Imagine paying for a home in cash. Not just not taking out a mortgage, but buying a home with an amount of money small enough to fit in your wallet. That’s what Volonte Williams, a real-estate investor, just did in Detroit, where he scooped up a three-bedroom house in a nice neighborhood—for $5,500.
It’s one of the stranger side effects of the real estate collapse: the pocket-change home purchase. Back in 2006 “distressed” property—bank-owned or sold cheap by the homeowner to avoid foreclosure—accounted for less than 10 percent of the market. Now, according to the National Association of Realtors, the category accounts for nearly half of all sales. The result: deeply depressed home values in neighborhoods from the east side of Buffalo, N.Y., to the suburbs of Orlando and Phoenix. And even as the credit crisis begins to abate and some housing numbers improve, experts expect this ugly underbelly of the market to expand for months, if not years, to come.
For many communities, this collapse is a true-life nightmare, as boarded-up homes plague one block after another. But it’s also inspiring a new breed of eager real estate prospectors who are snapping up homes at absurdly low prices. While no one knows exactly what percentage of these homes is going to investors rather than owner-occupants, brokers across the country say they’re doing a brisk business selling to outside speculators. National listing service Homes.com reports increases of 30 to 50 percent year-over-year in searches for homes in foreclosure-heavy states like California, Michigan and Florida. And at least some of those searchers are buying: Home sales are way up in hard-hit towns like San Diego, Las Vegas and Detroit. In many cities a cottage industry has emerged to serve these out-of-towners, including consultants who help identify promising neighborhoods and flippers offering all-in-one packages. The curious can even hop on foreclosure bus tours, which sell out weeks in advance.
To most investors, of course, buying a neglected home in a struggling city sounds like far more trouble than it’s worth. But for others the crisis represents the chance to start on the path to Donald Trumpdom with a ridiculously low buy-in. Some see it as their last shot at making back the savings they’ve lost in the stock market. Even venture capital firms and hedge funds are joining the action. They buy bundles of 200 to 1,000 homes scattered in cities across the country for 20 to 30 cents on the dollar, hire locals to rehab and rent out the most promising properties, and abandon the rest. Buyers know they are taking a big risk, but the prospect of developing a steady rental income, if not eventually flipping the home, keeps them coming. “The return can be astronomical if it’s done right,” says Scott Galloway, a Huntington Woods, Mich., property attorney who represents venture firms based in Austin, Texas, and San Jose, Calif.
That’s a huge “if” in a recession as deep as today’s. Still, nowhere is this gold rush more frenzied than in one of the toughest markets, Detroit, where we spent a recent few days, and homes that sold for $120,000 in 2006 can now be had for a tenth that price. Never mind the headaches from copper thieves, crooked construction crews and notoriously high property taxes. The fire sale has attracted hordes of real estate optimists, who fly in with wads of cash or play the market from out of town, looking to assemble their own housing empires.
At first glance, Detroit certainly looks like it deserves its reputation as America’s bleakest big city. As of December it had 67,000 homes in foreclosure, and City Hall is predicting a 25 percent vacancy rate. With the median home price inside the city limits dropping to just $5,800, property is so cheap that there’s a movement afoot to convert parts of Detroit to an agricultural economy—some residents are already tending alfalfa fields and herding goats.
But there’s a case to be made for investing here. A shortage of quality rentals in safe neighborhoods keeps rents relatively high. Moreover, while the median home price in most cities is several times the median annual income, the inverse is true in Detroit, indicating room for price hikes once the credit market thaws. David Butler, a real estate veteran and founder of Hotspur Investment Group in Westminster, Colo., says his typical Detroit deal starts with buying a $15,000 single-family home in a nice area and spending another $30,000 on tax liens and repairs. Ongoing expenses such as insurance and property taxes cost another $3,000 a year. But the house can fetch $9,600 to $10,200 a year in rental income, and he expects to sell it for $80,000.
Returns like those are enticing droves of amateur investors. Tae kwon do instructor Donna Nowicki inhabits a universe a million psychic miles from the streets of Detroit. One side of her Center City, Minn., home faces a cattle herd; the kitchen overlooks a cornfield. But she spends many mornings online, touring Detroit’s newest foreclosures, searching for a fixer-upper. And while she has been to the city only once, she has the house-hunting confidence of a native. Last year she and her husband, Jim, paid a local consultant to drive them around town and show them the good neighborhoods. Donna, 47, kept a notebook and marked down her favorite intersections. “You can tell the areas where people are fighters,” says Donna, a second-degree black belt. So far they’ve bought three houses, sight unseen.
The Nowickis, who devour books by investing gurus like Robert Kiyosaki, decided long ago that real estate offers their best hope for a comfortable retirement. But Detroit was Jim’s idea. A 48-year-old sprinkler installer, Jim thinks their contrarian bet will pay off when the auto industry rebounds. Already, the Nowickis have had one success. They paid $15,000 for an impeccable brick colonial in an upscale neighborhood. After just $5,000 in renovations, the home quickly rented to a retired fireman for $950 a month. A local property manager takes care of maintenance, tenant screening and rent collection, and the house should pay for itself in less than two years.
If only every transaction were so smooth. During the rehab of a second home, thieves broke in and stole the water heater, furnace, bathroom vanity—even the toilet. Such burglaries are common, says Mark Maupin, a Detroit investor who teaches real estate at Wayne County Community College. Among experienced investors, standard procedure is to install an alarm system, tune the radio to the talk station and pay a neighbor $100 a month to park his car in the driveway.
The Nowickis did enlist help on a third property. A local woman has been keeping an eye on their $18,900 home near Mercy College and even threatened to shoot a vandal who tried to steal the air conditioner. “I love having her there,” says Donna. But even the neighbor can’t fix the tenant, a single mom with four sons who Donna says lied about her job to get the rental. Despite several ultimatums, she’s slow paying the $850 rent. Still, the Nowickis are far from discouraged; in fact, they’re looking to scoop up a few more bargains before prices start rising.
It’s one of the stranger side effects of the real estate collapse: the pocket-change home purchase. Back in 2006 “distressed” property—bank-owned or sold cheap by the homeowner to avoid foreclosure—accounted for less than 10 percent of the market. Now, according to the National Association of Realtors, the category accounts for nearly half of all sales. The result: deeply depressed home values in neighborhoods from the east side of Buffalo, N.Y., to the suburbs of Orlando and Phoenix. And even as the credit crisis begins to abate and some housing numbers improve, experts expect this ugly underbelly of the market to expand for months, if not years, to come.
For many communities, this collapse is a true-life nightmare, as boarded-up homes plague one block after another. But it’s also inspiring a new breed of eager real estate prospectors who are snapping up homes at absurdly low prices. While no one knows exactly what percentage of these homes is going to investors rather than owner-occupants, brokers across the country say they’re doing a brisk business selling to outside speculators. National listing service Homes.com reports increases of 30 to 50 percent year-over-year in searches for homes in foreclosure-heavy states like California, Michigan and Florida. And at least some of those searchers are buying: Home sales are way up in hard-hit towns like San Diego, Las Vegas and Detroit. In many cities a cottage industry has emerged to serve these out-of-towners, including consultants who help identify promising neighborhoods and flippers offering all-in-one packages. The curious can even hop on foreclosure bus tours, which sell out weeks in advance.
To most investors, of course, buying a neglected home in a struggling city sounds like far more trouble than it’s worth. But for others the crisis represents the chance to start on the path to Donald Trumpdom with a ridiculously low buy-in. Some see it as their last shot at making back the savings they’ve lost in the stock market. Even venture capital firms and hedge funds are joining the action. They buy bundles of 200 to 1,000 homes scattered in cities across the country for 20 to 30 cents on the dollar, hire locals to rehab and rent out the most promising properties, and abandon the rest. Buyers know they are taking a big risk, but the prospect of developing a steady rental income, if not eventually flipping the home, keeps them coming. “The return can be astronomical if it’s done right,” says Scott Galloway, a Huntington Woods, Mich., property attorney who represents venture firms based in Austin, Texas, and San Jose, Calif.
That’s a huge “if” in a recession as deep as today’s. Still, nowhere is this gold rush more frenzied than in one of the toughest markets, Detroit, where we spent a recent few days, and homes that sold for $120,000 in 2006 can now be had for a tenth that price. Never mind the headaches from copper thieves, crooked construction crews and notoriously high property taxes. The fire sale has attracted hordes of real estate optimists, who fly in with wads of cash or play the market from out of town, looking to assemble their own housing empires.
At first glance, Detroit certainly looks like it deserves its reputation as America’s bleakest big city. As of December it had 67,000 homes in foreclosure, and City Hall is predicting a 25 percent vacancy rate. With the median home price inside the city limits dropping to just $5,800, property is so cheap that there’s a movement afoot to convert parts of Detroit to an agricultural economy—some residents are already tending alfalfa fields and herding goats.
But there’s a case to be made for investing here. A shortage of quality rentals in safe neighborhoods keeps rents relatively high. Moreover, while the median home price in most cities is several times the median annual income, the inverse is true in Detroit, indicating room for price hikes once the credit market thaws. David Butler, a real estate veteran and founder of Hotspur Investment Group in Westminster, Colo., says his typical Detroit deal starts with buying a $15,000 single-family home in a nice area and spending another $30,000 on tax liens and repairs. Ongoing expenses such as insurance and property taxes cost another $3,000 a year. But the house can fetch $9,600 to $10,200 a year in rental income, and he expects to sell it for $80,000.
Returns like those are enticing droves of amateur investors. Tae kwon do instructor Donna Nowicki inhabits a universe a million psychic miles from the streets of Detroit. One side of her Center City, Minn., home faces a cattle herd; the kitchen overlooks a cornfield. But she spends many mornings online, touring Detroit’s newest foreclosures, searching for a fixer-upper. And while she has been to the city only once, she has the house-hunting confidence of a native. Last year she and her husband, Jim, paid a local consultant to drive them around town and show them the good neighborhoods. Donna, 47, kept a notebook and marked down her favorite intersections. “You can tell the areas where people are fighters,” says Donna, a second-degree black belt. So far they’ve bought three houses, sight unseen.
The Nowickis, who devour books by investing gurus like Robert Kiyosaki, decided long ago that real estate offers their best hope for a comfortable retirement. But Detroit was Jim’s idea. A 48-year-old sprinkler installer, Jim thinks their contrarian bet will pay off when the auto industry rebounds. Already, the Nowickis have had one success. They paid $15,000 for an impeccable brick colonial in an upscale neighborhood. After just $5,000 in renovations, the home quickly rented to a retired fireman for $950 a month. A local property manager takes care of maintenance, tenant screening and rent collection, and the house should pay for itself in less than two years.
If only every transaction were so smooth. During the rehab of a second home, thieves broke in and stole the water heater, furnace, bathroom vanity—even the toilet. Such burglaries are common, says Mark Maupin, a Detroit investor who teaches real estate at Wayne County Community College. Among experienced investors, standard procedure is to install an alarm system, tune the radio to the talk station and pay a neighbor $100 a month to park his car in the driveway.
The Nowickis did enlist help on a third property. A local woman has been keeping an eye on their $18,900 home near Mercy College and even threatened to shoot a vandal who tried to steal the air conditioner. “I love having her there,” says Donna. But even the neighbor can’t fix the tenant, a single mom with four sons who Donna says lied about her job to get the rental. Despite several ultimatums, she’s slow paying the $850 rent. Still, the Nowickis are far from discouraged; in fact, they’re looking to scoop up a few more bargains before prices start rising.
