Is a $500 house really worth the investment?

Some 62,000 properties have faced foreclosure in Detroit this year over unpaid taxes, around half of which are to be auctioned for $500 a piece this fall, but does this present a buying opportunity for investors or an offer to avoid?

“As a local Detroit investor and someone who has been involved in several hundred transactions over the last few years, I always advise against foreign investors participating in the tax auction,” says Al Beahn, CEO of Pioneer Homes.

“There is a reason you can buy a house for $500 and it’s because it’s located in desolate areas of Detroit where no one lives or wants to be.”

Jose Jafferji, a Realtor and an investor in nearby Windsor, Ont., agrees. “Cheap properties are cheap for a reason,” he says.

“They come with a host of problems: bad neighbourhoods, bad tenants and properties that require a lot of work. There might be opportunities there, but it all depends on how much risk you are facing.”

Jafferji experienced this scenario firsthand, visiting a real estate auction in Buffalo, New York, where properties were being sold very cheaply. “Everything looks great on paper,” he adds.

“However, after driving through those neighborhoods, I’m glad I didn’t buy. [An investor] would likely not have any stability in their cash flow because they will constantly be faced with high repair and maintenance bills, frequent tenant evictions, damages and no appreciation.”

Beahn points out that many major cities across the country host these types of tax sales, especially cities with a similar demographic to Detroit. He believes that Detroit is always put in the spotlight as an easy target.

“Yes, Detroit has its problems, but we are not the only ones,” he says. “The problem with the negativity associated with Detroit is that all the negative publicity the city receives makes the public blind to all the amazing and wonderful things the city is also doing.”

Examples of this include hundreds of millions of dollars invested in renovations in certain parts of the city. Dan Gilbert, owner of one of the U.S.’s largest mortgage companies, Quicken Loans, and owner of the Cleveland Cavaliers, has also invested nearly $1.3 billion in the city over the last few years.

“There are so many positive articles on Detroit and what they are doing to make this a much better place not only to live, but a great place for businesses the thrive,” adds Beahn. “Detroit has had its ups and downs, but we are making a very strong comeback.”

But this comeback won’t involve the purchase of these “$500 houses.” Beahn says these properties will not be successful for investors. “Not only are they in bad areas, but the amount of work needed to get them brought to code, will bring you close to $30,000 or $40,000 and up,” he says.

“Anyone who is seriously interested in investing in Detroit needs to find a local investment company or real estate specialist with experience and knowledge of how to properly invest in the city and surrounding suburbs.”

 
 
 

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