Stock and Inventory
The city has plans, in conjunction with the federal government, to eliminate entire
neighborhoods around the city that have been deemed not "viable" for long term redevelopment
and growth or reinvestment. (See attached articles). The basic premise behind this
strategy is the fact that the city of Detroit is too big and the infrastructure
and housing stock is also. In Detroit's heyday it was second only to New York in
terms of population growth, wealth, etc. Its infrastructure was built for a population
at that time of 2MM people. There are only 800,000 people living in Detroit at this
time. The population has slowly gravitated towards more stable neighborhood "pockets"
however there are still many people who are living in areas where homes are boarded
up, burnt out, or falling down. These are homes that were thrown up because of the
city's significant growth in a short period of time due to an economy fueled by
the automotive and manufacturing sectors creating a boom period in the areas like
Detroit. Many of these "shotgun" homes were stick built; frame styled and only built
to last 50 years or so. They are not viable anymore. These are the homes that you
can find on an internet auction for $1k. Not worth buying though. However, banks
and institutional organizations who have been forced to become property owners do
not see the differences in stable areas and not so stable areas. They see an address
on a balance sheet and “write-off” great homes because of negative perceptions based
on zip codes. By taking advantage of what could see as a glitch in the banking world's
accounting and strategically acquiring in the best neighborhoods, we are in essence
insuring future capital appreciation because as the city's infrastructure shrinks
around certain core neighborhoods, the values in the areas will only appreciate.
We are buying homes in the best neighborhoods in the city. Some may ask if there
are thousands of these types of homes available and if there will ever be any type
of appreciation because of the sheer volume. There is definitely not a surplus of
the type of home we are buying. We have dedicated agents who check up on new inventory
at least twice daily to find any new homes that meet our criteria. The homes that
we are able to sell to investors are in the most affluent Detroit neighborhoods
and the ratio of renter to owner occupant is still quite low. It is our banking
and broker relationship cultivated over the past years that give us a competitive
advantage.
Locations – Detroit
We are typically buying in the following neighborhoods: University District, Grandmont/Rosedale,
Southwest Detroit, & East English Village. I have provided some links to some of
these neighborhood's community development corporations (CDCs). These are some of
the leading CDCs in the city because of the strength in their funding, their membership,
and the neighborhood as a whole.
The University District
http://www.udcaonline.com
Grandmont/Rosedale Community Development Organization
http://www.grdc.org
The investment strategy centers on the inefficiency currently present in the market
for single family homes in select neighborhoods in the city of Detroit, Michigan
and other surrounding markets. This inefficiency is caused by a confluence of factors
including the subprime mortgage foreclosure crisis, the ensuing tightening of lending
standards, the general downturn in the local economy and the sensationalizing of
this unfortunate situation in the press. The record level of foreclosures flooding
the market has so dramatically increased the supply of available houses, at a time
when demand for these houses is experiencing a temporary but dramatic dip, that
pricing is being driven down to unprecedentedly low levels. In conjunction with
this unique acquisition opportunity, a tremendously efficient and cost effective
process has been developed by which these houses are fully renovated within a matter
of days following acquisition and leased within no time creating a stable long term
cash flowing investment. For example, an investor who may have paid $60,000 in 2006
for an investment property, with an annual tax rate of $3,000, would yield an $850
monthly rent. Now an investor can pay $30,000 for that same property, have only
a $2,100 annual property tax liability, and still achieve a $750-$800 monthly rent.
This trend has increased the cash flow opportunities in this market substantially
and we believe for only a limited time. Today we are seeing investors, whose properties
are managed efficiently, achieving 15%-20% annual returns on their investment. This
downward spiral has resulted in a tremendous buying opportunity, for those with
liquidity, at prices well below their efficient market value. Houses that presently
appraise for between $100,000 and $150,000, once fully renovated, are being acquired
for between $15,000 and $40,000. This opportunity will exist in its current form
for a finite period of time while the market searches for an equilibrium point.
We project this will take 12 to 24 months.
Select Neighborhoods and Select Houses
Properties are being acquired only in strategically selected locations and each
house is individually inspected to ensure the asset and location fits the investment
strategy. Although these significantly deflated prices are available in virtually
every neighborhood in Detroit and some surrounding communities, properties are not
acquired without understanding the market dynamics of that particular micro-market.
A house simply being “cheap” is not sufficient motivation to justify a purchase.
The target neighborhoods are those with a strong historical basis. Target neighborhoods
are well maintained, working class neighborhoods in which community pride is evident.
The characteristics upon which a neighborhood is evaluated include historical rates
of owner-occupancy, population trends relative to competing neighborhoods, market
rate home sales prices on a six month trailing basis and current rental rates to
name a few. A few such target neighborhoods, in Detroit, for example, as detailed
in the most recently available census data, experienced population growth of 13.5%,
4.8%, 16.9% and 12.2% during a period in which the city as a whole decreased in
population by 7.46%. This in part illustrates the attractiveness of these neighborhoods
within the city. Each house that is acquired is individually inspected and a detailed
renovation budget is established prior to acquisition to ensure compliance with
the investment model. Each house is evaluated as though it would be owned on a long-term
basis.
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