
Mystery Bidder Bids $3.2M for 6000 Detroit Homes - coreymgilmore
http://www.businessweek.com/articles/2014-10-24/buying-derelict-detroit-mystery-bidder-wants-6-000-foreclosed-homes#r=hp-ls
======
valarauca1
There is a huge market for international property speculation especially with
American property.

The owner will likely sell each house for a tidy profit (to another investor),
the new owner of only 1-5 houses will turn around and try to sell those back
to Americans, realize s/he got had.

TL;DR international property scam

References

[http://www.nuwireinvestor.com/articles/waterfront-
properties...](http://www.nuwireinvestor.com/articles/waterfront-properties-
in-detroit-an-investment-opportunity-61484.aspx)

[http://www.crainsdetroit.com/article/2013102/NEWS/310209983/](http://www.crainsdetroit.com/article/2013102/NEWS/310209983/)

[http://michiganradio.org/post/no-chinese-investors-arent-
buy...](http://michiganradio.org/post/no-chinese-investors-arent-buying-
detroit-they-do-have-eye-motor-city)

P.S.: If the parcels are located semi-close to the new arena complex it maybe
a serious investment, but I doubt it.

~~~
watty
Can you explain the "scam" part?

~~~
deelowe
Evidently, speculation == scam now.

Also, I'm one of those people who buy 1-5 properties from bigger investment
firms. My return (with rentals) varies between 17-20%. So, no, I don't feel
had.

~~~
sedachv
Where in the country are you that you're realizing those kinds of profits?

~~~
MCRed
I think this is plausible, since return is based on your investment. EG: You
buy a $300k property, maybe have $40k in rent, $6k in maintenance costs, but
only put down $30k on the property, your total investment is $36k. On rent
alone you're returning $4k (spread between mortgage+maintenance and rent
income.) $4k on a $36k investment is %11. But on top of that you have added
~%50 of your mortgage payments (which are covered by rent, "free" money) to
your assets.

Do you believe this is rare? I don't know the real estate market well, but it
seems pretty plausible to me.

First thing I'd do is look for a city where the influx of population exceeds
the new home starts. If you find something like that early on, after a few
years, your return will be pretty dramatic as rental prices go up, but your
mortgage is based on the price at the time you bought (which may be well below
the current value of the property.)

Between appreciation and the rent paying down your mortgage balance, plus
possibly a return on the rent itself, a return on equity (which really is just
the downpayment plus maintenance costs) could be pretty high.

~~~
totalrobe
40k rent coming in on a 300k property?! You're off your rocker...

~~~
tonyarkles
I'm using Canadian interest rates because it helps me do gut-checks related to
the current property values around me. A $300k house here is a decent house. A
5-year closed fixed mortgage at today's rates (3.24% on promo) works out to
$1456/mo. From what I've heard from friends, they're renting relatively most
homes around here for about that price. Looking at MLS, there are
significantly nicer homes in the $300k price range, and it probably wouldn't
be a huge problem to rent one of those out for $1750/mo ($300 profit/mo =
$4k/yr)

While the $40k/yr rent number above does seem suspicious, the percentages
otherwise work out reasonably well on the back of my envelope. Another
important thing to consider is that at the end of it, even if you made $0/mo
on the property, you still end up with a (hopefully) valuable piece of
property to sell that had the mortgage paid off by the renters.

------
seanmccann
The value of one single house is basically negative because of the bad
neighborhood, bad surrounding homes, high crime, etc. By buying a larger
number of contiguous homes, you can greatly reduce those problems. Sounds like
a fantastic idea.

~~~
d4vlx
There is some contiguousness but they are mostly spread all over the city.
Take a look at the red properties on this map (zoomable):

[https://whydontweownthis.com/2014/mi/wayne/detroit#15/42.347...](https://whydontweownthis.com/2014/mi/wayne/detroit#15/42.3472/-83.1043)

~~~
larrys
"but they are mostly spread all over the city"

6000 homes spread out also means you can also create a mini company town by
essentially luring people (for a new company) to the city and giving them a
choice of different properties, renovated and ready to go with efficiencies
gained by having so many to deal with. (Similar to when, say, Levittown was
built (all in one area of course but same concept with construction).

~~~
ams6110
Many if not most of the houses are beyond renovtion. A fair amount probably
have fire damage (arson in Detroit is legendary). Sitting for years with
broken windows, holes in the roof, etc. leaves them rotted shells

~~~
larrys
The idea would be to bulldoze them and then just sit on the land until you
need it for some reason. Carrying costs are obviously much lower that way you
can't vandalize a lot (although you can dump on it of course..)

~~~
seanmccann
From what I remember, this is exactly what Detroit is trying to avoid. They
have these auctions with the expectation that they will be lived in either by
the owner or a lessee.

------
650REDHAIR
Detroit gets a bad rap.

I've traveled quite a bit from 18-24- going coast to coast by car at least a
dozen times. I always avoided Detroit because of the bad press it gets. This
year Apigee hosted #apicraft in Detroit and it was AWESOME. I fell in love
with the city. The outskirts are still rough, but Midtown to downtown was
really, really good. The "opportunity Detroit" slogan everywhere paired with
the local's can-do attitude makes me want to invest more time and energy into
the city.

I can't wait to go back!

~~~
danielweber
Different parts of it are in different shape. There's also the utter
bankruptcy that means _someone 's_ gonna get squeezed really hard sometime
soon.

------
gatsby
Sounds like a possible Dan Gilbert project.

Context:
[http://www.forbes.com/sites/joannmuller/2014/09/29/gilbertvi...](http://www.forbes.com/sites/joannmuller/2014/09/29/gilbertville-
a-billionaires-drive-to-rebuild-the-motor-city/)

~~~
rmason
Very doubtful. Gilbert has only bought skyscrapers in the downtown area. He
bought the buildings for what it would cost to rent that much space for a year
in Manhattan. Lately Gilbert has been outbid at auction by Chinese investors
so he's exhibited financial discipline.

This mystery bidder is paying $500 per house and it would cost ten times that
much on the low side to tear down the house. Somebody needs a large chunk of
land and for some reason wants it in that specific area. Maybe Piston's owner,
Tom Gores, is planning a downtown stadium?

~~~
gatsby
Tom Gores is a good guess, but I think the homes are too distributed to
assemble a sizable plot of land. Besides, if you want to buy acreage in
Detroit, it's easier to buy an couple old industrial lots than to pay $30m to
tear thousands of homes down. Besides, it's hard to imagine a stadium in the
middle of a residentially zoned neighborhood.

Here's why my money is on Gilbert: [http://nextcity.org/daily/entry/hey-dan-
gilbert-you-cant-bul...](http://nextcity.org/daily/entry/hey-dan-gilbert-you-
cant-bulldoze-every-abandoned-building-in-detroit)

> "Business owner Dan Gilbert has bought more than 30 buildings with 7.5
> million square feet of office space in Detroit’s central business district."

> "Now, Gilbert wants to get involved in Detroit’s neighborhoods."

> "Part of that deal is a new task force faced with the indomitable challenge
> of figuring out what to do with Detroit’s tens of thousands — no one really
> knows the exact number, some say 78,000 — abandoned buildings. "

> "Gilbert is on that task force"

> "'To get the neighborhoods going, we’ve got to take down the 78,000 or so —
> we don’t even know the exact number of structures that need to be taken
> down, mostly houses,' Gilbert said..."

------
uptown
The one thing they're not making any more of in this world is land. $3.2M
isn't much money for a very large number of people in this world.

~~~
elmuchoprez

        The one thing they're not making any more of in this world is land.
    

Huge portions of the US remain undeveloped or under-developed. Land isn't
really in as short of supply as some would have you believe.

    
    
        $3.2M isn't much money for a very large number of people in this world.
    

$3.2 is just the purchase price. The article says the buyer would be looking
at another $25-million to demolish the structures that can't be salvaged. Then
you have upkeep and taxes. I'm sure the actual total monetary commitment is
still within reach for many, but it's not nearly as low as $3.2.

~~~
talmand
Land can potentially be in short supply in areas people want to be located,
especially land locked cities.

~~~
smeyer
Right, but once you start talking specific locations, you get back to the fact
that land isn't really in short supply in Detroit these days.

------
waterlesscloud
Half the homes need to be torn down, and 2000 lots are already empty.

So it's just 1000 actual homes that may be re-inhabited, and 5000 empty or
soon empty lots.

That could be pretty tough to deal with, whatever your plan. Probably not
dense enough without re-building to avoid the blight returning again. All
those empty lots would hurt. So some huge money will have to be poured into it
to accomplish much.

------
atwebb
So, things like this always interest me, maybe it's long term living in a
similar city or just idealism. Anyways, I've always wondered when these places
will get so cheap, and so readily available that a single, long term interest,
entity will buy a large portion of a major city. At some point, even with the
tenants, tear downs, clean up, and taxes, land with that amount of
infrastructure around it has to bottom out right? Back of the napkin stuff and
some assumptions:

6000 parcels (so assuming separate pieces of land)

average of .25 acres a piece (sourced from no where except where the dots lie
on the maps in relation to sizes I'm used to seeing and accounting for some
larger properties)

Gives you 1500 acres, or ~2.3 sq miles. That's in a city that's total 138 sq
miles.

Again, assuming the article figures are accurate it will cost ~27M total to
buy and deal with those 6,000 properties. So for 27M dollars you can own about
1.7% of the entirety of a major metropolitan city. That's 1500 acres. It's not
the most desirable, it's surely a pain, you may be able to recoup some cost on
some properties or by selling scraps, it may cost $50M in total, who knows. I
just think it's interesting you can by one very large house on the coast, or
1500 acres in a still major, and formerly powerhouse, city.

~~~
maxerickson
Clear development land in Wayne county is selling for $25,000 an acre (and
more, I looked a bit for large lots, which should at least somewhat mitigate
location).

At those rates, you could maybe expect a nice return with a simple tear down
and wait strategy.

------
fiatmoney
It's only possible to have a "mystery bidder" because real estate is exempt
from money laundering regulations.

I'd bet 2:1 it's shadily acquired money from overseas looking to be stashed
out of the reach of local anti-corruption agencies.

~~~
cpwright
You also need to sink another ~$24 million into the property to demolish the
houses, and if you don't make sufficient progress it will be repossessed.
That's gonna be a bunch of jobs, so I'm not sure Detroit would care.

I also would think that you would probably want to have more liquid property,
or at least something that might possibly generate some marginal income.

~~~
sp332
It can't be "repossessed" if you own it. (And it wouldn't be repossessed
anyway since the bank probably doesn't want it back :p)

~~~
fiatmoney
It can be seized (or a lien placed) by the city or state for not paying
property taxes, or fines from lack of upkeep.

------
swalsh
I was recently buying some reclaimed lumber, it was quite expensive. It occurs
to me that 6000 homes depending on how old they are might be worth that much
in materials alone.

~~~
Havoc
I was under the impression that most US houses in that price range will be
cheapish wood and drywall? Not sure you'd get much reclaimed lumber worth
anything out of there.

Still - innovative idea.

~~~
waterlesscloud
These are older houses, most of them likely made from much better materials.

Still, with the kind of weathering an empty house would get in Michigan, a lot
of it could be totally ruined.

~~~
atwebb
> most of them likely made from much better materials.

Unfortunately lots of lead paint as well. It is still a very real issue.

------
porter
"Be fearful when others are greedy and greedy when others are fearful." \-
Warren Buffet

------
trhway
>Everything is sold as is: The homes may lack furnaces or wiring and they may
come with mold, tenants, or both.

mold or tenants, they don't make distinction between them...

Interesting that Detroit government still burdens these properties with
extremely high taxes (thanks God and voters for prop 13 in CA :) even though
the only service the Detroit government provides there is "foreclosure
service".

What are the chances that a buyer of huge amount of parcels can separate that
area from the city?

~~~
jmspring
Thank god for Prop 13?

Oh jeez. You mean the fact that businesses can sit on commercial properties
for more than either of our life times and not pay much more in taxes?

Or the part where a family with a bunch of kids pays less in local property
taxes, yet uses public resources more than a single individual who bought
their house 5-10 years later?

The idea of Prop 13 has merit, but the disparity it has raised and the hole
this state has been dug into, not so much.

~~~
trhway
>Oh jeez. You mean the fact that businesses can sit on commercial properties
for more than either of our life times and not pay much more in taxes?

one can see how a minor adjustment made be made here :) Though as things work
as it is, why risk breaking a working machine...

>Or the part where a family with a bunch of kids pays less in local property
taxes, yet uses public resources more than a single individual who bought
their house 5-10 years later?

if they bought at the same time, the family would still be using more public
resources, wouldn't it?

there are some minor flaws, yet anytime i see property taxes in other states i
always grateful for that relict of direct democracy, ie. Prop system of CA,
which allows voters to control at least the most important things, like real
estate taxes.

>the hole this state has been dug into, not so much.

what hole? We're booming. Again.

~~~
jmspring
Whole vs hole, but nice typo on my part.

Not all municipalities are booming, I think some form of revised prop 13
coupled with a consideration for impact of household count would be a bit
better.

~~~
trhway
>a consideration for impact of household count

yep. I'm already paying a tax for having a dog (and some municipalities are
now taxing cats too), so i definitely wouldn't mind if others had to pay for
their family members too as, obviously, a child is a bigger drain of public
resources than a dog or a cat.

~~~
jmspring
Where are you that taxing pets is happening? Don't mess with my furballs.

~~~
trhway
pretty much any city in Bay Area and i think in all CA have that yearly
registration/license fee

------
eevilspock
It seems obvious to me that too high taxes are the real problem here.

If the tax rate makes owning a piece of property unsustainable, then no matter
what your political-economic beliefs you have to agree, right?

I say this as a supported of property taxes (as a stand-in for ground rent
owed to the true owners of the land, the commons. Read up on Georgism or
Geolibertarianism to understand what I'm talking about).

------
specialp
I hope whomever bought it was not planning on reselling the properties piece
by piece on ebay and other places. A lot of these types of homes are sold that
way to someone that is like wow I can buy a house for $1500! Then they realize
there is nothing they can do with it, and it actually costs them a lot of
money in taxes and upkeep, and abandon it.

Hey they could have had a sports stadium for just $500k more:
[http://www.nfl.com/news/story/0ap2000000360831/article/ponti...](http://www.nfl.com/news/story/0ap2000000360831/article/pontiac-
silverdome-auction-nets-500000-in-sales)

------
e40
I wonder what the property taxes, per year, will be on the 6000 parcels.

And, since many cities allow you to challenge the stated value, it could be
very expensive, in time, to challenge 6000 parcel values.

~~~
IkmoIkmo
Me too. I'm actually in Europe, only lived in Canada, but I was inspired by
this guy: [http://www.buzzfeed.com/drewphilp/why-i-bought-a-house-in-
de...](http://www.buzzfeed.com/drewphilp/why-i-bought-a-house-in-detroit-
for-500)

So I looked around a bit... the problem is you can often get a cheap house,
but only if you take over taxes on the property, which are often multiples of
the value of the house as they accumulated over the years. And then there's
annual property tax which are really high.

I don't exactly know why... But I've seen houses which get taxed on a value
that's 5-10x the value of the house. And beyond that, the tax rate is often 3x
higher than other cities.

So you might have a house that's worth just $20k, but then it's valued-for-tax
at $100k, and you pay 4% on that. So you're paying $4k in taxes or 20% of the
house's value every year. It's insane.

And it's keeping people out. I for one am not interested in paying $10k in old
taxes for a cheap home I have to completely newbuild, and then pay taxes on it
as if I was paying rent on top of a mortgage.

But it's probably a goldmine for any company with a 50-year vision who can get
economies of scale on things like construction, and can negotiate huge tax-
relief deals, e.g. waive old taxes and waive taxes the first 5 years etc.

------
therobot24
Land grab? Maybe. But at least _someone_ is buying the property. The prices
are very low for a reason, very little demand. I believe a renovation plan
needs to be in place within 6 months of purchase. I very much doubt it'll
happen for all 6000 homes, but will probably happen for at least some portion
of them. I really hope the city doesn't twiddle its thumbs following up on
these.

~~~
IkmoIkmo
True, sort of. But the contrary point is that they want to discourage e.g.
people from New York buying some home for $10k out of pocket, not doing
anything with it and hoping to flip it in 20 years, as in any big city a plot
like that alone is worth $50-60k. Demand is great, but you really want to get
people to actually live there, too.

Haven't heard of any requirements for a plan, can you elaborate? Afaik, you
own the plot and can leave it shitty if you want as long as it's not a safety
hazard.

> Often buyers are legally required to rehab these homes to bring them up to
> code. In Detroit, buyers are required to sign Affidavits of Compliance
> Responsibility, which obligates them to make repairs outlined in an
> inspection report. Only after that can a certificate of occupancy will be
> issued, which makes the house legal to live in.

Found this, seems to only apply for a certificate of occupancy (meaning you
could let it sit as a long-term investment hoping the rest of the city
improves to the extent your property value rises enough to make renovation an
easy profit) not sure if it's what you're referring to.

~~~
therobot24
I'll have to find it a bit later, but i remember reading when Duggan announced
the auctions that a plan for remodeling/renovation/etc needs to be set within
6 months. The idea being that you can waive back taxes if you plan on actually
doing something with the property other than letting it sit, however I can't
remember if it only applied to planned occupancy or across the board...

------
tempestn
Does anyone know why the properties being auctioned off appear to be so
randomly situated around the blighted areas? As others have commented, it
seems like a developer could do a lot more with a contiguous (as much as
possible) group of properties than with the same number spread across the
city.

------
huherto
If I am allowed to make a wild guess(wishfull). It is the mennonites.

They have a farming culture. They are very good at building their own
communities and Detroit is located next to some of the largest fresh water
lakes in the world. In farming fresh water is everything.

------
lovelearning
I sure hope the buyer is doing so for altruistic reasons. [1]

[1]: [http://www.businessinsider.com/detroit-foreclosures-may-
evic...](http://www.businessinsider.com/detroit-foreclosures-may-
evict-150000-people-2014-10?IR=T)

------
erok
Each home = $500. There is more than $500 of materials in each home. Aveerage
home has 200-300lbs worth of copper. Each home gets destroyed. I am calling it
right now.

~~~
abbottry
This assumes that each home has not already been stripped of copper, which is
not the case. Most of these homes are bricks and wood.

~~~
freehunter
I grew up in Michigan, and I can say with a good amount of certainty: any
house in Detroit that is unoccupied does not have a single thing of value left
in it, especially copper. Even some places that _are_ occupied have had their
copper stripped from them, sometimes live wires that results in the death of
the thief.

EDIT: Some links. Copper theft is a big deal in Detroit.

City of Detroit borrowing a page from scrappers and thieves by selling old
copper wire to boost Detroit's finances.

[http://www.detroitnews.com/story/news/local/wayne-
county/201...](http://www.detroitnews.com/story/news/local/wayne-
county/2014/10/21/detroit-bankruptcy-trial/17650679/)

Thieves stole copper from functioning pumping stations, leading to massive
flooding in Detroit recently

[http://detroit.cbslocal.com/2014/08/13/copper-theft-a-
possib...](http://detroit.cbslocal.com/2014/08/13/copper-theft-a-possible-
factor-in-metro-detroit-freeway-flooding/)

Copper thieves caught in a sting on camera

[http://www.wxyz.com/news/local-news/investigations/copper-
th...](http://www.wxyz.com/news/local-news/investigations/copper-thieves-
caught-on-camera)

~~~
erok
Crazy. Nevermind me then. I got no idea what anon 3mil guy is doin. _edit_
thanks for the links! nutty stuff.

------
tphummel
OCP gathering property for "New Detroit"

~~~
teddyh
You mean “Delta City”.

------
chovy
Hacker houses! Turn Detroit into a tech meca

------
bussiere
He may just want to play simcity IRL ...

------
Havoc
Smells like an investment banking scheme to me. "Buy When There's Blood In The
Streets"

------
drcode
Pretty easy to see how this'll turn out: Some moderatley rich person with
access to a 10% down payment of 3.2M is taking a gamble and is in way over
their head...

Just wait, within a year they will lose ownership of all these properties in
bankruptcy and they'll be back in the hands of the city.

~~~
DanBlake
Loans dont work that way in 2014. There is no bank in their right mind who
would grant a loan to buy this, even at 90% down. The 2007/8 crash changed how
banks and loans operate.

If anyone lent any money, it would be private investment- But those guys
generally dont fuck around for sub 10mm deal size.

This is one dude using his own/biz's money/

------
pearjuice
It is not unlikely Airbnb goes wild and tries to get feet on the ground in
Detroit and expanding its legal reach by being able to verify as institutonal
home exploitation company.

