Wednesday, May 25, 2011
Another Wide Eyed Detroit Investor See's the Light
Today illustrates why I started this Blog in the first place.
Yesterday I received a call from an investor, who was interested in having us manage a 20 unit building he has under contract. After a short conversation, we decided to meet at the property, and see exactly what this project would entail.
Well, as is often the case, it turned out the investor had never actually BEEN to the property. He wrote the offer blind. He took the pictures in the listing at their face value. He also took the sellers word, that the property was 80% rented.
I’m sure by now you can see where this is going. We pulled up at 10am today. I meet Mr. H for the first time face to face. It was obvious, that Mr. H was surprised to see the surrounding area consisted of boarded up, and falling down properties. The building in question appeared to be fully rehabbed in the listing photos. All new kitchens, new windows, etc. The reality, this building has not been actively managed in years. 25-30% of the windows were broken and or missing all together. The front doors to the building were gone! The vast majority of units had been kicked in, and stripped. Gang related graffiti was spread throughout the interior of the building.
5 units WERE occupied. But not by paying tenants. These units were obviously being occupied by squatters. The plumbing was missing from the basement. The electrical to the building had been jumped with scraps of metal. And unfortunately, this is not the first time we’ve seen a Detroit Rental Property presented for sale in this manner. In all likely hood, the seller hasn’t seen their property in months, if at all. But instead is relying on the pictures and information his “man on the ground” is sending.
This building (1442 Calvert, Detroit) was up for sale on LoopNet.com for 130,000.00. http://www.loopnet.com/Listing/16463161/1442-Calvert-Detroit-MI/
I figured it would cost 100K just to bring this up to a legal, rentable status. At that value, we advised him to offer 50K, or walk away from the deal. Thankfully, he decided to walk away.
I came back to the office, and pulled him some listings in Mount Clemens, smaller units, but in MUCH better shape. They were asking 6500 per door in Detroit, and the building needed significant work, with essentially 100% vacancy, and the need to evict several people. I was able to show him a 5 unit building in Mount Clemens that was in livable condition, for just 7800 a door. The taxes in Detroit were 1500 per door. In Mount Clemens, 950 a door. The Mount Clemens house, needed approx 1500 worth of work per door, Detroit, 5-6000 per door.
And of course, the rental income. In Detroit, the 2 beds would have brought 400-450. In Mount Clemens, 450-500. The numbers were simple. On a spreadsheet, the numbers in Detroit are only slightly better. BUT when you factor it over 5 years, Mount Clemens becomes a better choice. And when you take the decision out of the vacuum of a spreadsheet, and put it in the real world. It’s a no brainer. Unless you’ve physically walked the halls of these buildings as many times as I have, you just can’t appreciate the true condition, and level of effort required to do a Detroit Apartment.
Thankfully, Mr. H called us before being totally locked into this Detroit project. It looks like we will be able to get him out of his current purchase agreement, and move him to a much much safer suburban property.
- Summit Consulting
- Roseville, Michigan, United States
- Detroit Property Management - www.MetroDetroitRentals.com. - www.DetroitRealEstateInvesting.com We are one of the fastest growing Investment and Management Companies in the area. We have a unique blend of talents, that no one else can match. A licensed, Appraiser, Builder, Realtor, our insites into the market have allowed to double in size, during the "worst real estate" market of our lifetime.