Virtual Land Bank Platform 101: A Five Minute Crash Course
By Kevin Ra, Chairman and Founder at Parcel Revenue Corporation
In recent weeks, we at Parcel Revenue Corporation have been busy designing, patenting, and refining the COVID-19 Foreclosure Prevention & Income Tax Revenue Model, or COV-MOD®. We are humbled by the interest so many local government entities have shown. From day one, we promised to create free content explaining how our system works.
You have successfully found the first piece of the puzzle that will begin to break down the Virtual Land Bank Platform (VLBP) piece by piece.
Let’s dive right into it.
Background: Business As Usual
There are two methods local governments currently use to deal with problem properties, (vacant properties, foreclosed properties, etc.) code enforcement and land banking.
Method #1: Code Enforcement
These are the steps local governments take to ensure everyone in the community is maintaining their property to a standard outlined by local laws.
Code enforcement is a function local governments perform and citizens consider important for accomplishing community goals, such as protecting property values and the environment.
Techniques to gain compliance with duly-adopted regulations:
- Land use and zoning ordinances
- Health and housing codes
- Sign standards
- Uniform building and fire codes
These processes, however, are not triggered until after the code that needs to be enforced has been violated.
Method #2: Land Banking
A land bank is a government or government-sponsored entity that acts as a method of last resort for taking over properties that no one seems to want.
Land banks are governmental entities or nonprofit corporations that are focused on the conversion of vacant, abandoned, and tax delinquent properties into productive use.
Vacant, abandoned, and tax-delinquent properties are often grouped together as “problem properties”.
Problems associated with these properties include:
- Destabilizing neighborhoods
- Creating fire and safety hazards
- Driving down property values
- Draining local tax dollars
In many cases, these are properties the private market has altogether rejected. Prior to delinquency, the property would have been viewed as favorable within the private market.
When land banking was created decades ago, local governments considered it to be the best option in resolving some of the toughest barriers while returning land to productive use. This method helped to unlock the value of problem properties and converted them into assets for community revitalization.
Why Business as Usual Shouldn’t be Best Practices
Now that some background information has been laid, let’s take a look at why neither of these methods should be considered best practices in 2020.
Analytics, A.I., and other highly-capable technologies are changing the way we accomplish certain tasks. Machines are trained to think and predict future events that are otherwise not seen by the human eye.
The main problem with these methods is that they are reactive.
These methods require local governments to wait for issues that threaten community safety, family stability, property values, and incoming tax revenues ( i.e. property taxes and income taxes from residents) to occur first. Then, local governments react to these issues by issuing citations and fines (code enforcement) and/or triggering a legal action designed to transfer ownership of a property to a new owner who (hopefully) will put it to productive use (land banking).
Why now is the time for COV-MOD®.
If you thought 2008 was bad, you haven’t seen anything yet. As of April 2020, unemployment in the United States is 14.7%, worse than the depression era (Source: US Bureau of Labor Statistics). More families are struggling with property ownership, a phenomenon we can expect to follow the COVID-19 pandemic as it did the 2008 Financial Crisis.
Home crisis starts slowly, with people being unable to afford their property taxes. Then, they can’t afford their mortgage. Rather than face the ball of pain rolling downhill, threatening to crush their entire livelihoods, they run. They allow the home to go into foreclosure or they abandon the home before it happens.
Government only has reaction-driven systems, currently, to deal with this.
These reaction-driven systems become strained and inefficient because their deployment was already late.
It’s time to do something proactive.
Once the right technology is deployed, issues these methods are designed to correct can be predicted. Solutions to these problems can be identified and passed on to property owners years earlier. Think of it like heading the problem off at the pass.
This is where the Virtual Land Bank Platform (VLBP) steps in.
Using technology to solve a human problem.
Unlike code enforcement and traditional land banking, the VLBP is built on technological platforms. Artificial intelligence (A.I.) is a wide-ranging branch of computer science concerned with building smart machines capable of performing tasks that typically require human intelligence. Advancements in machine learning and deep learning are creating a paradigm shift in virtually every industry. To be effective, local governments must also integrate this technology.
How the VLBP relieves owners in distress.
The VLBP contains data from thousands of real estate transactions all with a common denominator, an owner in distress. The owner of the property was facing some type of emotional and/or financial distress that triggered their need to sell the property.
According to VLBP terms, the decision to sell (or walk away) is called the “sell decision” or the “sell trigger”. After years of research, we are now able to zero in on patterns that consistently repeated themselves.
Common sell triggers are “life events” such as:
- Job loss
- Aging homeowners deciding they can no longer benefit from owning their home
Our research was conducted by giving free attorneys to homeowners facing foreclosure, divorce, probate law issues, and other hardships. We loaded that data into the Zoho Creator Application Platform and Amazon Web Services, and the machines took over from there.
Activating technology to help people.
Today, the VLBP is a complicated and well-balanced mixture of proprietary algorithms, processes, and procedures designed to address the various stages that life events create in real estate transaction cycles.
We examine events that will most likely end in a property being repossessed by a bank or other lien holder after a foreclosure has been filed. The data is scored and the scores tell us whether or not the homeowner can be helped and how soon.
In urban areas, often low property values and low incomes make walking away from a property the only financially viable option. This results in a much larger pool of distressed properties than the reactive methods of code enforcement and land banking can efficiently react to. (Welcome to Cleveland, Baltimore, Gary, Indiana, etc.)
The VLBP creates scenarios that life events found in public records, such as court filings, are most likely to trigger over the 1-5 years that lead to the sell decision being made.
Common scenario: divorce
Legal Separation Filed → Divorce Filed → One Spouse Moves Out → Remaining Spouse Becomes Financially Burdened → Mortgage Payment Missed → Loan Modification Obtained → Mortgage Payment Missed → Loan Modification Default → Foreclosure → Bankruptcy Filing Temporarily Stops Foreclosure → Homeowner (Remaining Spouse) Moves Out → Property Sits Vacant → Bank Eventually Completes the Foreclosure → Property Resold
The VLPB is programmed to look at each one of these stages and over 200 factors that influence the decisions property owners make at each stage.
By finding patterns in how homeowners behave, we are able to determine:
- Which homeowners are likely to need help and why
- What communications channels they are most likely to respond
- The likelihood that their bank or mortgage company is going to offer the programs and services needed to save their homes from foreclosure
We engage the homeowner and gain valuable information. The VLPB then determines the likelihood that the property can be saved or sold, based on the homeowner’s circumstances. The property can be transferred via a traditional real estate transaction with the assistance of a realtor and/or attorney.
If either of these steps are successfully completed, the “Property Sits Vacant” stage from our example above, and the challenges this stage presents to local governments, can be completely avoided.
A model you can understand: franchise
To compare this concept to something all-American in origin, the VLPB is designed to function like the franchisor who owns 50 fast food restaurants.
The franchisor needs each restaurant to generate revenue sufficient to cover all required expenses and benefit his business as a whole at the end of each year. If 10, 15, or 20 of his restaurants stop generating revenue, the remaining restaurants now must generate more revenue to cover the ones that have failed.
A city or county is nothing more than a franchisor that needs revenues generated by the franchisees (homeowners) to function. This loss of revenue impacts the franchisor, the franchisees (in this case, the community), and many others in a variety of negative ways. Any threat to revenue that is not addressed quickly threatens that revenue for often unpredictable amounts of time.
We have a special name for the revenue generated by homeowners and their parcels of land, Parcel Revenue.
The VLBP predicts threats to Parcel Revenue where code enforcement and land banking can only react to those threats after it’s too late. This is a valuable service that can ease the pain of counties, cities, and the residents of them, for decades after COVID has passed.
The time to act is now. Visit www.preventforeclosures.org to learn more about how your county or municipality can think differently and rise above the impending wave of foreclosures that will happen as a result of the pandemic.