Detroit, bankruptcy, any silver lining?

Question

Any silver lining there. 100,000 creditors. 78,000 homes empty, population 700,000, down 1,300,000 from the glory days. 40% of the street lights are out, half the parks closed and over 100 schools closed. Highest crime city.

Talk about rehab....? Even high rises are trashed and empty.

I'm sure the city will stabilize and come back, perhaps not to its prior self but to some degree. The city has buildings scheduled for demo and can't due to the expense. Bet they would take properties off the list and give a deed if someone would make repairs and bring the property back.

I'm sure there is money to be made there, big money! Any thoughts?

Tom A. · Answer

The silver lining is the city now has the opportunity to go forward with a restructured debt load, restructured union contracts, restructured pension and retiree health care liabilities and with one person, the emergency manager in charge along with a bankruptcy judge, the ability to make decisive changes that the former leadership was unable to do.  For example, turn management and its associated costs of running the huge river island park, Belle Isle, or the historic fort, Fort Wayne over the the state or regional authority as has been proposed and rejected by the former incompetent "leadership".

Contrary to what I sense is the conventional wisdom outside Michigan, this is not the beginning of a disaster.  It's the inflection point where an ongoing disaster finally hits rock bottom and the city is given a chance to rebound financially.  City services are already brutal.  Bankruptcy doesn't make them worse (we joke they can't get worse when they don't even exist any more), but the reduced debt load and restructured city departments makes more money available to use for city services and makes the services more efficient.

From a real estate investing perspective there have been opportunities to pick up cheap properties for years and years.  You can bid at the annual second tax auction where thousands of properties start at $500 (and many don't get any bids).  The houses on the demo list are usually too far gone compared to what you can get in good condition for a relatively small price to make it worth buying a wreck of a demo house.

Detroit will continue to have areas where the housing stock is just devastated.  It will also have areas where there is strong demand, rising rents and asset prices, and an influx of young professionals.  It's really a fascinating city but not for the weak of heart.  I'll have to make a thread with some photos and commentary on the good and bad in the city some day.  It's a strange, scary, fascinating and fun place, all at the same time.

Aaron Yates · Answer

It's going to take some time to make Detroit turn around. Since surrounding areas dropped so much in the past few years, many people moved out of the city limits into neighboring cities like Warren, Roseville, Hazel Park, Ferndale, Oak Park, Southfield and so on.

These areas used to be more expensive than Detroit but once they weren't 1000's of people did a northward shift.

In fact people already in the surrounding areas even did a northward shift. It was quite a feat to see happening. It started back in 2008 and I was one of them that did it as well.

The owner of Quicken Loans has been buying up buildings in Downtown Detroit where things are still nice in some areas, but the neighborhoods are so bad and no one wants to live there. The ones that do really don't have a choice or anywhere else to go.

One of the biggest problems in Detroit is many of the residents don't take care of their own property. Whether it be because of financial issues or they just don't care I'm not sure of. But one drive through the neighborhoods and you would understand.

So the problem that an investor has is finding a tenant that will take care of the property after rehabbing it and preventing looters from trashing it during and after a rehab.

If people aren't willing to help the neighborhoods themselves, Investors will have a hard time as well trying to bring up the neighborhoods.

It will take some big team effort to bring the city back I think. Many people still have pride for Detroit and are trying to bring it back. But again... the citizens and residents in Detroit neighborhoods need to pull together as well or it just won't come back to where it should be.

Unfortunately even before the downfall Detroit had some pretty bad neighborhoods. So it's not like this was an all of a sudden thing. Neighborhoods have been abandoned, trashed, and burned down since the riots. To this day those neighborhoods have never been cleaned up.

In conclusion, the issues with Detroit were forth coming and will need a lot of people to come together to fix the problem and bring people back to the city.

If this happens, it will definitely be a place to profit from. But don't expect any quick happenings. I personally still see the northward shift out of Detroit into the northern cities. In fact a couple of my tenants did the same exact thing.

One works for the city directly and had never lived outside of the city. Apparently things are ran different in the city including Utilities. His wife and him are awesome clients but they have no intentions of ever going back.

They plan on staying in my house and eventually want to buy it. So how can we as investors or the City officials of Detroit convince people that Detroit will change for the better?? This is the $1,000,000 question.

Michael B. · Answer

Engineers and statisticians groaned at that one. The inflection point  of a curve is where the concavity of the curve changes, where the slope =1 or -1. It's usually either half way to the top or halfway to the bottom. Never at either the maximum or minimum.

Just hoping Detroit isn't only halfway down their path to the bottom. Hopefully it's a minimum, not an inflection point.

Yes, I do have time on my hands today, and tend to be pedantic at times. Sorry.

Jon Holdman · Answer

I've seen data that says the population was as high as 1.8 million in the 50's.  When your population drops to 40% of what it was, you end up with a lot of empty housing units.  And the ones that are occupied are spread throughout the area.  That makes in inevitable that many areas will have abandoned units.  And that city services can't shrink as much as they need to.  IMHO, that's Detroit's fundamental problem.  If the city had started small and grown to 700,000, it would be a physically smaller city.  All the required infrastructure - water, power, sewer, fire, police, trash, etc, would be more compact.  Cities can expand and grow, but shrinking is much more difficult.  What would you do?  Find areas and move everyone out of them?  Even if you raze the abandoned ones, you still need all the services to support this low-density population.

That said, I do see some prospects.  Bankruptcy is a way to shake off some of the debt and obligations and make a start toward aligning the expenses with the revenue.  But without somehow reducing the physical size of the city, I see continuing problems.  There's a general trend of people moving toward the warmer southern areas.  Even though there are some efforts to revitalize the city and gain new jobs, I don't ever see it growing back to 1.8 million people.

Levar Wilson · Answer

I would say that is a good assumption.  Particuarly as SAIC is setting up shop there and well as the automobile industry is still growing substantially.

Annette Hibbler · Answer

As a matter of fact, we took a small group of investors from Malaysia on a tour of our properties around Detroit.  They stayed in the city in one of the many beautiful luxury hotels there.  They bought loads and are coming back next year.

Also, we are headed for London in October to participate in the 2013 Investor's Show there.  We high expectations going into that market as US investments are very attractive to overseas investors.  There are already several US investment business there and we plan to take a slice of that pie.  Our advantage is that we can easily undercut the competition and we are not going there as "sales reps" but rather owner/partners.

We find that oversea investors are mainly interested in the smaller SF or MF investment.  But that's not to say that's true of all international investors. I can only speak to my own experience.

Steven J. · Answer

Okay, Annette, what can you tell me about crowd funding some of those properties out there? I'm very curious if there could be a killing in attracting those oversea investors (China) to a bankrupt city like Detroit that is now getting a clean(er) slate than before. And can they be attracted to large complexes?

Annette Hibbler · Answer

We are seeing a large and growing interest in Detroit turn-key SF investments.  We nearly sold out our inventory last month.  We are in the process of acquiring 20 more.  This is a huge market and I'm glad to be in on it.  Lots of investors are getting in on it recognizing the capital growth potential and instant cash flow. Rents are generally $700 and going up. I also posted a link to FOX Business News MONEY interview.  Last six minutes she asks two REO experts if they would invest in Detroit. Check it out.

Rob K. · Answer

I didn't say that only hipsters live in Detroit. I said that they're the only ones who are moving into the city. Most of the residents there have lived there for their entire lives. The only people moving in are the ones that want to live in a trendy urban area.  The school population drops dramatically every year. Part of that is because people send their kids to suburban or charter schools. A lot of it is because families leave the city and people without kids move in.

Detroit, bankruptcy, any silver lining?

Most Popular Reply