$500 US Detroit homes may be no bargain due to squatters and unpaid taxes
Foreclosed homes may need extensive upgrades and come with hidden costs
Sixty-two thousand properties have faced foreclosure in Detroit this year over unpaid taxes. About half will likely be auctioned for $500 apiece this fall.
Buying homes or vacant lots for $500 might sound inviting, even in a city as troubled as Detroit. After all, look at New York: Decades of crime and decay gave way to a real estate boom that has gentrified even outlying working-class neighbourhoods. Properties that sold for thousands in the bad old days are now worth millions.
- Detroit bankruptcy over, declares Gov. Rick Snyder
- Detroit may take years before fully functioning as a city
But there are no guarantees. "The opportunities are there but there are huge challenges," said Dang Duong, a law and business student at the University of Michigan who has bought and renovated several dilapidated homes in Detroit. "If you're under the impression you can buy a property for $500 and wait a few years until Detroit has recovered, that's going to be difficult."
Here are five things to consider before buying property in Detroit.
1. The house may be occupied
Are you prepared to evict former owners, longtime tenants or even squatters? Loveland Technologies, a mapping company that has surveyed every property in Detroit, estimates that half the properties facing foreclosure are occupied, housing about 100,000 Detroiters.
Critics question the morality of buying occupied homes and fear the program may increase Detroit's homeless population. They say many owners stopped paying taxes because they weren't getting city services in return.
Detroit has the highest property taxes of any U.S. city and the market value that sets the level of taxes is based on a years-outdated assessment. For long-time Detroit homeowners, many of them marginally employed or jobless, that can mean they face years of back taxes they can't hope to pay.
Darin McLeskey, who moved from an engineering career to buy, sell and develop real estate in Detroit, says sometimes "people want out. They can't afford the home or are tired of the city. Mentally they may have moved on, and sometimes physically they have moved on." In one case, he made a "cash for keys" deal with a squatter in an uninhabitable home: "I gave him $300, he signed a document. It was cheaper, easier and more amicable than an eviction."
2. The hidden costs of updates and back taxes
Duong bought a house in Detroit for $1,100 and spent $100,000 on roofing, wiring, plumbing, appliances, drywall, flooring, and new bathrooms and kitchens. He speaks reverently of preserving the 100-year-old maple floors, and wanted a quality renovation to attract good tenants. It's located in a privately patrolled neighbourhood near a hospital, so he sees it as a good investment.
But beware of hidden costs and scams. Properties may come with liens, water bills and back taxes totalling thousands of dollars, in addition to renovation costs. It's also not unusual to hear of homes sold to buyers in other states and countries, with purchase prices rising with every flip.
3. No absentee landlords
If you buy a home through the Detroit Land Bank, you have six months to bring it up to code — nine months for historic properties. The policy discourages speculators from buying and leaving property unattended.
Duong got a call before one of his projects was complete, but he said "if you are a legitimate landowner, they are easy to work with. They want people to either renovate or sell to someone else who can do it. That goes a long way to removing blight."
Looting and vandalism are also major problems. Homes under renovation risk having fixtures ripped out and tools stolen if the property is not lived in and secured. McLeskey moved tools into a townhouse and returned the next morning to find the door knocked down with a battering ram.
It helps to buy in populated areas. The more neighbours you have, the more secure it is.
Combatting blight also means maintaining vacant lots. McLeskey mows nearly all of his 40 vacant lots in the summer.
4. City services not quite up to standard
Garbage pickup, snow removal, water service, and police and fire department responses have improved in the last 18 months, but may still be less reliable than what you'd expect elsewhere.
5. Detroit's uncertain future
Are you willing to wade into controversy?
Supporters say foreclosure sales help the city recover by forcing homeowners to pay up or move on. Auction buyers then decide what's salvageable.
Detroit sprawls over 140 square miles, and officials would like to concentrate the population of 690,000 (down from 1.85 million in 1950) into a sustainable area by demolishing abandoned buildings in far-flung neighbourhoods. Theoretically, new property owners will pay taxes, the revenue will support city services, and property values will recover.
But critics say foreclosures may increase blight. Repossessed properties often don't sell at auction and they deteriorate faster once occupants leave.