Rebecca Cook/Reuters
If you're offering cheap U.S. property, Canadian investors will find you. No advertising necessary.
"I don't know where they're coming from," said Caroline Chen, a real estate agent in suburban Detroit. "I guess they just find me on Google."
Ms. Chen has been fielding calls for months from prospective Canadian clients hunting for distressed real estate. Some make the trip down, mostly from Toronto and Vancouver it turns out, searching for deeply discounted condos. After a tour of the city, some come back – with other would-be real estate investors in tow. "The next time, they come in a van with four, five, six other buyers," she said. "Almost every agent in my office got a referral."
Every sensible investor aims to buy low. And it doesn't get much lower than Detroit. Afflicted by a crippling population loss and the decline of Michigan's manufacturing base, Detroit easily meets the first necessary criterion for investing in distressed assets – it's cheap.
"Twenty years from now, if Detroit reinvents itself, you could look like a genius, having had the foresight to buy in 2013 when things were cheap," said Mike Wolf, a Calgary-based investor and consultant who bought a handful of single-family homes in Detroit after the housing crash in 2007. But, he cautions, the intervening years might not be so pleasant. Investing in Detroit property requires a strong stomach.
Since the U.S. housing bubble burst, Canadians have combed through the wreckage for properties priced to sell urgently. They focused on stricken markets scattered through the Sunbelt that offered both good rental income potential and likely appreciation from extreme lows. Canadians amassed vacation homes and condos in Arizona, California and Florida's Gulf Coast. More than half-a-million Canadians now own property in Florida.
But increasingly, the hot spots of the housing crash are picked over. The intense scrutiny by international buyers, which rose after Warren Buffett said last year he'd buy a "couple hundred thousand single-family homes," if it were practical, has pushed investors into alternative markets, even Detroit.
When Detroit became the largest city in U.S. history to file for bankruptcy in July, many saw a chance to bet on the eventual recovery of a major American city at its depths. "It's definitely increased interest in the city," says Calgary-based Wendy Fedoruk, whose U.S. Property 101 Real Estate Consulting Services advises Canadians on U.S. real estate deals. "But it's not for the faint of heart."
Mr. Wolf seconds that. The homes he bought looked good on paper. Scattered throughout what were once attractive Detroit neighbourhoods, houses priced in the $30,000 to $50,000 (U.S.) range could fetch $700 a month in rent – the makings of a solid return. But that investment rationale relies on the steady flow of rental income.
"What you're going to get in an economy like that, where people are losing jobs in a one-industry town, people will pay rent for the first month or two. After that, nine times out of 10, they're going to stop paying rent." All of his tenants went into arrears. After the long, cumbersome eviction process, vacancy presented its own problems. "People would steal furnaces, hot water tanks, sinks toilets, you name it. Anything with any value."
An income property is of little value without reliable renters, said David Kaufman, president of Toronto-based Westcourt Capital Corp., a consulting firm specializing in alternative investments. "If the cow won't produce any milk, the fact that the cow's on sale is completely irrelevant." The Sunbelt, by contrast, has clear investment appeal. It has desirable neighbourhoods with stable or growing populations in economies that, if not stellar, are at least not devastated. The housing markets there may have crumbled, but sound fundamentals otherwise has assured a recovery. "The pendulum just swung dramatically in the other direction," Mr. Kaufman said.
The same cannot be said for Detroit, a city mired in historic decline. The manufacturing sector lost 90 per cent of its jobs over the past 60 years. Over that same period, its population fell from almost two million to 700,000. There are now tens of thousands of abandoned buildings blotting the city's neighbourhoods, many of which are listed for below $1,000. Buyers in Detroit are also on the hook for insurance, maintenance and taxes, which are often based on outdated appraisals from the peak of the market. A new owner of a Detroit home purchased for $20,000 might owe $5,000 a year in taxes. Investing for appreciation, on the other hand, makes sense only under the assumption that all that has gone terribly wrong in Detroit can be fixed, Mr. Kaufman said. "Some people wonder if Detroit will ever emerge from bankruptcy."
While Mr. Kaufman said there is still investment potential in U.S. housing, he says latecomers to the distressed property bazaar might simply have to accept that they've missed out on the best deals. "An investing opportunity is a little like a shortcut home from the airport, once it's been identified it's probably a little too late to capitalize on it."
Tim Shufelt