A few years ago, the words “Detroit” and “real estate” were usually included in the punch-lines to jokes, but it seems that perhaps things are on the upswing in
What is your tolerance for risk?
Is now the time to go back to Detroit and start buying up land and abandoned properties for pennies on the dollar? Or is that time further down the road, if that time exists at all?
Remember the scene in Eminem’s “8 Mile” where they get drunk and decide to burn down an abandoned house just for fun?
The only danger in the scene has to do with Eminem getting out of the house as it’s burning, and never was there a fear that police would show up, or they’d be in any sort of trouble, or that they were hurting anybody.
It was just an abandoned house, in the middle of hundreds of other abandoned houses.
That was back in 2001 when things were getting really bad in Detroit.
Then in 2010, we all remember when the Pontiac Silverdome – an entire football stadium, sold for only $500,000. Today’s football stadiums cost upwards of $1 Billion to build.
In 2012, the city of Detroit filed the largest-ever municipal bankruptcy in U.S. history, as they had an estimated $18.5 Billion debt.
Detroit’s history as a city is far too long to even delve into at this point, but let’s just say that it was at one time in the mid-20th century, one of the most important cities in the United States of America, and today it sits as perhaps one of the most troubled.
Perhaps all good things come to an end, but then by the same logic, don’t all bad situations eventually turn around?
A reader sent me THIS article from The Guardian last week and asked, “Know any good real estate agents down in Detroit?” She was joking, but I was surprised to read the content of the article and see that foreign investors are “making their move” in Detroit.
From the article:
In September, the Shanghai-based developer Dongdu International (DDI) made its first move. In an online auction, it snapped up three iconic downtown properties, all built during the city’s early 20th-century heyday as an industrial powerhouse. DDI purchased the David Stott building, a 38-storey art-deco skyscraper built in 1929, and the former Detroit Free Press newspaper headquarters, a T-shaped edifice adorned with bas-relief sculptures of biplanes and locomotives. Later, it acquired the 10-storey Clark Lofts, an inconspicuous residential building with a manual, pre-second world war elevator – the oldest in Detroit.
Altogether, DDI spent $16.4m (£9.6m) on the properties, slightly more than a top-market apartment in Shanghai.
The company plans to transform the buildings into vibrant offices and upscale apartments, according to the CEO of DDI’s leisure branch, Peter Wood. “Once we’ve shown to the locals in Detroit that we’re deadly serious, then other things will happen,” Wood says, sitting in his corner office on the 10th floor of a Shanghai skyscraper, a dozen or so Chinese employees typing diligently in cubicles outside. “Detroit is planning for this area to come back. It’s all about rejuvenation.”
So maybe $16.4 Million is nothing worth getting excited about, but it’s something.
And somebody, at some point, has to be the “first” person to act, in order to start a trend.
I’ve never heard of Dongdu International (although I shouldn’t really be expected to…), and I can’t suggest that just because they invested in Detroit, that it’s time for the rest of the investor pool to make a move.
But surely Detroit’s time will come, no?
Personally, I would divide “Detroit real estate” into two categories:
The market here in Toronto for single-family homes is so insanely hot that it’s all we talk about.
But in a market like Detroit, where there are so many abandoned single-family homes that are actually worthless, it’s the commercial real estate that will more than likely make a comeback first.
DDI purchased the Detroit Free Press building, seen here:
This is a historical, commercial building, situated downtown, and there are far, far fewer of these than there are single-family homes.
It doesn’t come as a surprise to me that foreign buyers are purchasing buildings like these, and holding them long-term. This building has been vacant now for 16 years, but even if the new owners don’t plan to fix it up and lease it out, it could be a good buy-and-hold.
On the flip side, we have something like this:
Here’s an entire 2-storey house, up for sale for $1,795.
Not for rent at $1,795, since that would be an exceptional price for a 2-bedroom condo in Toronto, let alone to rent a house. But rather, this house is for sale at $1,795, as are thousands more like it.
I was on www.zillow.com browsing their listings, and many of the owners of these houses (most are financial institutions) are putting in the listing remarks, “Can purchase as part of a package of 50-100 homes.”
Remember what Warren Buffet said earlier this year?
So I suppose there is a way to “buy a couple hundred thousand single family homes” for Mr. Buffet, and there’s a way for an individual investor or a group to purchase, say, one hundred cheap homes in Detroit for next to nothing.
These homes – ie. the one I showed above, may sell for a few hundred or a couple thousand dollars, but the buyer must pay the back taxes to the city, as well as transaction fees.
But bottom line – we’re talking entire houses for a few thousand dollars, and if an investor has cash, and a long-term outlook, there’s a play to be had here.
That’s the question, and there comes the risk.
I’m sure that everybody reading this would rather have their money in the TSX, or even in lower-risk ETF’s, income funds, bonds, or what have you.
But somewhere out there is a person who, in ten, fifteen, or twenty years from now, we’ll be reading about in the paper, in response to the question, “So when did you buy your first single-family house in Detroit?”