The local Detroit economy was already devastated by the time of municipal bankruptcy in 2013 came to fruition. Housing could be considered the epicenter for the Detroit economic fall. The decades of disinvestment, population loss, and exclusionary housing policies caused Detroit’s housing market to experience distress well before the historic 2008 housing market collapse and Great Recession that followed.
Detroit has the country’s most unequal housing market
LendingTree analyzed homes in the 50 largest metro areas to determine the GINI coefficient of home values in each metro to measure home price inequality in each market.
Detroit presents a unique opportunity. There is opportunity at both the high and low end of the income spectrum. Meaning, persons that earn a high salary will find stable neighborhoods, good community and fruitful employment. Similarly, lower income earners are still able to achieve the American dream of homeownership.
Ironically, Detroit has become a safe-haven for real estate flipping. Home prices in Detroit remain 20 percent or more below peak values, allowing renovated properties to see a healthy 10 percent appreciation annually.
Cash is still king.
Property appraisals are distorted in Detroit from a lack of comparable properties for renovated buildings. A high number of distressed sales, made it difficult for potential homebuyers to receive loans for the amount they need. Most home sales in Detroit require cash or use a land contract. Only 19 percent of the 3,800 sales in 2016 involved a mortgage, reflecting the difficulty to secure loans in a city where property values are less than half what they were in decades prior. In 2014, 97 percent of Detroit city homes sold for cash, according to data from the Urban Institute, a Washington, D.C., think tank that has extensively studied Detroit. The national average is 36 percent.
Black Friday Shopping for Real Estate
What started as mindless scrolling through Craigslist turned into back and forth phone calls with a would be seller. This led to a same night’s drive from Columbus, Ohio to Detroit (3.5 hours). The Fullerton Manor apartments was a 42 unit 3 story brick building listed for $85,000 so we were obviously skeptical about the pricing.
The building was completely vacant. To be honest, it was the epitome of blighted with fire damage and a partial missing roof. However, oh what a gem it was! Too bad, our $5,000 earnest money was returned by the title company after discovering the seller was a fraud. We were disappointed but still curious about the purchasing power and potential in Detroit. We called my dad, a former real estate developer, for advice. He suggested Richelle and I continue looking for low priced properties. We had the advantage of mobility and willingness to drive between states as needed. We took his advice.
Understanding intrinsic value vs market
When the demand is low for homes in an area, prices reflect the lack of market interest. The low entry pricing is an opportunity to acquire property at prices that are below the cost to build. Whenever you can buy an asset less than its intrinsic value, it is worth considering.
In terms of quality characteristic Detroit neighborhoods have a lot going for them. Yes, neighborhoods are experiencing high vacancy but pockets within each street have strong signs of pride and ownership. The level of trash, debris and garbage throughout the streets was fairly minimal. Many homes even unoccupied structures showed signs of newer roofs. A lots of properties had been recently boarded up and secured. Both the new unweathered plywood told this story and the city of Detroit sticker. Massive brick homes predominantly makeup neighborhoods outside of downtown. Architectural charm and detail prove the tale of wealth and excess once experienced here.
Today, we own 25 units – a triplex, three duplexes, a 14 unit apartment building and a commercial warehouse in Detroit, MI. Our goal is to own and redevelop 100 units in the city by December 2020. Detroit has an abundance of housing stock, which as a real estate developer, makes it a wonderful opportunity to gain experience. The city previously was a top competitive economy and the infrastructure is established to support growth. The Michigan metropolitan statistical area (MSA) has an abundance of population. Exiting bankruptcy, the city leadership has re-established control of municipal finance and economic progress is moving forward. To learn more about our experience investing in Detroit, sign up for our newsletter or read more of our articles.