Pick of the Litter
The Fall Landscape was a strange mixture; dank and desolate, with deteriorating houses partially engulfed by trees holding rainbow hued leaves. Two Japanese maples had sprung up on Detroit’s Kentfield block, while weeds and crab grass had grown over the curb and into the street. The street, a once heavily populated block, had begun a slow descent back into the wilderness of Antoine Cadillac’s Fort Detroit.
The neighborhood had, in the summer, seen a resurgence in interest thanks to a Detroit Free Press article investigating how blight had begun overtaking homes in a manner resembling a walled tsunami. But now the neighborhood was back to normal—albeit chilled by the setting of fall. And while the neighborhood had been mostly forgotten, one thing in particular stood out: the neighborhoods bulk property scandal. Because you see, that house with the overreaching crab grass in the yard, alongside the un-manicured Japanese maple is just one of the homes in a long list of bulk property bundles.
And while buying homes in bulk is not a new practice in the world of real estate, in the past several years, the practice has begun to stand out for a variety of reasons. Chief among them: investors have no idea what it is they’re buying.
The Bulk Deal
Trained as a real estate assistant in Detroit, before going on to receive his real license three years later, Antonio Curry, a man only interested in single family dwellings, set up an appointment to speak with me through a mutual acquaintance. From our conversation alone, I could tell he knew his market, could tell he knew properties…yet I was confused to why I was on the phone with him. “I’ve got a listing of homes being sold in bulk—I’m calling you because I want you to look over the portfolio.”
At the cost of a dollar per house, Antonio had gained access to the bundle deal by paying a real estate agent working for a New York hedge fund offering up the transaction. The portfolio, the agent promised, “held fifty homes, all single family,” just like Antonio liked. But Antonio, saddled with a profitable rental portfolio of his own, lacked the time to thumb through the housing list. In Antonio’s view, having a real estate adviser analyze the collection couldn’t hurt—even if the analysis itself cost him a small fee. Indeed, in the world of foresight, Antonio Curry knew that a small cost now would save him from larger costs later.
An Odd Mix
If Antonio was under the impression that the portfolio held any worth, he was disabused during our later conversation. The homes—all fifty of them—were, for the most part, run down. Those that weren’t blighted, held an almost blighted decorum. And if that wasn’t enough to turn him away, this was—the properties, at least thirty-five of them, were two bedroom single homes—with only one bedroom completed. Out of the entire lot, one lone house stood alone as shining model of the group’s saving grace, a three-bedroom home with two stories and a well-manicured lawn, aside a living fence; alas, even this home’s shine, however, was stunted by mark of an unfinished basement.
The Immediate Problem with Bulk Deals
The homes in that portfolio weren’t wholly different from any other portfolio I’ve reviewed, made up of homes from around the country. The trouble with bulk buying is that the investor doesn’t necessarily know that their buying. This is more problematic if you’re investing from a distance—say another country or state. But trouble can also lie in state of residence investing. The reason: a decline in value because of how often the home has been repackaged in bundle deals.
Most would like to think a bundle deal works like this: A list of homes are purchased cheap. They all bring in revenue, and one, all, or a select few are sold. Yet that isn’t the case. What tends to happen is: Bundled homes come from tax foreclosure auctions. The homes are rented back to the original owner on a land contract. The owner defaults on the land contract and is evicted. And due to the lack of tenancy, the house falls into a state of disrepair. The home, now with no resident, is re-sold in another bundle deal. With a falling housing value that disrupts the entire neighborhood.
And while this may seem like its all, it’s really not. Additionally, homes in the portfolio may be priced differently based on premium charges due to size, while other homes in the portfolio may offer a return on income model, which is more often than not, miscalculated and unfeasible.
The Criteria for Bulk Buying
Bulk deals can be complicated if not measured up against any criteria. Aside from the home, its occupancy, and current rental market demands, investors should check for the following:
1. The neighborhood;
3. Neighborhood crime statistics;
4. State & Metro Area employment statistics; and
5. Educational institutions in the area.
Why Use the Five Benchmarks?
First, assessing the neighborhood can tell you a lot about whether homes in the area are on the decline, incline, or just stagnant. If stagnant or on the decline, it could be because of a home in your bulk portfolio.
Second, the land’s value calculation is determined by the city government. You can then measure the land’s value against comparable properties.
Third, a neighborhood crime statistic report is a no brainer, and you should want one to decide how long tenants will stay in the home dependent on the crime rate or—if a tenant moves out—how long will the vacant property be standing before its scrapped.
Fourth, state and metro area employment statistics will give you a feel for how gainfully employed people in the area are. If numbers of employment are high, you shouldn’t have a hard time finding a tenant.
Finally, educational institutions in the area often equate to student housing. Although this isn’t always the case, many students loathe living on campus and prefer the freedom offered by using their student voucher to rent residential housing—not sharing a cramped dorm room with someone they don’t even know.
When applied against homes in a bulk deal, these five benchmarks can provide you with enough knowledge to pass or buy. Some of the homes could be worth saving, while at times they might not even be worth mentioning.
William Alexander is a real estate analyst and adviser for Avallonn.com.
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