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Wednesday, May 23, 2007
MapQuest can show you the fastest route... and the shortest route. But it doesn't warn you about bad neighborhoods...
I'm in Detroit to investigate the real estate meltdown this week. Last night, I had a dinner appointment with six Detroit businessmen. Roma Café was only two miles from my hotel, and I figured I'd see more with my boots on the ground, so I walked... taking the direct route MapQuest suggested.
Detroit is a bit like Baltimore. You can find yourself in a slum only a couple of paces off the main road. I was walking along when I started to notice lots of empty drug baggies scattered along the sidewalk. I looked up and saw a small gang of hustlers hanging out on a nearby doorstep. I felt them pointing at my chinos and Timberland shoes, so I stepped up the pace.
In the end, everything was fine, although I did glance over my shoulder a couple of times. When I told the guys at the restaurant I walked, they looked at me as though I were lucky to be alive and told me not to walk around Detroit anymore.
The businessmen I ate with confirmed my theory... that Detroit is a contrarian utopia.
Four of the men were straight investors. They called themselves 'slumlords.' They buy property on the auction block, "rehab" it, and then rent it out or sell it. They also run property management companies and help people get title insurance and mortgage loans.
Next, you have Andy. At 24 years old, Andy moved to Detroit from Ohio 18 months ago to get into the foreclosure market. The banks repossess houses (from upside-down subprime borrowers usually). But banks don't want to be in the real estate business, they want to lend. Holding property ties up their reserves. And as they can lend $10 for each dollar of reserves they hold, a $100,000 property actually holds up $1 million of potential loans.
In short, the bank will do almost anything to get these houses off their balance sheets, including selling them at 40%-50% discounts... especially to people like Andy who can pay cash upfront. In effect, Andy makes 40% equity out of thin air the moment he buys the bank's property.
For example, he closed on a house yesterday. It was listed at $180,000. He bought it for $110,000. He'll sell it next week for $160,000. That's $50,000 created out of thin air. The bank wins, Andy wins, the homeowner wins, and Detroit wins.
Andy says he loves the negative press articles about Detroit. He clips them out and shows them to the banks to get better deals on the property. (As an aside, none of these guys wants me to tell this story. They don't want anyone to find out how easy it is to make money in this town.)
Lastly, we have Ken, a wealthy businessman. He grew up in Detroit. He already owns millions of dollars of property here, including commercial warehouses. Now he has his eye on the penthouse apartments of the 1001 Woodward - the skyscraper I inspected today.
Ken says there's plenty of old wealth in the suburbs. It's just downtown that's so depressed. But he says people are crying out for a downtown renaissance... with bars, clubs, nightlife, and retail. It'll come, he says. And when it does, things will snowball fast.
Ken says he wants to set up a Detroit property REIT. The first thing he'll do is buy the penthouse condo apartments. Then, he'll go into the suburbs and buy the vacant $2 million mansions on sale for $1 million. It'll be an easy investment to sell. Great yield, no downside.
Here's another thing to consider about Detroit: They're giving away huge tax breaks if you move here, live here, or invest in property here. If they're trying this hard to get people to live here, imagine what kind of breaks they'll give to businesses to come and create jobs here. Detroit will bounce back. It's just hard to imagine it right now, which is why investment opportunities are so bountiful.
These guys are all working hard and kicking butt in Detroit. My hunch about this city is right: Making money in real estate here is very easy right now, especially if you have ready cash to buy what no one else wants.
More to come on Detroit next week...
P.S. Did you know? Wayne County, home to Detroit, lost more people from the beginning of 2005 to the end of 2006 than any U.S. county except the four counties in Louisiana and Mississippi devastated by Hurricane Katrina, according to Census figures released in March.
P.P.S. Click here to read a recent USA TODAY article about Detroit's meltdown
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