Detroit house flipping practices and investment strategies

Detroit House Flipping

Detroit Housing Revamp

Detroit is a city that is indeed behind the proverbial "eight ball" in a lot of ways. The nastier parts of Detroit are full of abandoned and burned houses, crimes go unreported or at least unanswered and local agencies are uniquely pathetic at completing and providing even basic services at a satisfactory level. However, not unlike work industries and neighborhoods of yesteryear, it is possible for the Detroit housing market to see a rebirth. This would need to be done carefully due to monetary, cultural and economic pressures but it is entirely possible. While the house flipping alone would not solve the problems that Detroit has, it is absolutely part of the overall solution and the free market is the best source to use as the government money well is currently tapped out.

Analysis

There are some that have stated that many large portions of Detroit and surrounding or nearby areas such as Flint should simply be razed and left bare. There is probably some wisdom to this given the exodus of people that have left the area not unlike what happened in New Orleans after Hurricane Katrina ravaged many neighborhoods with most of them being poor and destitute. However, housing and homes are needed and any person or entity rehabbing or building houses in the Detroit areas needs to be very careful because doing so the wrong day can lead to loss of money or complaints about outcomes or events like gentrification and racism.

However, there are some areas in Detroit that are worth reviving and this can be done without causing home prices to skyrocket. However, there would be a concern in spending a lot of money on any given house because there would fear of not being able to make back even what was paid for the house let alone any profit. However, while things are not that bad in Detroit, they are still pretty awful. Even so, there are positive developments that are starting to spring forth in the housing, government and private business arenas in Detroit. Ford and General Motors are starting to thrive again and Chrysler is also faring decently even though they are now owned by Italian automaker Fiat (Healey, 2014).

Before going any further, the industry and area in question will be described and detailed. The thing about home upgrades and maintenance is that very few home owners have the means or the knowledge to do themselves. Add in the fact that home upgrades through conventional contractors are generally quite expensive due to the profit motive of the contractor as well as the difficulty in doing changes of any large size or scope when the house is occupied. However, when a home is empty and owned by the person investing the money for future sale and that person has the knowledge and connections to significantly rehabilitative and fix the house without an insanely large expense, then there can be a quick "flipping" of the house. The house is bought, fixed up in fairly short order and hopefully sold before more than one or two mortgage payments are necessary if the house is financed. Even if the house is bought outright, the house has to then be sold for more than what is paid plus what is sunk into the house to make it better for a future homeowner.

The general focus of flipping a house would normally center on the kitchen and the bathrooms first and then the infrastructure of the house like the plumbing and electrical (Inspect A Property, 2014). However, any rooms that have obvious problems and flaws like holes in the walls or ceiling, bad carpeting and so forth will need to be fixed as well. However, these expenses are usually rather minor so long as the structure of the house is not compromised and there are not very expensive problems that must be fixed as part of any renovation such as mold and asbestos. The latter, even if present, does not always have to be fixed but if the asbestos has to be disturbed it then has to be removed and this cannot be done casually as asbestos can cause cancers such as mesothelioma. There is also the valid concerns of comparing the costs that are needed compared to the cost of homes in the area. In areas like Detroit, there are probably homes that can be had for free or close to it but any house flipper would probably need to aim higher so that the overall price range from purchase to eventual sale is wide enough to make the business risks worth the effort.

Another facet that has to be taken into account in the house flipping industry is the ongoing economic and other fluctuations that can occur. Housing prices are usually fairly predictable in that neighborhoods rise and fall on their own but they almost always rise. Houses are touted as the primary way for any average person to create wealth as they can be financed over fifteen to thirty years and they hardly lose value as compared to other assets like cars and electronics. However, the housing market is not without risk. One example of this is the fact that some areas get economically depressed and destitute quite quickly and this has manifested quite starkly in Detroit since the automakers started struggling and the Detroit area does not have much to hang its hat on industry-wise other than the auto industry. However, there are more widespread examples of housing prices going into the proverbial toilet and the recent housing bubble bust that started in the mid-2000's and got very nasty during the Great Recession from 2007 to 2009 has still not healed and this has been truer for some areas more than others. One such area has been Detroit. In terms of the wider effects and phenomena that have hurt both Detroit as well as the wider country has been the fact that loan money for homes was entirely too easy to get for the longest time and it caused home prices to rise to an unsustainable level (Vogel, 2013). Not unlike gas prices getting to a point where the market could not support it and/or the consumers would not accept it, the price's floor fell out because the demand was eviscerated (Foran, 2013).

Regarding a forecast for the housing industry, the wider national market is starting to crawl back ever so slightly and this path should continue to arc upward and onward in the coming years and decades (Esswein, 2014). It is moving fairly slowly right now because while middle- to upper-tier jobs are basically back to pre-recession levels, the same cannot be said for lower-level jobs that are low pay and/or low-skill and the auto industry is certainly included in that summary. Further, a lot of the higher jobs in the lower tier have trended towards lower pay and this has hurt the middle class (Lowrey, 2014). As noted before, Ford and General Motors are doing fairly well although the latter has been having major issues with recalls relating to their ignition switches in cars that are as old as ten years (ABC, 2014). Interest rates are going to be a key indicator of progress in the housing industry and they have remained in the basement since being lowered to where they are now during the Great Recession (USNews.com, 2014). However, they were low before that but not as low as they are now. So long as economic progress remains perpetual, even if it is small, the industry should arc up gently over the next generation but the chances of any major shift in rates or home prices is unlikely for at least the near future although not everyone has refinanced for whatever reason (Bradford, 2012).

Government regulations in general really affect the lenders more than the buyers but there are effects and conditions that will affect all buyers to some degree but buyers in Detroit even more so. The first effect would be that getting a mortgage, assuming that is the route taken by this group in whole or in part, will be harder to pull off than it was before as cash reserves and steady income will be a fairly necessary or at least optimal prerequisite to getting any major funding from banks. If the group can operate in a cash only basis at least as it relates to buying houses, that would help avoid a lot of those problems. Another issue is that the clarion calls about gentrification are quite likely to happen in Detroit for the flipped houses if the margin or profit is too large and/or if the price point of the home as sold post-flip is too high for buyers. This focus gets all the more strident if the prior residents of the area are gentrified out of the area. Precisely this is being batted about when talking about rebuilding the ravaged areas in New Orleans that were laid to waste and ruin by Hurricane Katrina (Burdeau, 2012) (Campanella, 2013). While the above may not seem related to government meddling, it most certainly is. The interest rates charged and who gets money is greatly affected by government regulations, requirements and restrictions. Furthermore, local governments are going to get testy if they feel that house flippers are profiteering on prior homeowners in any way similar to what pawn shops and payday loan companies do when they take clear advantage of people that need money and need it now. In a similar way, people need housing and if they get priced out of their neighborhood, this will lead to them going to a poorer area or even leaving Detroit and a ton of people are doing the latter. However, beyond these cultural and mild governmental issues, the playing field is still fairly straightforward to traverse so long as the facts specific to Detroit are taken seriously and in a complete fashion.

Regarding the unique position in the industry, there are probably many people that would like to seize on the Detroit situation but due to the mass exodus still continuing and the fact that Detroit is actually in bankruptcy right now, this would seem to scare off a lot of people (Milford, 2014)(Seelye, 2011). Of course, the homes that are burned out and/or clearly flop houses for drug users and pushers, there are neighborhoods that have homes that are worth something and could be worth a lot more if rehabbed even in an incremental and basic fashion such as some fresh coats of paint, some new doors and drywall and other fairly minor fixes. It is not as of these houses can or should get granite countertops and the like as the focus should be more on affordable housing for people that want a solid house that does not cost too much. This focus is what will set our group apart from others because while profit is absolutely the motive, any notion that there will be gentrification or other ill cultural effects as a result of the house rehabbing is obviously not true. Also obvious is that the Detroit government is ill-equipped to undergo such programs but any razing or wide-scale rehabbing of the more squalor-ridden areas will need to be left to people with much deeper pockets.

One major reason why success is fairly straightforward to achieve is because there are not really any corporate giants that are engaging in the same tasks and upgrades. To be sure, most of the other outfits are probably just regional or local contractors that are trying to play the same game as the group behind this report. The difference with this group is that the cost-effectiveness of the upgrades as well as the houses chosen for the updates will both be done very carefully as spending too much and thus being out of tune with the price points and preferences of the local populace will only lead to less profit or even a loss on each house. The profit level for each house will not be all that great but if the number of houses is large enough, then the profit that can be realized can be quite large and it can be garnered in such a way that does not roil the local people and/or the governing bodies and people that are on the lookout for people that are looking to make "obscene" profits as a result of the suffering or challenges of others. The chances of this type of accusation being made skyrockets when minorities are dominant people involved. Much the same dynamic would exist in areas like Atlanta and Kansas City, MO and for the same reason. However, Detroit is the most poignant and obvious example of this. New Orleans, although a lesser one, has proven to be one as well.

One potential risk in this project is noted above and in prior positions in this paper and that would be the cultural and political influences that would likely weigh in on any outsiders or perceived outsiders engaging in housing rehab for profit. However, there are other limitations and risks that should be recognized as well. The second overall risks is the selection of the wrong houses in terms of being able to rehab and make a profit off of. To be sure, there are many houses in Detroit that are beyond repair and/or are subject to be razed or redeveloped in the near future. Beyond that, there are some neighborhoods that should be avoided as many people will not want to buy a home in said areas due to less than optimal location, crime or because the services in the area are lacking to none. Yet another risk would be the city not being willing or able to provide the proper support services such as issuance of permits, sending of inspectors and other very important tasks that only the local government can provide. It will have to be assumed in advance that a certain amount of lead time will be necessary to get things done with the local government so perhaps scheduling things in advance will be warranted as opposed to waiting for everything to be done. Meetings can be pushed back at the first sign of problems that will lead to the house not being ready for inspection.

More long-term risks is that the market will continue to look dim and this could lead to people either staying put or skipping town rather than investing in an improved house. Beyond that, the amount of people that would be ready and able to buy a house from an income or work location standpoint may be compromised and this could further shrink the pool of available buyers. This in turn would lead to long turnaround times between the purchase from sellers and sale of the homes to new buyers and this could hold true regardless of how quickly the home is turned around. Of course, the amount of money spent on mortgage payments and so forth would rise with each day and week that the home is not sold. As such, perhaps a cash-only purchase system and only for houses where profit is at least close to a sure thing would be the way to go so that homes can be queued up and ready for sale but not in a way that requires ongoing costs other than taxes and other fees that are not avoidable.

One major limitation to this program and plan is that it is not entirely known if the auto industry is going to continue to recover and the late spate of recalls that General Motors is enduring, and Ford as well to a much lesser extent, is proof positive of that. Furthermore, the other Detroit auto giant, that being Chrysler, is majority-owned by foreign bodies and the likelihood of that changing in the near future is not all that good. However, this is quite true of many carmakers in that they operate in the United States extensively but yet do not have their "roots" in the country. Examples of this would include Toyota, Hyundai, Kia and Nissan. There does not seem to be any indication that Ford and GM are next to meet Chrysler's fate but things can change on a dime if recalls continue or sales otherwise falter. Another limitation to this project and plan is that interest rates and/or financial regulations pertaining to the house flipping are subject to change quite quickly at the local, state and federal levels.