Detroit propertyPosted on: 05 September 2011 by Laura Henderson
Laura Henderson visits Detroit for some savvy investments.
The American property market has certainly seen better days, last month’s figures hammering a further coffin nail into the property Klondike with prices having fallen for the eighth month in a row back to levels last seen in 2002. A dominant force, stifling property values and sending municipal governments scrambling to manage the crisis, is the mounting tally of foreclosures, with more than more than 1 million repossessions slated over the next two years. For some buyers however, this cut-price sector of the market represents a once-in-a-lifetime opportunity to snap up a genuine bargain. But is buying a repossessed home as simple as it seems?
These days the term ‘foreclosed or distressed sale’ is common currency in the property industry. Many global developers have found themselves in the (post-crunch) position of having built projects which are now depleted of buyers. Similarly, investors who have bought off-plan are trying to pull out and recoup their deposits. At the same time, owners looking to sell are increasingly twitchy about moving their properties off the market and banks have large numbers of repossessed housing stock effectively sat on their balance sheets when what they really need is liquid cash sitting in the coffers. All of this adds up to something that buyers love more than almost anything else – the opportunity for a bargain. But it isn’t without risk.
“Buying a repossessed property is vastly different from a straightforward house purchase,” stresses Brian Cross of London based brokerage Cicada Investments. “Unless you’re truly a real estate expert, it’s important to find an agent and lawyer with foreclosure experience in your chosen market. They’ll not only know what the past history of the property is and how this may affect your purchase, they’ll assess your ability to sell it on in the future. That is not to say that all foreclosed properties have something to hide – but you need to know where you stand from the outset.”
One Stateside location currently offering strong buying opportunities is Detroit in the Great Lakes State of Michigan. Property prices have risen by 20% in the past year, with manufacturing and auto industries in this bustling port city also making a climb back, bolstered by government investment. “A lack of readily available credit and the requirement for high mortgage deposits is currently keeping the opportunity to buy out of reach of many of the local population,” explains Cross. “For this reason the Detroit lettings market is producing high rental returns, which makes the city an ideal buy-to-let opportunity.”
Tapping into this potentially lucrative market, the company has launched a one-stop investment package for buyers that comes with a built-in rental component. “It ensures buyers are getting a true buy-to-let package and not simply a below market value property,” adds Cross.
Entry-level costs for a three-bedroom detached house start from £27,500 with additional first year set up costs in of approximately £2,000. “Once up and running these properties rent for a minimum $9,000 (£5,500) per annum. After property taxes, annual insurance and all other costs have been paid you are looking at a net return of around 12% per annum.”
Property aside, the package incorporates a 12 month rental contract and full refurbishment in order to achieve the best rental returns. “Cicada Investments properties are concentrated in neighbourhoods surrounding Grosse Pointe, such as the East English Village and Morningside in addition to the Western Suburbs of Detroit,” confirms Cross. “These locations are well suited to both working families and young professionals alike. Tenants here are working Americans requiring rental property for a longer term.”
Beyond the initial 12 month period, buyers can decide whether to renew their contract or source a letting agent of their own choice. “As the freehold owner of the property, clients are free to rent or sell according to their own personal investment strategy,” adds Cross. “Our lettings partners based in the States offer an online client login which allows access to all accounts and documents relating to the property. This online facility provides investors with access 24 hours a day from a UK base in addition to dedicated property managers during office hours.”
Like all well-executed strategies, Cicada Investments have due diligence structures in place to protect buyers, but with more repossession opportunities primed to hit the market in the coming months, investors need to carefully vet individual contract terms and developer credentials before taking the plunge. Says Cross: “A foreclosure purchase isn’t for everyone, but if you’re targeted in your research, have a good property manager and are able to consider a 3 to 5 year sale horizon then it’s an investment well worth considering.”
Choose your location wisely – location is a hugely important factor in choosing your property – so do your research. The low price of a property may cover up the fact that it’s not in a desirable location, or in an area where it’s difficult to rent out. Check all location details thoroughly and don’t buy unless you know exactly where the property is.
Check the property liens – A lien is a legal claim on a property by a lender or other entity that is owed money by the owner of the property. In addition to the outstanding mortgage balance, buyers need to be aware of other liens, which can drive up the purchase price. Examples include outstanding property taxes and unpaid repairs.
Sort your finances – Whether you use cash, a home equity line of credit, resources from other investors or mortgage products, secure the money for your purchase in advance. Sellers only want to work with serious buyers who are ready to buy quickly. You could miss an opportunity if you don't have your financing in place.
Do your sums – Calculate how much you'll need to sink into the property, outside of mortgage and tax payments. Necessary renovations, upgrades and other expenses can pile up and eat into your profit margin.
Determine how much you can afford – How much you can afford depends on the amount of cash you have on hand and the amount a lender is willing to loan you based on your credit rating, income and other factors. Use this calculator to see if you can afford the property.
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