The real deal about Detroit...?

Question

Hi all,

I'm a newbie out-of-country investor (American living in Singapore). Been using the internet to check out REO markets across the US, and Detroit keeps coming up where you can get the most house for the least money.

I know that Detroit has been stuggling for a long time, and that it's likely that any property I buy will not sell fast, but if I buy low enough, should that really matter?

Would welcome any thoughts or observations.

Account Closed · Answer

I am originally from the suburbs of Detroit. I left in 1989 to move to Los Angeles. It's funny seeing and hearing all the real estate hype about Detroit from across the country. I still go back every year to visit family. The funny part is that from my perspective it's like saying Compton, East LA, and Watts are great investments in the Los Angeles areas. And they actually could be. I don't know. But they would be scary for me even if they are. 
                                                                                                                                                                        
                                                                                                                                                                        Here are some Detroit suburban neighborhoods that should be OK from what I remember, and seemed good in Dec 2007, in terms of not hearing gunshots: 
                                                                                                                                                                        
                                                                                                                                                                        (Trendy/Hip)
                                                                                                                                                                        Royal Oak 
                                                                                                                                                                        Ferndale
                                                                                                                                                                        
                                                                        (yuppie middle class)                   
                                                                        Sterling Heights
                                                                                                                                                                        
                                                                                                                                                                        (Middle Class/working class)
                                                                                                                                                                        Warren
                                                                                                                                                                        St. Clair Shores
                                                                                                                                                                        Fraser
                                                                                                                                                                        East Point
                                                                                                                                                                        
                                                                                                                                                                        (Middle ---> upper middle class)
                                                                                                                                                                        Troy 
                                                                                                                                                                        Shelby Township
                                                                                                                                                                        Utica
                                                                                                                                                                        
                                                                                                                                                                        (Weathy)
                                                                                                                                                                        Gross Point
                                                                                                                                                                        Bloomfield Hills
                                                            
                                                            This only covers some of the north east suburbs of Detroit. There are a lot of other areas. 
                                                                                                                                                                        
                                                                                                                                                                      Anything in the Detroit City Limit - south of 8 Mile road is pretty scary for me. Detroit (inside the city limits) is a very large area of mostly scary neighborhoods. For those out of state investors using heat maps,  the east west street names are numbers, and go down as you head south. Once you're at 8 Mile Road or less, it's scary. Hence the movie name, "8 Mile."  So if you're at 16 Mile road, it may be nice. 23 mile road is really nice, but gas is an issue now. 
                                                                                                                                                                        
                                                                                                                                                                        Hope the list helps.
                                                                                                            
                                                                                                            I've been considering a purchase there, too. I like Royal Oak. But the -population growth, -job growth, and mostly manufacturing elements of Detroit, all have me feeling cautious. 
                                                                                                            
                                                                                                            My dad was saying some health care companies may be moving in down the road. But I believe there haven't been any official announcements. 
                                                                                                                                                                        ~Matt

Mike McClung · Answer

I think it's less a question of if, and more a question of how long :wink: My carrying costs are minimal, so I don't have to worry so much about flipping. And I can afford to sell it below market value.

But I'll be sure to update here. A plan is a plan, and reality has a tendency to make hash of plans....

Jason Trepins · Answer

[size=24]IF[/size]
it sells

Good Luck  :green:

Mike McClung · Answer

TC-

You forgot total rewiring  :D

You're absolutely right in 99% of the cases in Detroit, too. You don't get something for (almost) nothing, which I learned when I first decided I wanted to start investing and chose Detroit as my petri dish. I spent about $1,000 on property inspections for prospective purchases, to see what I would be getting into (considered it the price of doing business from thousands of miles away). The inspections turned up exactly what you're talking about- rotten roofs, AWOL plumbing, AWOL bathroom fixtures detached garages about to fall in on themselves, basements taking in water, outdated/missing furnaces/water heaters, nightmare rat's nests of outdated electrical wiring.... The list goes on and on. I'm glad I spent the money.

As for neighborhoods, that's much harder for me to judge from a distance, since I'm originally from Texas, not Michigan. I have to rely on what other people tell me/what research tells me.

Oddly enough, all this hasn't put me off Detroit. I've enjoyed the learning process immensly (which makes my wife doubt my sanity even more than she did before), and it made me keen to find that one REO house that, while not perfect, is not a money pit about to collapse. Which I think I've done. More importantly, at some point you have to stop dreaming and scheming and start doing.

The bank has accepted the offer of $7,500 on the house I chose. Roof is new, wiring is new (new = less than 5yrs in my book) interior of the house is in good condition if dated, detached garage will not fall in on a car parked inside, basement is not an indoor pool when it rains. Yes, it'll need a new furnace and hot water heater, some plumbing, and the like, but even taking a dim view of neighborhood comps, purchase price plus repairs minus sale price should see me net $30k. Which to me is worth sifting a lot of sand to find a gem.

And if this all works roughly acording to plan, then I'll be able to take that money and start sifting sand in the $10,000 to $20,000 range...

Tom C · Answer

Mike,

"10,000 in decent neighborhoods that involve only minor renovations" in my area this means, drywall in good shape, house not full of mold, but will need a furnace, all new plumbing, waterheater, new roof and all new plumbing fixtures.

"Decent neighborhood" means crack dealers and prositutes only come out a night and no recent shootings

Mike McClung · Answer

Mark,

Wow, you really know your stuff! I've really taken a long look at the Detroit market over the last couple of months, and decided, due to my particular strengths and weaknesses, to go into single-family housing with a buy and hold mentality.

When you spend enough time sifting through the REO housing in Detroit, out of the hundreds that are not worth investing in (for me at least), there are a few priced under $10,000 in decent neighborhoods that involve only minor renovations. Not having to carry a mortgage on these allow you the ability to sit on the sidelines without the pressing need to rent.

Now I'm off to read your blog!

Mike

Mark McGlothlin · Answer

Mike, to add to what Ryan was saying, unemployment has been running above 8% (6 month rolling average), employment growth is negative (-4.0% in April), and the ongoing population losses are impressive.

We've been following the multifamily market there carefully and given the well described residential real estate stresses these days, you could argue that B or C class multifamily could make sense.  It's not a market for the weak hearted investor, or inexperienced property manager.

We're probably more concerned about the economic development potential being squashed by high taxes and union dominance, and the state govn. is doing very little of actual benefit to turn things around.  It's probably not going to get better there for a bit, but we agree that there's emerging market potential there.

Mike McClung · Answer

Hi John,

I did poke around, and it did clarify matters some. Thanks!

Mike McClung · Answer

Ryan,

Thanks for the info. Sounds like there *are* opportunities there, but a fair amount of risk as well. Unless I can put 'boots on the ground', I'm afraid I'm bordering on speculating...

But I come back to the fact that some of these houses --good, solid houses-- are practically being given away on the REO side... :crazed:

Jon Holdman · Answer

Mike, use the search function (over to the left, down toward the bottom) to search for Detroit.  Its been a fairly active topic of discussion, and I think you'll find those old discussions interesting.