Detroit can't sell repo houses, even for $500

DemolitionWhat if you gave a house giveaway and nobody came? This was almost the scene last week as Wayne County (Detroit) tried to auction off almost 9,000 repossessed properties only to find over 80% of them drew nary a single bid, even with the minimum set at $500.

According to Reuters, these properties would fill Central Park in New York City.

The auction didn't go smoothly, however. Out-of-town speculators cherry-picked prime properties in areas such as the Boston-Edison district, while locals who showed up too late for registration weren't permitted to take part.

Complicating the Detroit realty market is a new rule, the Home Valuation Code of Conduct used by Fannie Mae and Freddie Mac that requires the mortgage lender, rather than the mortgage broker, to arrange for an appraisal as the basis of the mortgage.

Since mortgage brokers are usually local, they naturally use local appraisers familiar with the local market. Mortgage lenders, however, often distant from the location, may well deal with appraisers that aren't savvy about the local market, and consequently undervalue a house and kill a financing deal.

I spoke with Tony Gebrael of Hometown Demolition Contractors in Sterling Heights, Mich. who told me that the cost to demolish a typical home in the area ranges between $5-$15 a square foot. A 2,000 square-foot home would therefore cost $10,000-$30,000 to tear down.

This means that if Detroit is sitting on most of these roughly 7,200 unsellable properties, it could cost the city around $140 million to pull them down. Detroit is already running a $300 million deficit.

And every demolished home is one less potential source for tax revenue. Talk about a vicious cycle...
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