House hunters find \'buyer\'s paradise\' in Detroit

Investment study case

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By Nick Carey
Sun Oct 7, 3:50 PM ET

DEARBORN, Michigan (Reuters) - Robert Neal is in heaven. "This is not a buyer's market, this is a buyer's paradise," said the 37-year-old former auto worker as he waited for a foreclosure auction to start in this Detroit suburb.

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Wearing dark glasses, a black baseball cap and a chunky silver necklace, Neal was a sprayer for 12 years at Chrysler LLC until June - when it was still owned by DaimlerChrysler AG - when he took a buyout offer to leave the company.

He wouldn't disclose the size of his buyout -- offers for someone with his experience were typically around $100,000 -- but came here to buy one or two houses to rent out to working families. Neal wants family homes with a market value of up to $90,000 and will pay up to $15,000 for them.

"If the price is right, I'm buying," he said. "When the market rebounds, I'll probably sell them."

This is where economic misery meets business opportunity, as investors look to snap up properties for a fraction of their value while the housing market is in a slump. The auction room in Dearborn is full of people seeking bargains.

This depressed city had five times the national foreclosure rate for a U.S. city in August - behind only the three California towns of Modesto, Stockton and Merced.

"This city has been hit by the slowing economy, the housing slowdown and the fact that lenders are being much more cautious with new loans," Dave Webb, a principal at Dallas-based auction firm Hudson & Marshall, which organized this recent auction of 700 Detroit area homes, said. "But you also have the problems of the God-danged auto industry, which just makes things worse."

Detroit and Michigan were further hit recently by budget wrangling that came close to shutting the state government and by a two-day strike by United Auto Workers union against top U.S. automaker General Motors Corp..

"Detroit is just unlucky," Webb said.

The recent auction here was in a Ford Motor Co convention center. Buyers had to pay a non-refundable $3,000 cash deposit and, in a sign of the times, Hudson & Marshall repeatedly cautioned prospective buyers they should have their loans cleared with lenders in advance.

The auction included smaller family homes as well as large houses in once posh neighborhoods, such as a 3,500 sq ft (325 sq metre) building in the city's Indian Village. Many homes in the neighborhood were designed by prominent 20th century architects for the auto barons.

In a leafy area a few miles from the center of Detroit, this 1920s mansion would be worth many hundreds of thousands of dollars. At the auction, it sold for just $116,000.

WAITING FOR THE REBOUND

Nigerian-born Robert Festus came here looking to buy homes to rent out in upscale suburbs of Detroit.

"The homes I am looking at should be worth up to $300,000, but I'm going to steal them for around $100,000," he said.

Like Neal, Festus said he plans to wait for the market to pick up before reselling his properties.

Detroit has lost more than half its population in the past 30 years and has been hurt by rising crime - according to 2006 Federal Bureau of Investigation statistics it had the third highest violent crime rate in U.S cities with more than 100,000 inhabitants - failing schools and other social ills.

At 7.4 percent Michigan had the country's worst unemployment rate in August. In Detroit, unemployment runs near 14 percent and a third of the population lives in poverty.

Given the decades of decline here, some might question whether a rebound will ever happen here.

"The Detroit area will bounce back. It has to," said Joe Tuttle, 28, who works in medical sales.

He and girlfriend, Carla Kumrow, 26, a buyer at an automotive supplier, want a home to live in, a rarity at this auction. They want a specific home in the well-heeled suburb of Birmingham with a market value of around $300,000. Willing to pay $200,000, they are outbid at $216,000.

Hudson & Marshall's Webb also says the area will recover.

"Michigan will need to diversify its economy more, which takes time," he said. "If investors are willing to hold their properties for a long time, their investments will pay off."

"I am becoming more optimistic about Michigan's medium-term economic prospects given that GM and the UAW have agreed on a new contract and a state budget accord has been reached," Comerica Bank Chief Economist Dana Johnson wrote in a recent note. "However, in the near term, the local economy is likely to remain pretty stagnant."

While the market is down, property auctions in the Detroit area are the stomping ground of people like Pat Karbon, 28, and Dave Ehrlichman, 27, who buy small family homes valued at around $80,000 to $90,000 for up to $15,000 then "flip" them - sell them quickly on the market for around $40,000.

"In five years of doing this I've never seen prices so good," Ehrlichman said waiting to bid on a house.