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  • Dec 23, 2014
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Detroit

On July 18, Detroit became the biggest city to file for bankruptcy in US history. It owes about 100,000 creditors between US$18 and US$20 billion.

BusinessEconomy

Cheap Detroit homes are costly for communities, unwary buyers

PUBLISHED : Thursday, 04 July, 2013, 2:40pm
UPDATED : Thursday, 04 July, 2013, 2:42pm

The solid red brick house on a block of similar homes in Northwest Detroit sounds like a steal at US$3,728 (HK$28,906).

But in many ways, it’s a lemon.

The house, sold at an auction last fall, sits at the edge of Detroit’s infamous urban blight. And scrap thieves, or “strippers,” have taken anything of value, including the kitchen sink and metal pipes, requiring repairs of up to US$15,000 (HK$116,310).

“You could take a great picture of this house, put it online and make buyers ... think it’s a good thing,” said Antoine Benjamin, chief operating officer of real estate firm Benjigates Estates, which bought the house at a Wayne County auction to renovate and rent out. “But you have to understand how close you are to wasteland.”

Low property prices in Detroit in the wake of the housing crash in 2008 have lured investors from California to China. Speculators bank on high returns despite a financial crisis so dire Detroit’s state-appointed emergency manager, Kevyn Orr, has cited a 50-50 chance the city will file for bankruptcy.

But small-time speculators eyeing quick profits often let the houses fall into disrepair because they lack the funds for renovations or end up abandoning them - and frequently do not pay real estate taxes.

In 2011 alone, the last year for which data is available, Wayne County had to write off US$170 million in uncollected taxes on Detroit properties. About 100,000 city-owned properties, many of which are abandoned, are in limbo until a study of local property values is completed.

“The city has made no effort to make those 100,000 available, so we don’t have a real market,” said Jerry Paffendorf of Loveland Technologies, whose widely followed property database includes Detroit’s tax delinquencies and foreclosures.

Bill Nowling, a spokesman for Orr, said the city does not intend to sell right now because there is no way to discover fair market value, and the emergency manager is awaiting the result of the Michigan Tax Board study.

“There is serious concern that the assessment process in Detroit is broken and many, if not most, properties have been inappropriately assessed at artificially high levels for years,” Nowling wrote in an email.

A state plan to demolish abandoned buildings may eliminate some of the blight, but would do little to resolve city property codes that are unclear or largely ignored.

“The lack of property code enforcement means there is no risk for investors who buy here and neglect their properties,” said Khalilah Gaston, executive director of the local nonprofit Vanguard Community Development Corporation. “We have to ensure there is risk and not just reward.”

One speculator, 22-year-old graduate student Darin McLeskey, who also runs a non-profit urban farming group, noted Detroit’s many rules on property use but few resources to police them.

“With no code enforcement, it’s the Wild West,” said McLeskey, who moved to Detroit from an outer suburb. And he has taken his shot, spending $25,000 to snap up 20 empty plots and three homes in the city.

McLeskey is a rarity among speculators because he plans to make Detroit his home. Detroit’s population fell 25 per cent in the past decade to 700,000, well off its 1950 peak of 1.8 million, as manufacturing declined and white residents moved to the suburbs following race riots in the late 1960s.

In a few neighbourhoods, sales are picking up on recent talk of new infrastructure projects including a light rail line, a new hockey stadium and a new bridge to Canada.

At Wayne County’s annual foreclosure auction last year, 12,000 properties were sold online, some for the minimum US$500 (HK$3,877) bid. More bargain seekers are expected this fall when around 25,000 properties will go on the block.

“Just a few years ago the big joke was, ‘You can buy a house in Detroit for US$500, ha ha ha,’” said Ted Phillips, executive director of the nonprofit United Community Housing Coalition, which helps homeowners fend off foreclosure. “Now the buzz is, ‘You can buy a house in Detroit for US$500 and it’s a great investment.’”

Detroit property prices rose 20 per cent year-on-year in April, Standard & Poor’s Case-Shiller Home Price Index showed.

Benjamin estimates the house Benjigates bought in Northwest Detroit for less than US$4,000 will ultimately cost about US$20,000 after renovations. But the company has a renter lined up and should be able to sell it for US$30,000, he said.

The North End district in central Detroit sits alongside the route of a planned US$137 million, 3.5-mile light rail line and has attracted serious investors. On a recent visit to the area, groups speaking with New England, British and other accents and were seen walking the neighbourhood looking for deals.

Phillips of the United Community Housing Coalition worries about a get-rich-quick mentality. “These homes are not just paper investments,” he said. “If they’re left to disintegrate, they undermine neighbourhoods.”

To monitor abandoned properties and foreclosures, Loveland Technologies, a for-profit company, has created a private online database, www.whydontweownthis.com, that Wayne County deputy treasurer David Szymanski has described as the most reliable source for such information.

Data provided to Reuters by whydontweownthis.com depicts the city as a patchwork of neighbourhoods where multiple foreclosed homes belonged to individual owners.

One such owner, Shirley Ray of Signal Mountain, Tennessee, bought dozens of houses on April 21 2011, for US$10,000 (HK$77,539) each, according to whydontweownthis.com. Of the more than 20 Detroit-area homes still listed under her name, most have been foreclosed on and the rest are seriously delinquent.

Ray did not respond to numerous calls seeking comment.

Other speculative buyers hurt the city’s cash flow by refusing to pay property taxes.

According to whydontweownthis.com, a local investor named Ralph Kinney owes more than US$70,000 (HK$542,770) in property taxes on seven Detroit homes.

Kinney could not be reached for comment, but his property manager, Darren Pettway, said Kinney buys homes cheap and rents them out. He then sells them at a profit to buyers who also agree to pick up the back taxes.

Occasionally, Pettway said, Kinney defers foreclosure proceedings by paying down a nominal amount of the property taxes he owes.

“He (Kinney) hasn’t lost a house in seven years,” he said. “The taxes eventually get covered by someone else, so it all works out.”

In some of Detroit’s more vibrant neighbourhoods, residents are fighting back, targeting blight where the city lacks the resources to do so.

Economics are improving to the point that some “benevolent speculators” are investing in ways that benefit neighbourhoods, Gaston of Vanguard Community Development said.

For instance, Abass El Hage’s Upstream Real Estate Investments has bought nearly 30 homes to renovate, rent out, or sell to investors, she noted.

Vanguard is helping El Hage seek up to US$1 million in financing toward a retail and restaurant project called Milwaukee Junction in an abandoned and stripped red-brick building purchased for US$15,000 last year.

El Hage said longer-term investments, like Milwaukee Junction, are the next wave in Detroit’s real estate market. “Too many people are trying for a quick flip,” he said. “That kind of deal is gone.”

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