublease the properties for a minimum of about one year and a maximum of about two years. The minimum provides time for the neighborhood to stabilize and time to evaluate tenants as potential purchasers; the maximum ensures that the properties will not become permanent rental units. The basis for the rental charge you will pay to HUD under the master lease is the average rate of return HUD would have received had it sold the property "as is" in bulk lots and invested the cash at an annual return of about 10 percent. Under the sublease, you will be required to rent the properties to approved tenants at fair rental value, a rent level which should be roughly equal to prevailing homeowner costs. The rent must be increased gradually over the rental period to keep pace with the market and the level of costs associated with the anticipated property value in a fully-recovered and stable neighborhood. WHAT ARE THE BENEFITS ...To Your City? If your city participates in a successful Community Stabilization Program, it can expect to receive benefits in several areas: community improvement and neighborhood stabilization; reduction of crime, especially vandalism, leading to reduced social service and security costs; improvement of the neighborhood tax base; and other political benefits. Also of major importance to your city is the fact that the program is inexpensive in comparison to other programs now in use. Most expenses can be budgeted against rental income. Some costs, however, will be incurred in terms of city staff time and start-up costs. ... To the Homeowners? The equity protection that a stabilized neighborhood provides is the homeowner's principal benefit. In addition, the neighborhood becomes a more attractive place to live, as evidenced by the improved condition of the homes, better public services, and possibly the provision of amenities such as day care and recreational programs. |