Archive for September, 2008

I have always been a fan of old homes. Not 1930’s and 40’s. Boring. I’m talking REALLY old ones from the turn of the century.

There’s something about walking through one of them when it’s vacant and listening. When I do this I can almost hear the sounds of the families that lived there. I imagine conversations about hopes and dreams, and others about the simple routines of everyday life. It’s at these times that words fail me and I wish that I had spent more time studying poetry.

The attention to detail in these homes is magnificent. Real crystal doorknobs, hand made fluted moldings, leaded glass French doors, red oak hardwood floors, and soaring ten foot ceilings.

Personally one of the wonderful things about Southeastern Michigan is the large number of these homes. Northville, Saline, Romeo, and of course the city of Detroit all have concentrations of them.

So when I moved my family back to Michigan in 1998 I was intent on finding one for us. Having spent 12 years in California, I had grown tired of the neutral colors and stucco exteriors that are so common in the prevailing southwest architecture & design.

By far the most spectacular homes of this vintage are concentrated in two areas of Detroit – Indian Village and Boston-Edison.

So I focused on both.

The problem was that I was the only one looking.

I easily located several unbelievable homes, mansions really. I vividly remember my favorite one in Indian Village – 5500 square feet, six bedrooms, four baths, carriage house, garage, and formal dining room that was bigger than my present family room. For $300,000. It needed some work, but it was totally livable.

So I packed up my wife and kids and we drove out to look at a few of them.

My fascination and love of these homes and neighborhoods lost out to a single question that my wife asked as we looked at the one in Indian Village – “honey I love it, but where is the nearest grocery store?”

She was right. At that time I think the closest one that I would have felt comfortable having her go to from Indian Village was in Grosse Pointe Park.

So it was the suburbs for us.

What got me thinking back to this was a sad column that was in the Wall Street Journal yesterday about the Boston-Edison district that I have included below.

It’s sad to see that the neighborhood is starting to decay at the hands of petty thieves. But it’s heartening to see the residents pulling together to preserve the neighborhood’s rich heritage.

Henry Ford’s Detroit Neighborhood 
Tries Hard to Keep Up Appearances

Boston-Edison Survived Riots, White Flight;

Residents Hope to Weather Foreclosures, Too

 By JAMES R. HAGERTY

September 11, 2008; Page A1

DETROIT — The faded elegance of this city’s Boston-Edison neighborhood, once the home of Henry Ford, has survived white flight, the 1967 riots that destroyed nearby shops, and the long decay of the U.S. auto industry. But three years ago, residents started noticing a disturbing trend: More and more of the stately homes were vacant.

“We were losing our homeowners,” says Ada Tinsley, a retired nurse who counts seven empty houses on her block. Elderly homeowners died or moved away. Speculators bought houses, then abandoned them. Longtime residents borrowed against their houses to pay off bills, then found they couldn’t afford their mortgage payments. In the 36-square-block neighborhood, about one in five houses is now vacant, mainly because of foreclosures.

The foreclosure crisis has come as a sucker punch to thousands of neighborhoods across the U.S., from desolate cul-de-sacs in Las Vegas to thickets of mostly empty condo towers in South Florida. What’s unusual about Boston-Edison is that the residents who remain are fighting back.

Organized by an 87-year-old neighborhood association, some do unpaid duty mowing lawns, trimming hedges and picking up litter outside vacant houses. Others park their cars in the driveways of empty houses to make them appear to be lived in. The association’s Web site promotes mansions in need of new owners. Some members have volunteered to rush to the scene when burglars are breaking into empty houses.

Jill Thomas, a mother of two who works for her family’s auto-parts salvage business, has lost count of how many times she and her neighbors have called the police about suspicious people, such as a man recently seen towing two shopping carts of scrap behind his bicycle. “911, they know my name,” Ms. Thomas says.

Victoria Koski, who is home-schooling her two children in a Boston-Edison home with four bedrooms and a ballroom, wants banks that own foreclosed properties here to remember the neighborhood’s high aesthetic standards. “There’s a classy way of boarding up a house and a tacky way,” Ms. Koski says. She suggests painting the boards in colors that blend with the stone and brick exteriors.

“We’re simply trying to keep up appearances,” Ms. Koski says.

Many neighborhoods will struggle to do that in the years ahead. Barclays Capital estimates that there are 811,000 bank-owned homes in the U.S., up from 129,000 two years ago, and predicts that the total will grow 60% more before peaking in late 2009.

Thieves mine empty homes for doorknobs, light fixtures, doors, radiators (attractive as scrap metal) and, especially, copper pipes and wiring. “Right now the city of Detroit is the biggest copper-mining location in the country,” jokes Tom Ball, a real-estate agent here. Within a few minutes, these looters can cause damage that costs tens of thousands of dollars to repair.

In a few places, such as Boston-Edison, residents are taking matters into their own hands rather than waiting for political solutions. In Cleveland, a neighborhood group in the Slavic Village area organizes lawn mowing at vacant homes and encourages youths to paint cheerful designs on boarded-up windows. The city of Los Angeles is training neighborhood leaders to report signs of deterioration in vacant homes so action can be taken before blight spreads. Just Cause, a nonprofit group in Oakland, Calif., pressures utility companies not to shut off the water of tenants whose landlords are in foreclosure.

Boston-Edison has an edge over many other threatened areas because it has had an active neighborhood association since the 1920s. Neighbors know one another and can organize themselves for action.

Boston-Edison, named for two of the main streets that cross through it, is about four miles north of downtown and was on the fringes of Detroit when people began building houses here around 1900. Aside from Henry Ford, residents have included the labor leader Walter Reuther, Motown Records founder Berry Gordy Jr. and Sebastian Kresge, who ran the five-and-dime store chain that eventually became Kmart.

In the 1950s, African-American professionals and entrepreneurs began moving into what had been a partly Jewish neighborhood, and Boston-Edison today remains racially diverse. Plutocrats don’t live here anymore. Middle-class people — including teachers and young professionals — restore houses built for the rich. One house has 11 bedrooms and nine bathrooms; others have such features as pipe organs or bowling lanes. Many still have buzzers for summoning the servants.

Neighborhood volunteers track down banks, investors or other absentee owners to urge them to take care of properties. In some cases, they report zoning and code violations to the city.

Houses for Sale

The idea is “to put pressure on the absentee owners to not just let houses rot,” says Jim Hamilton, a retired economics professor who is president of the neighborhood association. But preservation alone isn’t enough. “The only solution for a vacant home is a buyer,” Mr. Hamilton says. The association’s Web site (www.historicbostonedison.org) provides free ads for homes for sale, mostly in the range of about $20,000 to $200,000. The group occasionally organizes tours of available houses.

Then there is the charm offensive. Ms. Tinsley, a lifelong resident who lives in the three-story brick house her grandparents bought in the 1950s, has been cooking meals for a new neighbor who is busy renovating a home he bought two months ago. “I tell people if they move into our block, I’ll feed them for a year,” she says.

Jerald Mitchell, a retired anatomy professor who lives in Henry Ford’s old mansion, took it upon himself to defend a vacant house nearby. He removed mantels and light fixtures and stored them in his garage until a new owner arrived.

Ken Yourist, a graphic artist who has lived in the neighborhood for 10 years, last year began cutting the grass next-door when a foreclosure left it unoccupied. Eventually, he decided to buy the house for $6,500. The previous owner had paid $179,000 for it in April 2006 before defaulting.

To deter thieves, residents banded together earlier this year to hire a private security guard, Mike Mader, to patrol the streets 50 hours a week.

In Pursuit of Perps

On Aug. 4, Mr. Mader, making his rounds, noticed that the back and side doors were open at one vacant house. In the backyard lay a pile of radiators. Mr. Mader used his cellphone to call John Serda, a patrol commander for the Detroit police. About the time Mr. Serda pulled up in his car, two men jumped out of the house through a window and ran down an alley. Messrs. Mader and Serda caught up with the intruders a couple of blocks away, and Mr. Serda arrested them for trespassing.

The neighborhood group is installing motion detectors in some vacant homes and setting them to sound an alarm in a neighbor’s home if someone enters. Ms. Koski, head of the neighborhood security committee, alerts neighbors by phone when suspects are spotted in or near an empty house. “We all get in our cars and mobilize,” she says. The volunteers array their cars around the empty home, making it difficult for thieves to drive off before police arrive. Some people who participate in these “flash mobs” take pictures of the suspects’ vehicles.

“We want to take our neighborhood back,” says Amy Officer, a 38-year-old computer technician who has joined several of these expeditions. She hopes criminals will conclude that it’s too risky to loot in Boston-Edison and move on.

Brian Ceccon, a social worker who keeps a database listing which of the neighborhood’s 930 homes are vacant, sees reason to be encouraged. People have moved into 22 previously empty homes since mid-June, leaving about 185 unoccupied. Mr. Ceccon thinks the recent purchases are “a sign of better times ahead.”

Here we go again.

Don’t you just love it when someone asks your opinion of something that you actually happen to know a LOT about, you give them the answer, then they proceed to argue with you?

It happened to me again last week.

And unfortunately it was one of those I-already-made-the-decision-so-I’m-only-asking-you-because-I-want-to-validate-in-my-own-mind-that-I-was-right kind of questions.

I’ll spare you the details, but the person bought a trashed out house in a marginal area that he’s planning to fix-up and rent. He bought it because he couldn’t believe that the house was THAT cheap.

I didn’t have the heart to tell him that it was because nobody else wanted it – because it was in a bad location.

So I thought that I would take the opportunity to discuss what I consider CRITICAL SUCCESS FACTOR #1 in being successful in owning rental real estate.

And that’s LOCATION.

You can’t fix it.

You can’t change it.

And you can’t convince anyone else to like it.

So don’t buy in those areas.

Here’s an anecdotal research technique that I used a while back to determine the good/bad line for location.

I have taken almost a couple of hundred applications for my rental homes, and what I have done is driven by the homes and apartment buildings that these applicants were moving from.

I looked at their dwellings, I looked at the areas, and I even made appointments to see some rental homes and apartments in those areas.

Why?

Because I COMPLETELY understood what my tenants were moving AWAY from.

Once I understood that, then the location decision was a no-brainer.

This works because it’s simply a variation of the strategy of finding out what your customers want and giving it to them.

A voice of reason in the darkness. Hat tip to LM for the link.

Thomas Paine looks good for a guy his age.

How many times have you heard that OPM is the key to all the riches in real estate?

Seriously – you can’t turn on a single late-night real estate tv infomercial without some fly-by-night “guru” with a Bentley and a bevy of blonde babes screeching at you about using OPM to make you rich beyond your wildest dreams.

I should know – I’ve watched them all. (For the information only. Not the babes. Really)

The question though, is a serious one. Is access to OPM truly the Holy Grail of real estate investing?

Personally I say both YES and NO, because it can be either a tremendous blessing OR a debilitating curse.

Let’s DEFINE it first though so we’re all clear on the concept.

Other People’s Money (OPM) quite simply is money that’s not your own. It includes everything from unsecured business and personal lines of credit to money that you raise from private investors, and every other source like it under the sun.

On the plus side, OPM is very attractive, especially if you have limited (or zero) money yourself. OPM lets you participate in transactions that you wouldn’t otherwise participate in, and if managed correctly it can help you build wealth.

One of the very favorable aspects of using OPM is that you can often set the interest rate that you’ll pay when you use money loaned by a private individual. Right now I pay my private investors anywhere from a fixed and secured 6.0% to a fixed and secured 14% annual interest, depending on the risk involved. They’re happy every point along that range because the returns that I pay are substantially greater than those in the various markets – and my returns are secured.

The down-side of OPM, though, is significant.

While interest rates on loans from private investors are often done with fixed rates and terms, interest rates on unsecured lines of credit are just about always variable.

This generally isn’t a problem if the money is used for short-term projects, but I know of several investors that have used these types of funds for buy and hold investments. And a few of them even went into foreclosure a year ago when interest rates spiked up.

Another unfavorable aspect of unsecured lines is the fact that they’re callable, which means that at any time the lender can demand repayment in full, and they don’t need a reason and you can’t say no. Think about the likelihood of that happening in this economy when banks are tightening up on their secured loans.

But the most dangerous aspect of OPM doesn’t actually involve OPM at all.

The most dangerous aspect of using someone else’s money is the lack of working capital – or in other words the danger is running out of money. Let me show you what I mean.

Let’s take one of my own houses as an example. I have a rental home in Harper Woods that I bought for $69,250. I received a loan for 100% of the purchase price from a private investor.  And let’s say for the sake of this example that I didn’t have any other money.

So what happens if, say, the basement drain line gets blocked and the full, finished basement experiences a minor flood and that causes some water damage?

Well the house wouldn’t be rentable, and I’d be very worried about mold taking over, so something like this would need IMMEDIATE attention.

And the various costs to address this problem would be significant. The plumber would cost $600-$700 to jet out the roots. The water damage remediation people would cost something in the area of $2000. And the repairs after the fact could cost another $3500 or so.

That could easily be a little over $6000 – or more – for a relatively small problem.

But – if I didn’t have any money, how would I pay for this?

And what happens if I can’t pay for it? The downside would be extreme.

The tenant would move out. I then wouldn’t be able to make the payment to the private investor. Mold would start to take hold and spread, and in a few months the investor would foreclose and get a mold-infested house back.

All because I ran out of money. All because I didn’t understand working capital.

The two points that I’m trying to make are these: 

1. Just because you CAN use OPM on a deal doesn’t mean that you always should, and
2. You need to have a reserve set aside for each property, ESPECIALLY if you’re using OPM.

Lack of working capital is the #1 reason why businesses fail. Don’t be a statistic!