You Have Every Reason to Be Skeptical: Detroit House Flipping

Investing in Detroit single family homes is really hot, and each week I receive calls from prospective investors from all over the world, lured by the sirens of big profits, wanting to know if this market is as good as the media portrays it to be. My answer these days is a highly qualified “yes, but….”

Here are several things that smart real estate investors need to be skeptical of:

1.Property managers and contractors. In Michigan, property managers need to have a real estate broker’s license. The have a fiduciary duty to their clients to manage and maintain properties. Before sending a property manager any money to perform construction or manage remodeling projects, screen property managers carefully. Too often, unvetted property managers abscond with significant client monies without performing the work. (I was recently hired to sue a property manager who stole over $25000 from an out of state investor.) Using unlicensed contractors can be just as disappointing.

Solution: Work with reputable property management companies and licensed contractors who have a history in business and referrals from happy clients. Trust but verify licenses and insurance.

2. Documentation. I am busier than ever cleaning up after ‘self-inflicted” legal problems caused by non-lawyers. They create various real estate and finance agreements that include, but are not limited to mortgages, loan assignments, leases, purchase agreements, contractor agreements, and lease options. Trust me, I am not complaining, but the last time I checked, the real estate business is hard enough without having to deal with the frustration, delays and setbacks caused by poorly drafted documents and weak due diligence. Recently a purchase agreement earned my client a high 5 figure settlement, all because the draftor, a non-lawyer, failed to include one sentence in their agreement. Yes, one sentence.

Solution: Do yourself a favor, have an experienced real estate attorney create or review your documents and assist you with legal due diligence.

3. Inspections and Certificates of Occupancy. Relying on third party inspections without personally checking on a property can generate a host of problems. Many investors use their own money or money procured from small investor groups. Purchasing a property without knowing the estimated repairs needed to obtain an Occupancy Certificate (“C of O”) is like flushing money down a drain. Last year, in order to get her C of O, a client lost substantial equity when the city required her to replace an entire pea gravel circle driveway with a concrete one.

Many clients and other smart Detroit investors come far and wide to inspect properties before they purchase. Recently, an investor believed they had purchased a vacant property. When they went to secure the property they soon learned the home was ‘tenanted.” The cost of a contested eviction delayed their ‘flipping” plans for over 5 months. Those who invest in properties sight unseen have only themselves to blame.

Solution: Personally inspect your investment property or hire a reputable agent. Would you invest in a stock without reading the prospectus?

4. Title and property taxes. Understand the property tax forfeiture and foreclosure process and verify a property’s lien and tax status before you close. Nothing is worse than restoring a property only to find that it was sold to another party at tax sale or that title is such as mess that the investment does not have marketable title.

Solution: Hire a real estate attorney and pull a title abstract before you buy. Why buy into a lawsuit?

Conclusion. Every real estate investor has their ‘‘war story” and these challenging experiences contribute to their continued success or become a source of financial stress and even ruin. Detroit real estate is Michigan’s modern day 'gold rush' and news of the fantastic opportunities has been broadcasted throughout the country and the world. But it’s okay to approach this market with some healthy skepticism, because investors who fail to exercise caution will get burned. And you can “take that to the bank.”

About the Author: Since 1990, attorney David Soble has represented investors, lenders, loan servicers, business owners and consumers in real estate, finance and contract matters. He has been involved in thousands of real estate transactions for his clients and has successfully saved his clients millions in lending agreements and contract negotiations. He can be reached at 888-789-1715.