June 15, 2023 01:31 PM
House flippers around the country have had a rough go of it the last year and more, and national data is starting to bear that out. But in Detroit, the sentiments — and data — are a bit more muddled.
A new report shows that pending home sales in the city of Detroit hit a five-year high for the month of May, typically one of the busier home-buying months.
The 606 pending home sales in the city last month represented an increase of 9.8% from April and was about 33.8% higher than one year earlier, according to the data from Farmington Hills-based Realcomp, which manages one of the multiple listing services used by metro Detroit Realtors.
While the report does not offer a specific reason for the jump, residential real estate industry sources point to activity by the investor community as a key driver. However, the specific maneuvers being done by investors differs depending on who you ask.
Many landlords in Detroit — facing trouble collecting rent and mounting violation bills from the city — are liquidating their assets, according to Terrence Bowers, a vice president with Southfield-based Bowers Realty and Investments and president of the Detroit Association of Realtors.
"They're done with the headache," Bowers said of the sentiment of many landlords he works with.
Erick Monzo, owner and Realtor with Mount Clemens-based The Monzo Group, said he's seeing some liquidation of property portfolios by his investor clients, but nothing particularly out of the ordinary. Rather, he attributed the jump in pending sales to a shift in the overall market and investors feeling more comfortable parking money in Detroit residential real estate.
"It's new flip investors investing in renovations in the city," Monzo said of the pending sales boost, noting that comparable sales data has long been seen as a challenge for investors in Detroit, but has become more reliable. "They can build a system based on the other flips they've done. As housing gets more expensive, they're looking for cheaper entry points."
Additionally, Monzo noted he's seeing strong interest — at least from many of his landlord and investor clients — in land contracts. The mechanism straddles the line between home ownership and renting, with borrowers paying to the property owner, essentially the bank.
A landlord contract allows the seller — the landlord — to be shielded from capital gains taxes, Monzo noted.
Investor perspective
Land contracts are just one reason that investors in the city are bullish for both the present and the future.
Israeli investor Shai Bar has acquired approximately 450 properties in the region in recent years, largely working with Monzo and a handful of property management firms. Bar, representing a group of investors, said his group has sold about 150 properties and another 50 on land contract.
Between the demand for rental properties and land contract deals, Detroit makes for a "big opportunity," Bar told Crain's.
The investor said he's purchased properties in inner-ring suburbs such as Warren and Eastpointe, but rental rates in Detroit have kept up or surpassed what can be charged in those communities, leading to substantially better returns in most cases.
The investor said he's purchased properties in inner-ring suburbs such as Warren and Eastpointe, but rental rates in Detroit have kept up or surpassed what can be charged in those communities, leading to substantially better returns in most cases.
Investor Nate Fanning and his family have myriad real estate interests around the city, including roughly 50 rental properties, commercial property and they own Uptown Barbecue, near Livernois Avenue and the John Lodge Freeway.
Fanning said he feels now is an opportune time to venture into real estate investing in Detroit, believing that high interest rates will eventually fall, leading to spiking prices from rampant demand.
Asked about his experiences dealing with the city of Detroit — which has been on a tear enforcing blighted properties — Fanning said it amounts to a cost of doing business, and the efforts are needed for the sustainability of the city.
"It's a little bit of a headache," Fanning said of the city's efforts to address blight and enforce rental code violations, some of which can be tenant responsibilities. "But if we want better services this is what has to happen. You have to take the good with the bad."
To that end, Detroit Mayor Mike Duggan has issued warnings to residential landlords in the city that enforcement is likely to continue.
"We have too many landlords in this town who own too many houses and can't keep them (in compliance), Duggan said during a March news conference announcing a new down payment assistance program for lower-income renters in Detroit.
"The city's enforcement of our rental code is only going to get stricter and stricter and those fines are only going to pile up," Duggan continued. "If you own too many houses and you can't keep them up to code, as a landlord you should think about talking to a couple of your tenants and say to them ... 'I can sell this house to you and there's down payment assistance available.'"
Since the program was announced in late March, city staff has approved 23 down payment assistance grants totaling $547,813, according to data from the city. There are an additional 40 approvals with a pending or upcoming closing date for a total of $955,875.
"We are pleased with the early roll out of the city's downpayment assistance program, but at this time, we aren't able to make that connection between landlords selling their properties and tenants purchasing them," Julie Schneider, director of the city's Housing and Revitalization Department, said in an emailed statement to Crain's. "We expect to have further information about the program and metrics soon."
Fanning said he's had a handful of tenants approach him about buying the properties they live in, but the landlord said he's not interested in selling at this time.
Investors hitting pause
Census data from late last year show that Detroit has returned to a city in which the majority of homes are owner-occupied, albeit by a narrow margin of just more than 51%.
Meanwhile, a report released last year by nonprofit think tank Detroit Future City found there's approximately 42,000 landlords in the city, the vast majority of which own just one to two properties.
However, many investors nationwide are hitting pause.
A report late last month by online brokerage firm Redfin found that investors bought nearly 49% fewer homes in the first quarter compared to a year earlier, with higher interest rates, softening rents and declining values cutting into their ability to make money.
Monzo, the Macomb County-based Realtor, was quick to note, however, that much of that decline in activity is skewed by investors re-evaluating markets in areas of the West Coast and elsewhere in the country.
Michigan, he said, remains on the radar for many investors coming from outside the area — including from international markets.
"They're coming to the areas that are affordable, and thank God we're one of them," Monzo said. "There are a lot of investment markets in the country, and we're kind of kicking their ass right now."
Landlords, investors drive up Detroit pending home sales - Crain's Detroit Business
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