Why aren't people buying cheap houses?

January 23, 2009 2:32 AM

Uber-cheap-houses filter: how did we get to the point where houses are selling for less than a thousand bucks and they're STILL NOT SELLING?

OK, I haven't been living under a rock (actually in Seoul, in one of the most wired countries in the world). I have a Business degree from a respected American college. A cursory glance at multiple major cities - not just Detroit - on realtor.com offered me any number of houses for under $5,000, and quite a few as cheap as $500. That's one month's rent where I used to live in the states.

Yes, I know the best of them are nicely considered 'fixer-uppers', while for others it's better just to knock what's standing and starting over. For the price, though...

So what's the deal? Are people too afraid of the economy getting worse? At these prices no credit / mortgage is needed... Afraid of moving? In other words why hasn't your Average Joe engineer / construction man bought a cheap house and gotten into the fixer-upper business?

posted by chrisinseoul to Work & Money (26 answers total)

Many houses selling for that cheap have liens against them that must be paid before you own the thing outright. So a house goes for $4k, and it has $20k liens against it, you're looking at a total price that's stupid above market for the house. Although you're right, it might still be cheap for the land.
posted by Netzapper at 2:55 AM on January 23, 2009

Sometimes the house needs lots of work to be able to get it up to occupancy standards, all the copper is gone, stolen for scrap metal, anything that could possibly be taken out and sold has been removed and the house is full of scary junk that will have to be removed at great cost in order to get it to the point where you can then start the expensive renovation work. So a vacant lot is possibly worth more than these types of houses.

I work in low cost rental housing in Syracuse and have seen some of these types of places first hand - we are not quite as bad off as Detroit but there are some abandoned houses that look ok from the outside and then you go in and it's scary.
posted by Melsky at 4:07 AM on January 23, 2009

Response by poster: Netzapper, I wasn't aware of the liens angle. Presumably the realtor is able to tell you in the disclosures, or is that the sort of thing that requires a visit to the country courthouse to discover?

Melsky, I've seen a number of scary houses (and dorm rooms) in my day. It definitely takes a lot more than a fresh coat of print to make things habitable again - or at least up to occupancy standards. That's the sort of thing you'd need a good inspection to find, which tends to get expensive and slow the entrepreneurial spirit down. Thanks for your input.

I've heard the saying over and over again: 'You get what you pay for'. But if all you need is a cheap roof over your head and you have some money saved...? Another old saying in the realtor market: they're not making any more land...
posted by chrisinseoul at 4:34 AM on January 23, 2009

It's also related to the old saying that in times like this the people with cash don't take risks, and the people who take risks don't have cash.
posted by peter_meta_kbd at 4:42 AM on January 23, 2009 [3 favorites]

netzapper, i don't think liens work that way. there might be 20k liens on a house that sells for 5k, but the new owner is not responsible for paying off the original 20k in liens--the seller is.
posted by lester's sock puppet at 5:07 AM on January 23, 2009

Plenty of houses are selling at "normal" prices. If these houses are really that cheap, there is a good reason for it. And that reason is that for some reason, even at that price, the house is still not a good value. Terrible neighborhood, liens, house is condemned and must be knocked down, toxic waste problem, etc.
posted by gjc at 5:08 AM on January 23, 2009

I'd second the "terrible neighborhood" comment. If the house is surrounded by a Mad Max type scenario populated with crackheads, enthusiastic burglars, and people who eat Sterno, it doesn't matter what you do to it - even the lot is basically worthless.
posted by crazylegs at 5:37 AM on January 23, 2009 [4 favorites]

This was a good explanation, in a recent thread.
posted by freya_lamb at 5:39 AM on January 23, 2009

I'm sort of (or totally) talking out of my ass here, but let's say you want to buy one of those $1,000 houses in Detroit. Now, it's in an amazingly awful neighborhood, so it's not like you plan to live there, so you think, okay, I'll fix it up and rent it out. So you buy it, then you discover that there's, let's say, $10,000 in liens against it. The city "discovers" them. So you pay those, $11,000. Now, to rent it, you have to get the house up to code, so renovations. Well, a few things are discovered, asbestos removal, or toxic mold in the basement, something really expensive. Let's say $40,000 in repairs just to get it to the most basic level of liveability. Now you're up to $51,000. Okay, then you want to rent it, but nobody wants to move there, save a few drug dealers and elderly women living on social security. You find you can rent the entire house for $500/month. Which would be fine, maybe, if you could rent it out constantly and then sell the house for a profit in ten years or something. But what if all your tenants are delinquent in payment, or getting hauled off to jail, or they are trashing your house, and what if all the houses around yours continue to fall into disrepair, thereby decreasing the value of your home? It just seems like a big risk and a lot to go through to make it work. I have read that the only people who make money on these properties are those who buy them for salvage, tear down the house and sell the pieces, then just leave the lot vacant and sell it off as a piece of land with a some rubble on it. I know that in Flint, Michigan, there is a program where the city just goes around with a bulldozer and knocks down old, decrepit houses, many houses a day. It's just constant destruction of old, unwanted, hazardous houses.

Now, if you had a bunch of money so that you could buy an entire block? Now you're talking. Then you could renovate all the houses and start to build a nice little neighborhood, or you could tear them all down and put up a grocery store or something.
posted by billysumday at 5:44 AM on January 23, 2009 [2 favorites]

In my city, the city is selling homes for cheap prices. Of course this has always been the case even in good times. These homes are in shi**y neighborhoods and need some major work to bring up to code. Usually a good sized investment is needed to do bring that house up to code but the city doesn't want to sit on a vacant house which continues to deteriorate for very long so they price it to sell.

I have been in some ghetto houses and they are sometimes sh*t-infested or cockroach-infested or even both.
posted by JJ86 at 6:01 AM on January 23, 2009 [1 favorite]

For the price, though...

Like I said in the previous thread on this, that price is probably more than the house is worth; if it were a screamingly good deal, those houses would have been snapped up by entrepreneurs already. The market is telling you something here.

The difference would be if you had some outside information (eg your poker buddy on the city council let you know where the new university campus was going to be built) or if you had a genuinely new idea (eg turn old houses into biodiesel) -- then the market valuation of those houses (as basically worthless) would be something you could take advantage of and profit.

(As an aside, if you find a realistic way for everyone to profit from vast swaths of rustbelt decline, you will likely be a national hero.)

And sometimes those ultra-low prices are part of a deliberate program of neighborhood renewal. Here is an article (from 1980, no less, but the programs still exist) about what was then called "urban homesteading" and how it works. Basically, the city sells you a ghetto house for cheap (free, sometimes a dollar, sometimes a few thousand) and you promise to fix it up and live in it. Get enough people to do that, and you have a very different neighborhood than you did at the start, with very different problems.
posted by Forktine at 6:43 AM on January 23, 2009 [2 favorites]

(1) Many of the places where very cheap homes are available are cities with falling populations, so your "Average Joe engineer / construction man" knows that even if he buys it and does the work, there isn't the demand for housing to support his activity.

(2) Even if there were strong demand for housing in the cities where you could routinely buy $1K or $5K houses, there is not strong demand to live in the run-down or dangerous neighborhoods where they tend to be gathered.

(3) Even if there were demand for their neighborhoods, they're still not a good deal. One of the places where you can buy $5k or otherwise very cheap houses is here in Buffamalo. So let's say you buy a $5K house or $8K house around here. It needs fixin'. Around here, labor isn't the cheapest thing in the world. So let's say that the structure is okay, so you just need to gut and rehab your $5K house for $80K. Problem: three houses down, there's a home for sale for $50K that's ugly but liveable inside, or at most needs only some carpeting and painting to be saleable for $55-60K. Why not just get that one instead?
posted by ROU_Xenophobe at 7:18 AM on January 23, 2009

w/r/t liens against the property, see Owner's Policy of Title Insurance.
posted by Chris4d at 8:05 AM on January 23, 2009

From a pure market perspective these houses have reached near-zero value because there's zero demand for them. Everyone in the neighbourhood is moving out. If you want to move there, great, a win for you, but setting aside any details of the houses in question it's purely an issue of supply vastly exceeding demand. The other posters all indicate specifics of why that's happening. And, to note: if no one wants to buy houses, probably there aren't many renters either. We have to assume a certainly level of market efficiency where existing landlords would have bought houses and raised demand if there were tenants to be had. Thinking you've found a deal that no one else has noticed is essentially the same as deciding that the real estate market in those areas has become as inefficient as possible. (what's the opposite of a perfectly efficient market?)
posted by GuyZero at 9:27 AM on January 23, 2009 [1 favorite]

In Detroit, anyway, the new owner of said cheap house is responsible for debts left behind by the previous homeowner (who no doubt just spirited away and abandoned the house). A lot of the homes priced at $500 are beyond repair, but the City can't afford to raze them, so they're trying to squeeze some sort of cash out of the situation. I used to work near I-94 and Mt. Elliott, and our company eventually bought the property next door in order to knock down the shell of a burned-out house, pave the lot, and use it for truck parking. We purchased the land and paid the outstanding property taxes and leveled the house ourselves (it had been standing empty for 11 years). Many years after we'd paved the lot, the City finally caught up with their paperwork and dunned us for outstanding water, electric, gas bills and City taxes left unpaid by whomever lived there a dozen years ago.
posted by Oriole Adams at 9:44 AM on January 23, 2009 [1 favorite]

Best answer: I dunno about $5,000, but I lived for a year or so in a $20,000 house in Pittsburgh. Here's what we got for that price:

• It needed a new roof — although we got away with just patching it for the year we were there — and the plaster on many of the interior walls was crumbling off due to the leaks.
• The insulation had apparently "settled" over time. Essentially, half the wall area of the house was un-insulated.
• The previous owners, when the bank foreclosed, had stripped out the entire kitchen and either sold it or taken it with them.
• During the year or so that the house sat empty, the neighbors had been stealing electricity from it. Before we could move in, we had to repair the damage they'd done by breaking in and monkeying with the electric meter, and we had to persuade the electric company that the bill they'd run up wasn't ours.
• The gas line from the house to the street was leaky.

Once all this stuff was fixed — which took us thousands of dollars and over a year of work — it was still basically a small, dark, cheaply made house from almost 100 years ago. Making it beautiful would have taken a lot more. And there was no way to make it durable short of knocking it down and rebuilding. If we'd stayed another year, I'm quite sure things would have kept breaking.

The neighborhood was also pretty sketchy. Not unlivable, but definitely not the sort of rapidly gentrifying area that makes for a really good real-estate investment.

And for what it's worth, this was a really good $20,000 house. A lot of the houses we saw in that price range were much, much worse — cracked foundations, collapsing walls, serious infestations, neighborhoods where taxis refused to stop, blah blah blah.

So, it wasn't a picnic, and I sure wouldn't do it again. But it had its perks too. We had a cheap place to live, and after the work we'd put into it, it was perfectly livable. My old housemate, who owns the place and still lives there, will probably be able to sell it for $10-20K more than he put into it — which is an awesome return on investment for a guy with lousy credit. And he got to be a homeowner (and the rest of us got to be vicarious homeowners) at an age when a lot of Americans are still hunting for their first real job.

But enough reminiscing. To answer your question — the reason nobody buys those $5,000 houses is, a $20,000 house is a big enough pain in the ass. Why suffer more? :)
posted by nebulawindphone at 9:54 AM on January 23, 2009 [4 favorites]

netzapper, i don't think liens work that way. there might be 20k liens on a house that sells for 5k, but the new owner is not responsible for paying off the original 20k in liens--the seller is.

I've bought two homes, and this is a condition in the purchase agreement that you decide to waive or not when you buy a home. Two and a half years ago when I was looking for my present home, I was interested in a house that had gone power of sale. Scotiabank owned the house, and they wanted me to waive a number of conditions including the condition on a home inspection and to accept responsibility for any liens against the house. Of course I said no (there could have been huge structural problems with the house and thousands of dollars in liens which I could NOT have weathered financially), wished them luck selling the house, and bought another.

I was told that this is typical for Power of Sale properties, and an ex of mine who was a lawyer freaked when he heard I was considering a Power of Sale property, saying they are NOT for less than wealthy people to buy, because they have to assume too much risk. Of course, that's the norm for Ontario. I don't know what the real estate laws are in the States, but perhaps there's a similar state of affairs, which would be another factor to explain why these properties aren't selling.
posted by orange swan at 10:01 AM on January 23, 2009

My husband is a real-estate investor, buying to rehab and rent. We did resales until about 18 months ago, when the market just completely fell apart here. The cost of buying houses in his target neighborhood is now about half of what it was just a year ago. The homes he purchases need major rehab, and IMHO are above the skill level of most of us, but are not the $1000 house we've been hearing about. As others have said, those are just shells, really, and I don't think you can make them livable without a huge investment, and then you would have an inhabitable house in an unlivable neighborhood. You cannot resell them, you cannot rent them. No one wants to live there.
posted by raisingsand at 10:32 AM on January 23, 2009 [1 favorite]

w/r/t liens against the property, see Owner's Policy of Title Insurance.

The company providing the title insurance will do some research to find current liens against the property before they issue a policy. They will not insure you against the liens they discover before you take possession of the property. In general, insurance covers the possibility of something occurring in the future, not the certainty that something has already happened.

In the usual, buying a standard sort of house case, these would be paid by the seller so that the buyer will go through with buying the house. orange swan explains above that things don´t always work this way with these cheap houses.
posted by yohko at 2:05 PM on January 23, 2009

One other possibility is that some of these cheap houses have some sort of chemical contamination that the owner is legally responsible for cleaning up.
posted by yohko at 2:06 PM on January 23, 2009

Best answer: netzapper, i don't think liens work that way. there might be 20k liens on a house that sells for 5k, but the new owner is not responsible for paying off the original 20k in liens--the seller is.

A certain smalltime unmade mafioso who used to serve me coffee told/showed me, in intricate detail, over the course of several weeks, about how his new scheme was unfolding.

See, he'd found that the City of Philadelphia was selling some condemned buildings at auction. He worked a deal with somebody at City Hall to let him buy these things before the auction--but, other than that, it was an above-board process. So, he bought a house for $8000 in the pretty nice little neighborhood in which we both lived. His plan was to fix it up himself and then rent it out.

Turned out there were some fees associated with the deal that weren't included in the selling price. One of those fees was about $1000, and was necessary for Licensing and Inspections to come out and break the seal on the house.

So, he got some keys, and we went over for a look. The entire house was a goddamn disaster area. Broken furniture, glass, plaster, and tile all over the place in every room. A good 18 inches of trash on the floor in most places. All of the fixtures and appliances were either gone or smashed completely. The brick on the outside needed to be repointed. And then there were the mounds of human shit in the house.

So, he pays to have this thing cleaned up. Men in hazmat suits showed up with a sealable trash truck. They spent about three days shoveling trash into the truck, and filled it each day. That cost him $3500. When they were done, you could actually walk into the house without fear of your life, but the floors and walls were still badly stained, and it still stank.

About this time people started to call my friend and explain that he owed them money: utility companies, some bank who had the house listed as collateral on a loan, the previous jerkoff's mortgage bank. All told, people wanted about $35k from him. He managed to get a lawyer to make the loan people go away, and talked down the utility company. In the end, he still paid something like $20k.

So, now we're up to, what, $32,500 on what was supposed to be an $8k house. Now, he couldn't have gotten a well-repaired house in that neighborhood for less than $300k, I admit.

But, when I stopped keeping track of the cash he was laying out, he'd just started remodeling the place to be livable. New floors, new carpets, new walls, exterior brickwork, new kitchen appliances and sinks, new bathroom fixtures and tilework, plumbing, electrical.

These things aren't cheap.
posted by Netzapper at 6:18 PM on January 23, 2009 [1 favorite]

It sounds like most of you are more than half-right, but no one has explained why title insurance, which is normal in home sales, is not taking care of liens and such that appear after the sale is closed.

That's what title insurance does. The insuror searches for liens, makes sure that all known liens are taken care of before the sale, and then covers the buyer for anything that shows up later.

If I'm wrong (and I've bought my share of homes), please explain specifically.
posted by JimN2TAW at 6:28 PM on January 25, 2009

Orange Swan explains that in Ontario people sometimes voluntarily waive their title-insurance-like rights. I assume the OP would not assume that kind of risk.
posted by JimN2TAW at 6:32 PM on January 25, 2009

Response by poster: OK, wow - such a wonderful display of responses. Now, for a twist: What about condo units? I'm not about to plunge into the various wonder of the twisted legal minds that think of condo fees and other ways to get into your wallet... A few searches have turned up condo units - meaning the building can't be falling apart if other people are still living there (right?).

My primary thought was in securing some cheap housing once / if coming back to the states - not necessarily in turning a fast buck. There aren't any fast bucks to be made in this market - if I figure out how, I'll write a book and make more money that way :)
posted by chrisinseoul at 9:48 PM on January 27, 2009

Check out this article about Braddock, PA, and how it is trying to market itself as a place that has reached the bottom and is going to be heading up. Ultra-cheap houses and buildings are a major part of that marketing push, and, if the article is to be believed, has been a key selling point for at least a few people.
posted by Forktine at 5:57 AM on February 1, 2009

All Boarded Up by Alex Kotlowitz, Mar 4 '09

NYT article about huge swathes of foreclosed homes in Cleveland that are being bought by speculators at super-low prices like the ones in Detroit. Here's a relevant snip:

"A few months ago, [local politician Brancatelli] met with Luis Jimenez, a train conductor from Long Beach, Calif. Jimenez had purchased a house in Brancatelli’s ward on eBay and had come to Cleveland to resolve some issues with the property. The two-story house has a long rap sheet of bad deals. Since 2001, it has been foreclosed twice and sold four times, for prices ranging from $87,000 to $1,500. Jimenez bought it for $4,000. When Jimenez arrived in Cleveland, he learned that the house had been vacant for two years; scavengers had torn apart the walls to get the copper piping, ripped the sinks from the walls and removed the boiler from the basement. He also learned that the city had condemned the house and would now charge him to demolish it. Brancatelli asked Jimenez, What were you thinking, buying a house unseen, from 2,000 miles away? “It was cheap,” Jimenez shrugged. He didn’t want to walk away from the house, but he didn’t have the money to renovate."
posted by LobsterMitten at 4:20 PM on March 8, 2009