Investors should be cautious with bargains in US subprime markets
Subprime real estate can offer tempting bargains, but investors should be wary of pitfalls, writes Peta Tomlinson
As recently as January this year, houses in Detroit, Michigan, were being touted for as little as US$1. This month, the stakes were raised - on behalf of an overseas owner, an agent was offering to trade a Detroit property for an iPhone 6.
When houses in what is possibly the United States' most beleaguered property market are dirt-cheap, you have to wonder why. Nevertheless, bargain hunters have swooped on what has been called "toxic property" in subprime markets, often in multiple numbers. Bloomberg reported last year that one investor bagged 29 Detroit homes for US$90,000, expecting to turn a profit in 10 years.
For many who have taken a punt on markets which collapsed during or since the financial crisis, the pot of gold has yet to materialise. Tales abound of promised returns which aren't there, much like the tenants who were supposed to provide them.
Patrick O'Neill has heard his share. "An experienced investor told of his third-tier city purchase in the US that went from bad to worse," says the CEO of the international property firm ONEILL Group.
The buyer had purchased a package of 10 housing units, sight unseen, priced under US$30,000 each. Unbeknown to him, one of the units had burned down prior to settlement, and another was burned down by the tenant a few weeks later. "He was then fined daily civil penalties for owning an abandoned property in violation of the city's blight ordinances," O'Neill says. "He has had no luck in reselling the properties."
The point of the story, O'Neill says, is that second- and third-tier cities do offer opportunities, but buyers need to exercise extreme caution.