When It Comes to Detroit Investment Properties, You Get What You Pay For!

What a great deal—a couple hundred bucks will get you the title and rights to a Detroit investment property. Don’t forget to read the fine print; the likelihood of meeting the home’s resident on your post-purchase inspection is pretty high. And don’t expect them to be very happy to meet you, or willing to move out.

Just because the price looks right, doesn’t necessarily mean that the deal is what it should be.  When the housing crash of 2008 left thousands of homes in urban Detroit desolate and unwanted, banks were basically giving them away to anyone who would take the responsibility of claiming papers. Buyers of these homes were often greeted with surprises—past-due bills, squatters, and neighborhoods full of blight.

Recognizing the difference between the price and value of a Detroit investment property is critical to yielding significant returns.  Although the price may feel right, the actual value, and location is what the investor should be more interested in when it comes down to profitability.  Value is influenced by the appreciation potential of the home and the general neighborhood attraction, among other factors. Back taxes, past due utility bills, failed city inspections and liens on a home can serve to drastically reduce the value of a home, sometimes resulting in a net loss of capital upon purchase. In the worst-case scenario, an unknowing investor can purchase a home, or group of homes, which have been previously condemned for demolition.

When the government agreed to help clear blight in the neighborhoods of residential Detroit, some areas were given higher priority than others.  Neighborhoods with swaths of burned down and condemned homes, abandoned by their previous residents had become havens for crime and drug activity. On the other hand, some neighborhoods still held promise for safe, family living. While local investors took interest in the relatively safer, popular neighborhoods, many news outlets and media reports focused on the unbelievable $1 deals in Detroit, resulting in foreign/out of state investors pumping money into the less popular, higher risk neighborhoods.  The accompanying chart, taken from the Detroit Free Press, displays home prices across the city, just to give an idea of it’s diversity.

Just about anything in a home can be replaced or upgraded, except for one factor—location.  The weight that location bears on the overall home value should never be downplayed, as an investor can spend thousands of dollars on renovations in a Detroit investment property, but never see profits with the wrong location. Renovation quality also has a distinct impact on the value of a home, and a smart investor will never cut corners during a home repair. One of the most preventable expenses for a real estate investor is the reconstruction/repair of an item, which was initially contracted to another individual. Get the repair completed professionally, and never have to address that leaky pipe again!

In Detroit, county treasury officials once advertised many foreclosed homes for sale, in order to put some sort of order to the tens of thousands of foreclosed/unoccupied properties across the city. Unfortunately, the lack of policing and funding to clean up city neighborhoods led the sale of thousands of homes occupied by long-term squatters, previous homeowners refusing to leave, and a homeless population with nowhere else to go. Onward began the long and necessary process to restore order.

Focusing their marketing campaigns on the extremely low initial investment required to buy a home in Detroit, some in-town investment companies promised high returns on passive income to unsuspecting investors. In reality, some homes were so badly damaged that buying the rights to the home most often resulted into an endless pitfall of rehabilitation costs, city certification fees, and even demolition projects! It should always be addressed; if you’re buying a turnkey home from an investment group, discussion of a warranty along with a visit, or neighborhood tour should always be discussed. If the house in question is advertised for a remarkable price, there may be hidden fees and issues that must always be taken into account. Do your homework!

Investment companies with business plans centered on longevity, rather than a pump and dump strategy, do not advertise mediocre homes to invest in Detroit. Decent working-class neighborhoods, with homes that attract responsible tenants have proven advantageous, even though they held average (as opposed to inflated) ROI’s. Working with an investment company that has a history of successful clients and proven results is an important step to avoid getting burned on a deal. Furthermore, neighborhood comparisons should always be provided, as some homes will look great on paper, but in reality have lower than projected values. Neighborhood vacancies, slow response of city services, and general blight surrounding a home can drive down the value of a beautiful home with tons of potential. Conversely, an “ugly home” in a great neighborhood can be spruced up cosmetically and structurally to dramatically increase its sales potential and overall appreciation value.

When presented with homes at rock bottom prices, the initial thought might be “I might as well buy and hold until the market comes back up again”. That method might not always work. Familiarizing yourself with the home you are buying, along with it’s history and comparable properties will help in avoiding a profit-dwindling situation. Neighborhoods with minimal abandoned homes, and a “community-feel” often serve as the most attractive investment markets, with desirable appreciation values. With the right planning, and a good team working for you, investing in real estate can build wealth, and provide passive income. Do your homework, and truly know where your money is going!

Article written with contributions from Strategy Properties