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October 5, 2015

Is Detroit’s “Rehabbed and Ready” program the answer to the city’s appraisal problem?

October 5, 2015

A big problem facing the Detroit housing market is depressed appraisal values. Distressed house prices, fewer home sales and an excess share of distress sales continue to put downward pressure on home prices, and along with it, on appraised values of nearby homes.

This reality presents two challenges for the city’s housing recovery: First, because lenders typically lend only up to the appraised amount and because many buyers simply don’t have out-of-pocket cash for repairs, most buyers are effectively shut out of the market, reducing demand for housing. Second, even when buyers do spend money on rehabilitation, the repaired homes are often appraised well below the purchase price plus the cost of repairs. For example, if a home sells for $10,000 but then needs an additional $50,000 in repairs, the fully renovated home may only be appraised at $40,000, much less than the $60,000 tab. Even if financing is available, the possibility of owing more than the home is worth is further keeping many people from buying a home.

Detroit Mayor Mike Duggan on August 26 announced the “Rehabbed and Ready” program, a new public-private partnership between the City of Detroit, Quicken Loans, Detroit Land Bank Authority, and The Home Depot. Under this program, the Detroit Land Bank will provide vacant homes that are in need of repair. Quicken Loans, a Detroit based mortgage lender, will provide an initial $5 million grant to renovate 65 homes, and will offer financing to qualified buyers. The Home Depot will renovate the homes in partnership with local contractors. Ready-to-move-in homes will be auctioned online through Building Detroit  to owner-occupants only (no investors).

Rehabbed and Ready will address the appraisal problem in four ways:

  • Quicken’s subsidy will allow rehabilitation of the homes before they are offered for sale. This means buyers won’t have to seek financing for repairs anymore, increasing the demand for housing.
  • Home Depot’s renovations will avoid the challenges faced by buyers attempting do-it-yourself renovations which can often fail to maximize home values compared to work performed by professional contractors. 
  • Quicken’s financing and funding backstop to cover any shortfall in the appraised value will make the homes available for owner-occupants on terms they can afford. 
  • Finally, and potentially most transformative, rehabbed homes will sell for higher prices, which will not only generate higher comparison prices for future sales but will also help lift the value of nearby homes.

Over time, the hope is that Rehabbed and Ready homes will sell at prices high enough to support an unsubsidized rehab market with traditional financing (i.e., the appraised value will cover the purchase price and the cost of repairs). According to Dan Gilbert, founder and Chairman of Quicken Loans, “[t]he Rehabbed and Ready program adds another critical component to neighborhood revival as it addresses the critical issue of rebuilding the market so appraisal values can be rationalized to allow financing to come back to the housing ecosystem in Detroit.”

This public-private partnership has the potential to increase the number and share of non-distressed sales in a housing market that is otherwise dominated by distressed property sales. And in doing so, it could reduce blight and bring much needed price stability to Detroit’s neighborhoods. Ultimately, all Detroiters want to live in desirable neighborhoods; the Rehabbed and Ready program could very well prove to be an important vehicle for getting there.

This post is one piece of a portfolio of products  Urban is releasing today about Detroit. These products were funded as part of a broader collaboration with JPMorgan Chase. Over the next five years, Urban researchers will be working with JPMC to inform and assess the company’s philanthropic investments aimed at expanding opportunity for people and communities. Learn more about Urban’s collaboration with JPMC here.

A vacant house is seen north of downtown Detroit on Thursday, Jan. 26, 2006. (AP Photo/Carlos Osorio)

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