What happens if I buy one or more incredibly cheap houses in Detroit?

July 28, 2013 6:07 PM

I just read an article about the real estate market in Detroit and they linked to a number of houses that were for sale for less than $500. Some of them have just preposterous asking prices -- like a 3 bedroom house for $39. I know nothing about real estate and tax statuses, etc. What would happen if I were to buy, say 1-3 houses that cost no more than $200 apiece? What would be the downsides of doing something like this? I wouldn't plan on living in them, I'd just own them.
posted by nathancaswell to Work & Money (28 answers total)

One of the downsides would be the condition of the house. A $39 house is probably not fit for human habitation and you could--assuming the enforcement apparatus ever gets around to it--be held accountable for getting it up to code, which could be thousands or even hundreds of thousands of dollars of repairs and upgrades and improvements.
posted by Ghostride The Whip at 6:15 PM on July 28, 2013 [2 favorites]

I have thought about this interesting question myself.

- You would owe taxes on them. I doubt taxes are much and this would all be pending the outcome of the bankruptcy stuff but you would owe taxes and quite possibly some utility fees though again tough to tell how that is working out depending on where in Detroit they are.
- You would need to pay more than that to buy them since you'd need a lawyer and that sort of thing.
- If you did not keep them insured and something happened to them (like a kid fell into the basement through a rotten floor) you could be on the hook for some cash.
- Detroit has winter, so to keep them from basically being victims of the freeze/thaw cycle, you'd need to either keep them heated or turn off the water. Either option has downsides.
- And yes, theoretically if they were not up to code and you wanted to ever use them as a house you might need to do repairs at some future time or tear them down. Either option takes money and time.
posted by jessamyn at 6:16 PM on July 28, 2013 [2 favorites]

I don't know anything about this either, but what do you plan on doing with them? If the infrastructure in Detroit is falling apart (e.g., garbage not picked up, water turned off in some places, etc.), I'd imagine it would be hard to find someone to rent the house. If no one's living there, it will be hard to do upkeep, and the houses could fall into more disrepair than they already are. And as others said, you'd also face taxes and other liabilities.
posted by three_red_balloons at 6:18 PM on July 28, 2013

Sure, you COULD buy some of those houses, but if you mean you'd buy them to rent out, consider the poor real estate market in Detroit --- all those empty houses are for sale at low prices because there are tons more houses available than there are people to live in them.
posted by easily confused at 6:19 PM on July 28, 2013 [1 favorite]

Many of the houses priced like that have been gutted - wires and pipes stolen and sold for scrap, any decent trip pulled out etc etc. I know people who have bought houses of this sort in Detroit and are rehabbing them but living in them is essentially camping out. Possible to do and to get something very worthwhile out in result but not at all simple or easy. Most of the people I know doing it are broke artists for whom it's both a place to live + studio space for very little money and lots of sweat equity. And all of them have been burgled, robbed, hassled etc.
posted by leslies at 6:21 PM on July 28, 2013 [3 favorites]

Response by poster: I would buy them strictly on the off-chance that Detroit turns itself around, under the assumption that the property value has nowhere to go but up. I would not live in them or attempt to rent them.
posted by nathancaswell at 6:21 PM on July 28, 2013

The last time I had to insure an uninhabited house, it was $700 a month, and that was 15 years ago, in a neighborhood that wasn't rife with issues. True, you may not care if your $500 house burns down, but you still have liability issues with your properties. In addition, these places are already wrecks, so by the time the market turns around, you'll have to rebuild from scratch anyway. Maybe you just want an empty lot, but that kind of ruins the fantasy of having a cheap house.
posted by sageleaf at 6:30 PM on July 28, 2013 [2 favorites]

For $39 plus legal fees and taxes, you can buy the right to incur the costs of tearing the house down, or at the very least boarding it up.

Detroit has a huge glut of derelict, abandoned, and hazardous buildings. It's not just "normal" housing stock turned cheap all of a sudden.
posted by kiltedtaco at 6:31 PM on July 28, 2013 [11 favorites]

I would not live in them or attempt to rent them.

So you'd be the responsible property owner if, say, they became crackhouse brothels?

Here's the thing: houses are depreciating assets. Shit breaks. It feels like they appreciate in value because the cost of maintaing the house is generally merged with the cost of having somewhere to live.

The value of a house left to its own devices is at best the value of its land. If you think the value of the land is going to appreciate enough in the long run to make it worth buying a bunch of houses and paying for them to be razed and cleared away, then go right ahead.
posted by holgate at 6:34 PM on July 28, 2013 [2 favorites]

Don't forget that Detroit's population is reportedly down to half of what it was --- the city has a VERY long way to go if it's ever to recover.

Meanwhile, you'd be liable for taxes, fire insurance, injury or liability (say a squatter falls through a rotting floor --- who're they gonna sue? yep: you), for the house being a blight on the neighborhood or anything else that comes up. It really sounds like far too much risk for far too little chance of maybe someday making a profit.
posted by easily confused at 6:41 PM on July 28, 2013

I've seen some of these $39 houses, and they are overvalued by about $10,039. Most are fit for nothing but the wrecking ball, and the few that aren't are fit for habitation only if you are willing to put several tens of thousands of dollars into them.

As an investment, they are worth headaches and liability; nothing more.
posted by Etrigan at 6:44 PM on July 28, 2013 [2 favorites]

Liability is the single greatest concern, as stated above. When you buy something at a tax lien sale, you typically do not owe the back taxes (that's what the sale price is - they're giving you the house and wiping out the tax debt.) Trouble is, there could be other stuff on the title, and there's also all kinds of safety and insurance issues.

Also, my stepdad did this in a smaller town in MI - he actually lives in it part-time, he got it for attending law school. It's an awful place, getting worse all the time, etc. They keep tearing down the other houses around him, the roads aren't being kept up... fundamentally, the property owners are the losers in this situation. At least the renters can just leave.

(You have no idea what the appraised value of these houses is, incidentally, just from looking at the advertised prices - most are valued by the county assessors at a much bigger amount than the sales price, which means you will also have a potentially-significant property tax obligation to meet.)
posted by SMPA at 6:48 PM on July 28, 2013 [3 favorites]

Have you seen Detroitopia?

http://www.detropiathefilm.com/

There are parts about a man who owns a house (possibly more than one?) trying to maintain it/them, and a scene or two about guys who strip houses. I can't recall if it gets into blight ordinances or taxes or anything like that, but if you haven't seen the film (or another like it, if that exists) it would probably give you at least some idea.
posted by DestinationUnknown at 6:51 PM on July 28, 2013 [1 favorite]

You would owe taxes and pay taxes.

Your pipes and etc. would get stolen, and since you wouldn't be there to prevent that from happening, or to do repairs to make a $49.99 house look like a place worthy of $49.99/month rent, nobody would pay you that rent either because why would they? Might as well just squat for free.
posted by oceanjesse at 7:15 PM on July 28, 2013 [1 favorite]

There are some good answers in a couple of previous questions about this:
What about those cheap houses in Cleveland?
Why don't more people buy these ultra cheap houses?
posted by LobsterMitten at 7:26 PM on July 28, 2013 [3 favorites]

Before you do this, I highly recommend you read Charlie LeDuff's "Detroit: Autopsy of An American City." It is not just the lack of infrastructure in Detroit that would fell a homeowner. It is that the city and its officials have turned the place into Armageddon.
posted by nubianinthedesert at 7:33 PM on July 28, 2013

It's simply a terrible idea -- if they were worth it, even as a lark, don't you think they'd already be bought? You'd be buying a dangerous property in a blighted or literally abandoned area that's likely been gutted to the foundations that you'd have to spend tens of thousands of dollars to fix up to sell even if the thing that won't happen (Detroit turning around) somehow happens. In the meantime you'd be paying to insure the property, and no insurance company is going to like the idea of the house like that sitting vacant and unmaintained. You'd just be buying a massive headache and it would probably cost you a small fortune to get out of it once you did.

Buy $39 worth of lottery tickets instead.
posted by gerryblog at 7:38 PM on July 28, 2013 [1 favorite]

This Is For Everyone Who's Thinking Of Buying One Of Those $500 Homes In Detroit

Selected quotes:
"In many cases, if you want to purchase one of the bargain properties, you will also have to pay all the back taxes the property owes."

"Jeremy Brown, who works in real estate in the city, emailed us to say that many of the cheapest houses have to be completely rebuilt, not least because thieves have stripped them of basic infrastructure.

Nearly all of them have mold, require all new electrical, plumbing, ductwork, drywall, many times a roof, all new windows, doors, cabinets. Basically everything. Anything that can be taken and sold, has been."

"You almost need to pay someone to sleep on an air mattress in the house while you are working and move in immediately upon completion," he said. "If these houses sit, people WILL break into them. You put in a new toilet, bathtub, and vanity...that night people come in and rip it all out."
posted by pravit at 7:49 PM on July 28, 2013 [4 favorites]

An option is to buy a series of adjacent blocks and just demolish the houses and leave the blocks empty.

If Detroit prices ever come back, a large contiguous block might fetch good money.

By demolishing, you also avoid all the maintenance and liability issues others have identified.
posted by dave99 at 9:45 PM on July 28, 2013 [7 favorites]

I would buy them strictly on the off-chance that Detroit turns itself around, under the assumption that the property value has nowhere to go but up. I would not live in them or attempt to rent them.

If you're just going to buy and hold decrepit houses, how can you rely on a turnaround? The process of gentrification (because that's what we're talking about) requires a lot of work by stakeholders (be they property owners or residents). If you let blighted houses sit, then you become partially responsible for the current status quo of Detroit. Speculative investment can be very destructive to community development.
posted by decathexis at 10:12 PM on July 28, 2013 [21 favorites]

The historic preservationist in me would love to do this, but the rental property owner-manager in me wouldn't dare.

The market is giving you the gift of knowledge. These houses are only selling for this much because they are worth, as noted above, negative value. They will cost you so much more to even hold them in a steady state than you could ever gain through appreciation. To somehow get them to be functional generators of rental income or rehab "flips" in any sense of the word (i.e. not including the one involving big profits) would require a real rebound in the Detroit area that involves a return of manufacturing jobs on the order of, probably, several brand new auto plants (to replace the many, many that have departed for lower-wage shores).

Now, there are probably houses in Detroit worth buying. It's still a pretty big city. But they are not in these neighborhoods. The houses going for $500 or $50 are on streets that have no other houses at this point, or at best only a few that are occupied. The houses that are in the neighborhoods where they are somewhat safe and will generate some income are already priced accordingly. Knowing which is which probably requires local knowledge, and not the kind you can get with a few absentee-landlord-style wing-ins.

As a rule, the foreclosure/tax sale market is a pretty tough one. In many cases you can't even gain access to the property to inspect it prior to sale. There's guesswork, there's bulk arrangements with contractors, there's free capital to spare to make the house occupancy ready again. You're gambling not just on the market but on a huge list of unknowns from missing plumbing/electrical to sheer structural deficiency on the point of failure.

My [lost one auto plant] city is actively engaged in "blight removal" and has a triage system in place -- basically, A is flipped, B is rehabbed, and C is razed. If you ask me some of the razed properties could be saved and the market is still here to make them work financially, but I'm not the city. These houses in Detroit are probably not A, B, or C houses, but D, E, and F houses.

If -- I lived in Detroit; had good relationships with contractors; had an eagle eye for home inspection and rehab estimation; had free capital in the well above six figure range; and had a lot more guts than I do now, I might take on this sort of project in selected neighborhoods where I thought my efforts might do some good stabilizing and slowing the overall decay. But I believe for the most part these houses you're talking about are not in those neighborhoods. And I don't believe that from afar it's practicably possible to know the difference.

I have many other ideas about how to save Detroit -- say, allowing the ring suburbs to re-annex parts of the city itself, block by block -- and I'd love it if something were being done that would be producing hypothetical results that I could support by doing this sort of investment. But I don't think the inexperienced, remote, penny-ante investor is going to be part of this process.
posted by dhartung at 1:06 AM on July 29, 2013 [6 favorites]

I've had the same thought as the post. Buy some properties for next to nothing and just sit on them waiting for Detroit for bounce back. Problems, which have been noted upthread already:

- it's a negative carry trade: you're paying tax for the privilege of sitting on an asset that may or may not work out. that's always risky, and it means the capital may be better deployed elsewhere.

- tort liability: if some idiot kids break in and fall down the stairs, or if a crackhouse pops up and there are rapes, ODs, whatever, then there's the potential to be on the hook. You can always house the house inside an LLC, which should go some way to minimizing liability (or limiting it to the value of the property), but nonetheless defending a suit, even if you prevail, would be expensive and a pain in the ass.

- regulatory headaches: gotta figure there is or will be some requirement to bring the house up to code or demolish it, and that's expensive. the fun part about the possible purchase is you get a house for super super cheap! and if it all of a sudden becomes not-at-all-cheap, then it's not so fun.
posted by jpe at 5:20 AM on July 29, 2013 [1 favorite]

> By demolishing, you also avoid all the maintenance and liability issues others have identified.

I strongly recommend visiting Detroit before considering your plans, to get a better understanding of the world you're considering investing in. Detroit is so large and so sparse that it can take your breath away.

You can drive through parts of Detroit and gaze across miles of former neighborhoods, one or two houses remaining per block. Proactive developers have a lot of space to choose from, and they're going to prefer the parts of town where people make an effort at rebuilding, not where they risk being surrounded by a desert of land left idle on speculation. By demolishing a block and waiting, you remove the potential of habitable housing from that block, and you are counting on reaping the windfall of everybody but yourself investing effort and money in the initial improvements necessary to make anything near your property livable.
posted by ardgedee at 5:26 AM on July 29, 2013 [2 favorites]

I would wait until the state of Michigan implements a property and income tax regime for Detroit which will protect you from expropriating taxes on your investment if the city ever turns around. The political environment of Detroit is implacably hostile to small investors.
posted by MattD at 6:42 AM on July 29, 2013

Try poking around on Google Streetview for some of the houses you're thinking of. This block is mentioned in one of the articles, for example. You can see the immediate neighborhood (which I don't know, this is just what I see on Google) has a long way to go before the house is going to increase in value -- and with that much vacant land around it, if the neighborhood and city were to pick up surely people would rather build new houses than deal with all the problems of the run-down ones.
posted by The corpse in the library at 8:33 AM on July 29, 2013 [1 favorite]

Remember that the world is full of investors with piles of money to spend on profitable real estate. Some of these deep-pocketed guys could walk in right now and buy block after block of Detroit for beans. They aren't doing that because they consider these places a bad investment. With the deed comes expensive responsibilities.

They might buy property from guys like you if guys like you were willing to go in, occupy, and repair enough houses to make the neighborhoods promising. But you can't just buy a shitty house and sit on it.
posted by pracowity at 4:17 PM on July 29, 2013 [2 favorites]

…and just demolish the houses and leave the blocks empty.

That's not much of a "just," is the thing. Demolishing a house can easily cost $10,000.

And, as ardgedee says, it will be a long, long time before the demand for empty lots in the city of Detroit comes anywhere close to the supply.
posted by Now there are two. There are two _______. at 7:10 PM on July 29, 2013

Speculative investment can be very destructive to community development.

bears repeating
posted by mrgrimm at 10:36 AM on August 5, 2013