Scams, ignorance burn foreign buyers of Detroit properties

[December 09, 2015]    By Megan Davies

DETROIT (Reuters) - Buying a property in Detroit a few years ago seemed like a steal for overseas investors – as little as a few thousand dollars would get them a house in a city that had hit rock bottom and could only see better times.

Yet the promise turned into a nightmare for many and stories of properties vandalized, ransacked, left untended and un-rentable have sapped the interest from overseas buyers, real estate brokers say. "The bottom has fallen out of the speculative market," said Darin McLeskey, co-founder of Denovo Real Estate, who said he had received a lot of "cries for help" from investors.

For a city that only emerged from bankruptcy a year ago on Thursday, any setback in the real estate market's recovery could hurt prospects of a sustainable rebound by depressing property tax revenues and making Detroit less appealing to live.

Property tax revenues fell to $100 million in 2014 compared with $183 million in 2006 as a result of population loss and the aftermath of the 2008 credit crisis, according to data from the Citizens Research Council of Michigan.Detroit largely missed out on the mid-2000 housing boom and was hit harder than the United States overall during the economic downturn, according to property website Zillow. Now, just as this city of 680,000 is gaining a reputation for industrial cool, attracting young professionals and artists, its housing market has become tainted by reports of scams and dubious practices.

"Nothing is as good as it seems," says Des Curtis, who lives near Bristol, England. Curtis says he invested $45,000 in a Detroit house in 2011 with the promise of steady rent but had his property vandalized and deemed unrentable. "My lesson was: keep away from Detroit for many years until it’s been re-established."Curtis tried to hold the agents responsible and discovered he did not actually own the property. He said, after a long fight, he recovered most of the money via settlements with firms he declined to name due to confidentiality agreements.

FAKE TENANTS A reputation for scams "creates blight for the city, it creates ill-will towards Detroit," said Debbie Schlussel, an attorney and conservative commentator who represented plaintiffs suing property management company Metro Property Group LLC in 2013. They accused Metro of buying homes in Detroit in unpopular and destitute locations for $500 to $5,000 and selling them to investors for up to $50,000, despite knowing they were unlikely to be rentable, according to the lawsuit. The firm made fraudulent guarantees about the properties, failed to do repairs when promised, and created fake tenants, the lawsuit alleged.

In court documents, Metro said that the vast majority of investors were satisfied with their returns and the services provided.

A judge held Metro and other defendants liable to pay the plaintiffs $625,000, according to court documents.

"The case was settled with a strict confidentiality agreement," said David Fink, lead counsel for the Metro Property group defendants. "The case was not adjudicated, so the court never made any findings of fact regarding the allegations in the complaint or in the counter complaint."

There is no hard data on foreign buying since many transactions are done through especially established companies or intermediaries. However, out of seven Detroit real estate agents interviewed by Reuters, six said that foreign demand was down.

There are other indications of dwindling foreign interest.

Data from Zillow showed that cash purchases - an indicator of interest from those looking for an investment rather than a home – accounted for 45 percent of the Detroit market in the first quarter of 2015 compared with 74 percent late in 2011. Property website Trulia figures also show overseas searches for Detroit properties fell to 6.2 percent of all searches in November from 10.1 percent in February 2014. The figures are one-year rolling averages.

Bernard Youngblood, Register of Deeds for Wayne County where Detroit is situated, said he has established a property fraud task force which receives a variety of complaints about overseas purchases.

"There are a lot of scams across various countries trying to get investors to buy Detroit properties," Youngblood said.

Wayne County Assistant Prosecutor Mariam Bazzi said her office had successfully prosecuted a case involving foreign investors and was investigating another.

A representative for Detroit's mayor's office did not respond to a request for a comment. (Graphic: http://reut.rs/1m7kjLq)

BLOCK-BY-BLOCK With an eerie mix of beautiful well-kept homes or stately mansions and burnt-out ruins next door or just a few blocks away, Detroit is a market like no other. For example, Palmer Woods, with its Tudor-style houses lies streets away from run-down properties and empty lots across Woodward Avenue, Detroit's major thoroughfare.

Even after price rises in the last few years, it remains the cheapest among the 50 largest U.S. cities, according to Zillow.

"It was the only place in the developed world where you could buy a detached brick house, three bedrooms, in a nice lot, for under $10,000," Canadian engineer Hamid Shad said in a phone interview. Shad said he got interested in Detroit 2-1/2 years ago and initially had some bad experiences with contractors but later developed a network of locals who helped fix up his properties.

Prices vary dramatically depending on the neighborhood, the street and the individual property and while some areas are stagnant, others have seen significant gains. Opportunities still abound for savvy investors but so do pitfalls for the ill-prepared.

According to Zillow, median home values for the city recovered modestly to $39,800 in October from a low of $37,300 in 2012, but still well below $79,500 in December 2005. Homes fetch more than $260,000 in some affluent suburbs such as Troy and West Bloomfield, still a bargain compared with $1.1 million in San Francisco.

Brokers say overseas investors got burned by their own inexperience or were misled by companies misrepresenting the state of the properties and over-promising rental income.

Foreigners also had trouble finding contractors or property management companies they could trust.

Amsterdam-based investor Edwin Schouten said he was shocked to find his locally-managed houses empty and vandalized.

"The first red flag was when I found houses empty and I could see the grass growing half a meter high," said Schouten, who now organizes his own property management.

Many investors have never visited Detroit and were unaware of problems such as buying the lone intact house on an otherwise abandoned block, brokers say.Michael Jordan, founder of StrategyProperties.com, estimates overseas demand has fallen by a third since 2013 and says foreigners who come to him to sell are often taken aback by losses they would need to take.

"The problem I run into is that investors are so deep in the hole."

According to a staff member at a Detroit title agency, who requested anonymity, foreigners were still interested in the city but have become savvier - buying via trusted intermediaries and "making real money." Hong-Kong-based investor Joseph Hung is among those who have not given up. Speaking by phone, Hung estimated that his roughly $155,000 investment in four properties and one plot of land was now worth $200,000. "I'm confident that Detroit will eventually come back.”
 

(Reporting by Megan Davies; Additional reporting by Rebecca Cook; Editing by Martin Howell and Tomasz Janowski)

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