Buyer beware

Watch the full episode. See more PBS NewsHour.

A few weeks back, in Aussie investors flock to US housing fund, I noted the relative undervaluation of US real estate compared with Australia, and how the newly launched US Masters Residential Property Fund, which is targeted at properties in the New Jersey area, was over-subscribed from Aussie investors seeking exposure to the US housing market.

While I believe that homes located close to New York City, like those targeted by the US Masters Fund, could represent good value (high property taxes aside), the same cannot be said for property investment in declining manufacturing centres like Detroit (Michigan) and Cleveland (Ohio). These cities have been losing population for decades as manufacturing jobs have moved offshore, leaving behind a swag of vacant derelict homes, many of which require demolishion by the city.

Despite the urban decay being experienced in these rust-belt cities, unsuspecting international property investors have been buying-up these vacant homes en masse. At $US1,000 a home, many investors believe that they have snagged a bargain, only to then find that there is essentially no resale or rental market, and that they are on the hook for property taxes and the maintenance attached to these homes.

The above video, from America’s Public Broadcasting Service (PBS), tells the cautionary tale of Cleveland (Ohio). While the whole video is worth watching, for me these are the money quotes:

PAUL SOLMAN: Investment banks once owned about 70 percent of the blinkered buildings in Cleveland. But more and more, they’re off-loading them as basement bargains to buyers looking to flip them for a fast profit.

Deutsche Bank sold this house for $500 to a firm called XBY, LLC.

FRANK FORD: A company like this is going to put this on the Internet, hope that some unsuspecting person sees it on the Internet with maybe a flattering photograph from a different angle, and pays $1,000. And then they have made $500 on top of their $500 purchase from Deutsche Bank for doing virtually nothing…

PAUL SOLMAN: Not much reason to invest in landscaping, even if the law demands basic upkeep…

ANTHONY BRANCATELLI, Cleveland City Council: We have been getting investors from overseas who are buying properties on the Internet, and it’s been crazy because then we have to chase people down overseas. And in the meantime, these poor residents have to deal with the aftereffects of it.

PAUL SOLMAN: Local resident Farai Malianga met a German investor and asked:

FARAI MALIANGA, Cleveland: Can you come and cut your lawn? And he says, you know, “Nein.”

(LAUGHTER)

PAUL SOLMAN: At the Cleveland Housing Court, Judge Raymond Pianka fines owners who let their property go to seed.

RAYMOND PIANKA, Cleveland Housing Court: In December, we had to go on Skype and Skype a Coptic bishop in Cairo, Egypt, who had purchased property in Cleveland, Ohio. We get calls regularly from Israel, from the United Kingdom of people who have purchased properties in the after-market.

PAUL SOLMAN: Please do not tell me that the Coptic bishop in Egypt is a deadbeat when it comes to keeping up his property.

RAYMOND PIANKA: He pled no contest. He repaired the property. He was fined. And he is no longer in housing court.

PAUL SOLMAN: Foreign investors have been bottom-fishing for great deals, hoping the real estate market will stabilize.

If it looks to good to be true, it usually is…

Unconventional Economist

Comments

  1. So on one hand we have an investment instrument to make money on these houses. I wonder if there is another instrument that bets these houses will be demolished?

    I give myself zero points for originality for that idea.

  2. Buying a house for $1000 LOL.

    On the other hand you can get nice houses and apartments in Chicago for half what you would pay in Melb, Syd or Bris — sometimes even less. Sure property taxes a much higher than council rates — a key trap for young players — but prices in Australia are insanity by comparison.

    • What somebody pays for stamp duty in Australia can cover 10 years of the difference between council rates and property tax in USA. 10 years is longer than how long people keep a home these days.
      So we actually pay more in “combined property taxes” than Americans.

  3. We are in the middle of purcashing investment property in the US. Something we have been working on the past 6 months.

    Will keep you all posted.

  4. There is way too many pitfalls for buying property in the U.S. One of the big problems which gets little media attention is alot of the U.S banks cannot prove they own the property they are trying to foreclosing on.

    Just some extra fluff for “New York state” R/E
    http://www.cnbc.com/id/43455507
    “In New York State, it would take lenders 62 years at their current pace, the longest time frame in the nation, to repossess the 213,000 houses now in severe default or foreclosure, according to calculations by LPS Applied Analytics, a prominent real estate data firm.

    Clearing the pipeline in New Jersey, which like New York handles foreclosures through the courts, would take 49 years. In Florida, Massachusetts and Illinois, it would take a decade….[/quote]

  5. UC you know my views on it, and this matches what I hear from a few people I tried to warn which were sucked in by the snake oil salesmen. Very hard/expensive to deal with from here as well once you’re obligated.

  6. My view is, if it represents such a good investment why aren’t the locals interested?

    You know things are wrong when you go shopping (early 2011) in a Perth mall and you see a stand selling Melbourne apartments as an investment….

    I also recall a friend telling me about bargains in Florida in early 2008……

    And I saw a stand spruiking US homes at the Sydney CBIT exhibition…..

    So if a friend or I see people spruiking investments that cannot meet “local demand”, I tell myself to bet against it.

    • The_Mainlander

      There is a significant number of marketing campaigns underway in Malaysia for Mrlbourne and Sydney properties all citing excellent investmnet/returns etc.

      Caveat Emptor!

      • when I was last in Singapore they were having spruik seminars on Aust property (perth, syd & melb) at the hotel I was staying in, I tried to attend but they were invite only to residents of singapore (think they thought I wasn’t going to buy one … how did they know)

    • npi, those Florida bargains are even cheaper now.

      There is an area south of Melbourne FL called Palm Bay, and there were new (4 year and more – never been lived in) homes and they were spruking them in San Diego last year. One of my colleagues brought one, and the prices have dropped quite bit more since then. Other big problem; you find it difficult to rent them due to falling high tech employment in that area.

      The trouble is that lots of people, not just Aussies, have been sucked in.

      Here is an example of one in the same area where my mate brought his. Built in 2006 and dressed up as a show home to look lived in.

      http://www.realtor.com/realestateandhomes-detail/1230-Talon-Way_Melbourne_FL_32934_M61854-14352

      • Reading motivations of an investment spruiked outside of the local area should ring alarm bells.

        Their sales strategy to seek demand outside the local area, but their sales tactics (as opposed to the longer term strategy) is to highlight how the local is in demand. The death throws of a Ponzi scheme?

        This seems to highlight the fact that these guys know exactly what they are doing and they are consciously ripping people off. I’ve just convinced myself the next time I go past one I’ll attempt give them a hard time and see what happens…….

        It comes down to “if it’s so good why aren’t you doing it and why are you making your money telling me?”.

        • “…next time I go past one I’ll attempt give them a hard time and see what happens…”

          npi, just hand them a moral compass instead. 🙂

  7. US housing undervalued OR Aussie Housing Overvalued?

    IMHO Aussie housing seriously overvalued.

    In fact I personally wrote to the RBA asking them to raise rates to hobble the Housing Bubble back in ’05 and they wrote back saying that it (housing) was A-OK.

  8. carbon bologny

    ASX3X I hope you kept that RBA letter. Send it back to them when the oz housing market crashes with a little note that says “morons”.

  9. I have a query about this story…..If folks are buying houses for %500 and hoping to sell to the suckers for %1000…..what is the price of the land the house sits on? Even if houses are going to be pulled down…my expectation is that the land itself might retain some value??

    • sure – it’s worth $100 with property tax and landscaping bill of few thousand a year

  10. How the hell do prices fall from 100,000 to 500 $, without touching any numbers in between ?

    The slow collapse of the Michigan auto industry resulted in jobs partly being outsouced to Mexico and Japan, but most were going to the southern states where wages were lower.

    (Quote Wiki)

    In a November 23, 2008, New York Times editorial, Andrew Ross Sorkin claimed that the average UAW worker was paid $70 per hour, including health and pension costs, while Toyota workers in the US receive $10 to $20 less.[18] The UAW asserts that most of this labor cost disparity comes from legacy pension and healthcare benefits to retired members, of which the Japanese automakers have none. The Big Three already sold their cars for about $2,500 less than equivalent cars from Japanese companies, analysts at the International Motor Vehicle Program say.[19] According to the 2007 GM Annual Report, typical autoworkers earn a base wage of approximately $28 per hour (higher than the average university educated engineer). Following the 2007 National Agreement, the base starting wage was lowered to about $15 per hour.[20] A second-tier wage of $14.50 an hour, which applies only to newly-hired workers, is lower than the average wage in nonunion auto companies in the Deep South.[21]

    http://en.wikipedia.org/wiki/United_Auto_Workers#Postwar

    Keep Michigan in mind when your hear a poli talking about removing the dominant employer in a region, then using the words “minor or painless”. If the industrial award system was the root cause and “average workers” earning more than degree qualified engineers is your litmus test, then we are already there.