So exactly how bad have things gotten in places like Detroit? Banks are having a hard time giving homes away. The Detroit News published a story last week which highlighted a recent transaction where a bank which had foreclosed on a property basically paid a buyer to take the property off their hands. The property was listed on the MLS for $1, but really that was only because, in order to make the sale legal, there has to be some transfer of wealth. In actuality, once you take into the account that the bank paid $500 toward the buyer's closing costs, they actually paid the buyer to take over the property. When all was said and done it was estimated in the Detroit News article that the bank paid around $10,000 to sell the home. This figure included approximately $3,500 in real estate commissions plus back taxes and water bills. For those who might be thinking this buyer got an amazing deal, though, let’s take a look at how this home got to the point it is at now.
According to the article, the home sold back in November 2006 for $65,000. At that time it was one of the nicest homes on the block. Last summer the home was foreclosed on by the bank; vandals broke into the home and stole everything of value, including the doors, plumbing, wiring, even the siding--everything, including the kitchen sink. One day, the real estate agency boarded up the home only to find the boards stolen the next day, used to board up another nearby home. You probably get the idea by now that this is not exactly the best neighborhood around. In addition, there is also the fact that taxes on this property run $3,900 a year. This new owner better run, not walk, to the court house and put in a request to challenge the property assessment or else this home may soon start eating away at their savings. Hopefully, too, they have some sort of understanding with the locals so that as they fix up the property the improvements aren’t immediately stolen. There is definitely a reason why it took 19 days to find a buyer even willing to take the property.
While Detroit happens to be one glaring example of the economic problems faced by some in our country, they are not alone. These $1 sales are common in other cities as well, including Cleveland. "And in some cities like Cleveland, judges aren't letting them [lenders] sit on the properties -- they're ordering them to tear them down or sell them,” Anthony Viola of Realty Corp. of America in Cleveland was quoted as saying in the Detroit News article.
Since it only costs around $5,000 to demolish a property, and that it cost the bank--at least for this transaction--around $10,000 to sell the home, it might make more financial sense to just demolish the home and hold onto the lot as an asset, which will hopefully be worth more someday in the future. Obviously, for this strategy to work, they would need to challenge the property tax assessment and get it lowered closer to the real value, which would be nothing. Once they did that they could sit on the property forever if they wanted (considering that they will be able to generate more income on the $5,000 savings then any expenses the vacant property might require), or they could even donate the property to charity, if they could find one to take it. Ultimately I wonder how much longer banks are even going to be willing to lend in neighborhoods like these. Something tells me it won’t be for much longer. Oh, that is unless of course the government is willing to guarantee the loans, which will probably happen. So next time it will probably be taxpayers who have the privilege to foot the bill on this. I don’t know about you, but I’m not excited about that prospect.
*For more information on this particular $1 house in Detroit see Zillow's excellent write up. They have a bunch more pictures as well.
*Photo courtesy of Bearing Group (MLS photo for 8111 Traverse St, the property mentioned in the article)