Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
Hey you. Yeah, I’m talking to YOU.
I know you’ve thought about it. I know because I get a handful of calls every month from folks just like you who aren’t from here. They call me about all of those $500 houses they see advertised in the city of Detroit.
The calls are all the same. They go on breathlessly about just how “lucky” I am to live near a place where “fixer uppers” are so cheap. About how prices are out of reach in their area and about how tough it is to find properties where they live.
So when I saw an article on Yahoo news about this, I thought it would be a good time to set the record straight. And peel back the curtain so you can understand the truth.
The article was pretty good actually, and it did a good job in explaining just why a $500 house isn’t the bargain that people think it is.
The article said that 62,000 properties have faced foreclosure in Detroit this year over unpaid taxes. About half will likely be auctioned for $500 apiece this fall.
And that buying homes or vacant lots for $500 might sound inviting, even in a city as troubled as Detroit.
After all, look at New York: Decades of crime and decay gave way to a real estate boom that has gentrified even outlying working-class neighborhoods. Properties that sold for just thousands in the bad old days are now worth millions.
But Detroit Ain’t New York Sparky
The City of Detroit is 142-square miles in size. That’s almost the size of 69,000 football fields. The city's "hot” area is perhaps a mile wide by a mile deep. So while the hot area is booming like crazy, the rest of it is section 8, empty lots, and burned out neighborhoods.
Not exactly in high demand. Or any demand. You catching my drift here?
Just this week I received two calls from two highly motivated sellers who begged me to buy their houses. One of them told me that “all he wanted to walk away with was $1000.”
I looked into both and found that both of their houses had zero value. ZERO. Because nobody wanted them – at any price. And the property taxes were current on both.
That’s pretty bad.
I know one investor who has developed a “strategy” to try to take advantage of some of those other areas. What’s he doing? Well, he buys 10 or more properties at a time, and he hopes that one or maybe two end up generating a return large enough to make all of that time, effort, energy and money worthwhile.
He says it’s working great. But that’s what I’d expect because he’s putting other people into these deals… he’s not doing them himself.
Where have you heard that before?
The Five Ugly Truths of Detroit
So here are the five things the article cautioned you to consider before buying property in Detroit.
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The House May Be Occupied
Are you prepared to evict former owners, longtime tenants or even squatters? Loveland Technologies, a mapping company that has surveyed every property in Detroit, estimates that half the properties facing foreclosure are occupied, housing about 100,000 Detroiters.
And if that isn’t bad enough, the do-gooders in Detroit actually – get this – question the MORALITY of buying occupied homes and fear the program may increase Detroit's homeless population. They say many owners stopped paying taxes because they weren't getting city services in return. Others say those who failed to pay taxes contributed to Detroit's troubles.
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The Most Expensive $500 You'll Ever Spend
Demolishing dilapidated properties and building from the ground up can be cheaper than rehabbing. But some buyers choose renovation to save historic architectural details found in much of Detroit's early 20th-century housing stock: turrets, gingerbread trim, pillars and antique woodwork amid broken windows and sagging rooftops.
One investor bought a house in Detroit for $1,100 and spent $100,000 on roofing, wiring, plumbing, appliances, drywall, flooring and new bathrooms and kitchens. He speaks reverently of preserving the 100-year-old maple floors and wanted a quality renovation to attract good tenants. It's located in a privately patrolled neighborhood near a hospital, so he sees it as a good investment.
But beware of hidden costs and scams. Properties may come with liens, water bills and back taxes totaling thousands of dollars, in addition to renovation costs. It's also not unusual to hear of homes sold to buyers in other states and countries, with purchase prices rising with every flip.
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Absentee Landlords Not Welcome
If you buy a home through the Detroit Land Bank, you have six months to bring it up to code — nine months for historic properties. The policy discourages speculators from buying and leaving property unattended. They want people to either renovate or sell to someone else who can do it. That goes a long way to removing blight.
Looting and vandalism are also major problems. Homes under renovation risk having fixtures ripped out and tools stolen if the property is not lived in and secured. Another investor moved his tools into a nearby townhouse and returned the next morning to find the door knocked down with a battering ram.
It helps to buy in populated areas. The more neighbors you have, the more secure it is.
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City Services Have Improved, But...
Garbage pickup, snow removal, water service and police and fire department responses have improved in the past 18 months, but may still be less reliable than what you'd expect elsewhere.
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Foreclosure Sales Are Controversial
Are you willing to wade into controversy?
Supporters say foreclosure sales help the city recover by forcing homeowners to pay up or move on. Auction buyers then decide what's salvageable.
Detroit sprawls over 140 square miles, and officials would like to concentrate the population of 690,000 (down from 1.85 million in 1950) into a sustainable area by demolishing abandoned buildings in far-flung neighborhoods. Theoretically, new property owners will pay taxes, the revenue will support city services and property values will recover.
But critics say foreclosures may increase blight. Repossessed properties often don't sell at auction and they deteriorate faster once occupants leave.
And all of this just barely scratches the surface. Detroit is terrible to deal with, and they excel in making it extremely difficult to be a successful real estate investor in the city.
So don’t be like the guy from Sacramento who called me a couple of months ago and (breathlessly) told me how he had just bought two properties in Detroit, sight unseen, for under $1,000. For both. And he thought it would be, and I quote, “a smoking hot deal” for me to buy them both for ONLY $5,000.
Trust me on this. We see those houses before you do. And we pass on them. Every time. So if nobody here wants them, why should you?
So save your money. Let the Chinese buy them all with all the interest we pay them.
Care to Chime in?
Got any thoughts to add about Detroit? Share them with us below.