Tales from Detroit: Can Ethical Investing Work?

2 Replies

Hi Folks,

I recently bought several properties in Wayne County's annual tax auction in the neighborhoods most people stay away from. I did this to test some hypotheses, and get an education one way or another. A recent forum discussion on the merits of trying to make a difference low-income neighborhoods can be found here by @KJMiller. The examples put forward were fixing up distressed properties in rough neighborhoods and renting to section 8 tenants. I want to add another scenario and also ask advice for how to structure some of the deals I am pursuing. First some background on how the annual tax auction works: The first-round of the auction happens in September when all tax-foreclosed property goes up for an opening bid of the back taxes owed. Anything that doesn't sell in the first round goes up again in October for starting bids of $500 + summer taxes. This is where they myth of the $500 Detroit house comes from:

1) I have a duplex that I paid $1350 for and one side is occupied by a renter who wanted to purchase it from the previous owner but she wouldn't cooperate (and good thing he didn't because she owed $8000 in back taxes). I have now wiped that tax bill clean with a $500 purchase and paid $850 to make the taxes current. The tenant was paying $400 / mo. in rent. The upstairs unit needs some light rehab (kitchen and bathroom) and the exterior of the house needs paint and a roof sooner than later. The tenant would happily buy the property from me for $4000 but would need to spread out the payments over a year at least. So my question is how to best structure a deal with one caveat being that I don't necessarily want to formalize a Landlord-Tenant arrangement given the amount of work the house might need if I had a housing inspector walk through, which could quickly kill any profit on the sale or bring the asking price out of reach for the tenant. BUT if I offered a Land Contract for $4k over a 1-year term, am I getting myself into TILA (Truth In Lending Act) issues? Please chime in @BrianGibbons or @BillGulley ! I imagine many investors would send a 30-day eviction and start from scratch....but I want to tread more lightly, and in Detroit a vacant property can spell disaster in terms of scrappers and vandalism (so keeping it occupied is a good thing!) For a primer on the mess of the Foreclosure Crisis in Detroit, watch this video: 

https://youtu.be/zi6uoRNtVyQ

I realize another strategy is to just flip this property (as many do) to another investor by listing it for sale as-is and say 'do not disturb occupant' and kick the can the down the road. This is where the ethical dilemma comes in for me. There are many ways to make money in real estate, but if you have the choice of actually helping someone out who got the short end of the stick, why not do the right thing? 

@Marc M. you have a few solutions available. 

1) flip it and not worry about it. Prob the safest from a risk management standpoint. 

2) sell it outright to the current occupant with a conventional mortgage. I've read quite a few posts about owner occupants being able to qualify for unique perks mortgages in Detroit, so that's another low risk option you have to liquidate the asset and not have future ties to it.

3) land contract it to the tenant. I would not suggest selling it for 4k. LCs usually come at a premium price. I'd target ~15k at minimum. It's also much higher risk since you have to go thru foreclosure proceedings in a not-so-landlord-friendly state if the owner defaults or disappears one month leaving you holding the asset that may or may not be vandalized, have back taxes owed, let insurance lapse, etc., etc. Lending wise, if you only have the one LC, I don't think you have much to worry about regarding lending standards. Consult an experienced real estate attorney in Detroit Metro for advice on this or reach out to some here in the forum for a free consult. 

I used to believe in doing the right thing and being a charitable landlord, but owning several Detroit Metro properties and the excuses tenants have given me -- or cost me -- I'm not so liberal about it. 

My recommendation would be to treat your investments like a business first and foremost in a non-charitable manner, then if you find a tenant worthy of A+ ethics, try to take care of them. 

My advice is to sell the property as soon as possible and never look back.

I owned 17 single families in Detroit from 2009-2012 and just like the video you posted, the property taxes are so unreasonable it makes no sense to invest there. Even with the slate wiped clean, you will have to start paying current property taxes at ridiculous rates. Couple that with professional tenants who do not care about your building, you will end up with a negative cash flow situation fast, even without a mortgage

Sell that property quick, and move on

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