Pumping the brakes in Detroit?

Question

So my wife and I were about to submit an offer on a property in a great neighborhood - Morningside/East English - in Detroit.  We had two different HMLs lined up to do the deal and we were about to submit an offer when we saw a nearby comp that we were tracking convert from available to sold.  It was one of the best remodels in the area (that we could see) and it sold for $1000 less than asking.  We though that would go for well over asking and when it didn't, our rehab model was blown up.  Is anyone seeing the same?

Also, based on recent news, I'm thinking that Detroit and the market as as whole isn't great for flipping right now:

https://www.marketwatch.com/story/5-signs-that-home-prices-could-be-rolling-over-again-2019-06-17?mod=mw_theo_homepage

https://www.marketwatch.com/story/home-flipping-rate-hits-9-year-high-and-that-could-foretell-troubles-in-the-housing-market-2019-06-07

Travis Biziorek · Answer

Folks are constantly looking for reasons not to invest in Detroit. I love it. I'm happy to keep buying as prices continue to increase, neighborhoods continue to improve, and more money flows into rebuilding the city.

Dan Gilbert may have been the catalyst behind Detroit's resurgence, but the reaction is well underway now. Money is coming from far more channels at this point.

But I'll play along... let's pretend Dan & Company are driving everything still. We're all aware that there are nine individuals on the Rockbridge Growth Equity team (Dan's investment fund), right? Assuming Dan is calling every shot, or is micromanaging the entire investment plan is to sell him short as a leader and entrepreneur. The guy didn't get to where he is today by doing those things.

Detroit's fate doesn't lie in Dan Gilbert's hands any more than Berkshire Hathaway's business operations rely on Warren Buffet. A tall comparison, I agree, but not far fetched if you understand the underlying operations of big business.

Keyonte Summers · Answer

$1000? thats it? I live and invest in the Detroit market. If $1000 is going to make or break you opportunity to invest here its not for you. I could see if its 5-10k  below but 1000$ shouldn't but you in worry mode. I have properties in East english village and it could be 100x reasons why it sold for 1k less. I'm not worried about the Detroit market we have some many good things lined up for the next few years with the many businesses that are bringing jobs, homes, and other projects to the city. I would rather take 1000 less than have the home sit on the market an extra 30-90 days.

Travis Biziorek · Answer

I guess that's where we disagree. I don't see any company relocating to Detroit simply because Dan calls them up and asks them to. That's a business decision, and owners/CEO's have obligations far beyond those between friends. Companies will relocate when Detroit becomes an increasingly attractive option for a company's headquarters.

Folks have every right to be skeptical, and I think it's warranted. You don't change the sentiment of a multi-decade track record of decline and deterioration overnight. But it does feel like things are taking hold, and it's pretty exciting to watch/be a part of.

Benjamin Molnar · Answer

Totally agree, we've changed our

Account Closed · Answer

@Benjamin Molnar why flip out of state in a low-priced market? Seems like it better fits the rental property profile, anyway.

Kevin M Strong · Answer

I've been reading the comments and I remain "neutral" because I don't know the D market. However, I've had several conversations with "successful" investors who cut their teeth AFTER 2008. We have been in a bull market for 10 years and we are do. We don't know when the R will appear. However, there is an opportunity cost question for the author of this post: If you waited 9-12 months what are you really losing?

Very few pundits or "investors" are talking about the biggest factors which WILL lead to the R (consumer debt). I had a client last week who made 250K and got laid off. Credit card debt levels are higher than what they were in 2008 and so is student loan debt. There are over 9 million people who are more than 90 days late on their car payment. Pick any local market and you will see an increasing number of pre-foreclosures. Once you review that information, look at the loan date. These home owners are losing their house when their interest rates are below 4%.  What does this mean in my humble opinion, LACK OF AFFORDABILITY. The consumer has too much liability debt and it will impact the housing market

Travis Biziorek · Answer

I'd really love to know where you're getting your data. Prices are rising "the way people say" they are. Just take a look at the housing stats from the Michigan Realtors' website. Year-to-date through May, the average sales price is up 16.88% since last year. In 2018 prices finished up 18.31% over 2017. Prices were up 20.10% in 2017 over 2016 prices. I could continue, but I think you get the point.

If you're focused on single family homes, you aren't going to make money in Detroit using the 1% rule assuming you're financing the purchase. Taxes and capex are too high, and property managers are too costly (not to mention terrible).

Benjamin Molnar · Answer

@Gordon Starr Totally agree - we've been impressed with how solid the houses are.  Some of the neighborhoods look like they're out of a story book and the homes are in the low $100K-200Ks.  We're looking to rent first now unless the house sells itself before we place a tenant.

@Travis Biziorek, @Joshua Birk We're not banking on what Dan Gilbert does, for all we know he's likely using the new tax law to leverage Detroit's Opportunity Zones to avoid capital gains.  There's growth in Detroit but, there's also A LOT of inventory.  It's a long term play and I don't care what anyone says about rising prices - it's not happening the way people say it is.  I was just there for a REI event and people generally agreed there is a lot of inflated listings making the market look like it's growing but, SOLD comps over the last few years don't support this.  The high listings keep dropping in price.  The increase in price per square foot are marginal now and I'm happy to show data that supports this.  Rentometer shows rents flattening in many areas.

That being said, we do think it's a great rental market if you know where to invest.  Big business is taking notice - it's all part of their cyclical, "Let's move operations to X because we can save Y on annual real estate costs."

We think trying to flip at this point is great if you're running a turnkey company that wants to pitch a poorly rehab'd, rental to someone from out of state with dollar signs in their eyes.  Those people only want to take value out of Detroit and it's not sustainable.  If and when a recession hits - we are heading into a particularly nasty election year - do you want to be holding a bunch of $40-60K houses with - potentially - a non-salaried tenant paying $900 a month?  We'll deliver value by providing a great rental property in a strong neighborhood with high home ownership.  We'll be happy with the 1% rule delivering a superior product over the long-term and let everyone else chase the high-risk 2%.

Gordon Starr · Answer

Detroit has some of the lowest price/rent ratios anywhere. It also has some of the most beautiful and well built smaller houses. What this means is IF (and that is a big if) you have a system that works to keep quality tenants in house, you will get some of the best returns anywhere. Just keep repeating the same thing on your path to financial freedom.

Pumping the brakes in Detroit?

Most Popular Reply