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Wayne is quite the character and not at all like you’d initially think he’s going to be. He comes across as shy and reserved in the beginning, even somewhat standoffish. But, once you get to know him, you realize that he’s just taking his time assessing the situation. He withholds judgment until he’s got all the facts. And, that’s exactly why I like him.

He recently heard another new investor mention that buying Detroit Land Bank houses was a good way to grow your portfolio. But, he didn’t want to take that advice at face value. Needing more information from someone with a long history of buying, renovating, and selling houses for profit, Wayne came to my office today to run the idea by me. He not only wanted to know how to buy property from the Detroit Land Bank Authority (DLBA), but whether or not he should. Here’s what I told him.

Are Detroit Land Bank Houses a Good Investment for Growing Your Portfolio?

How to Buy Detroit Land Bank Houses

In 2014, the DLBA was created to return vacant, abandoned, and foreclosed properties to good use by auctioning them to the highest bidder for renovation or demolition. The overarching goal of the DLBA, much like the Cook County Land Bank Authority, in Chicago, is to reduce neighborhood blight, restore property values, and make homes—and certain areas—safe and desirable again. And, the program is a success. To date, over 1,700 homes have been auctioned or sold in neighborhoods across the city, from Warrendale to Pershing and the North End.

Since the Land Bank houses tend to be in very rough shape and can be downright dangerous to even enter, real estate investors have typically been the only people able and willing to buy them. With a starting bid of only $1,000 each, it’s easy to see why. When you’ve got experience buying houses to renovate and sell, then a steep rehab budget for a severely distressed home can seem less risky, especially if your original buy-in was small and the potential for good returns big. But, in spite of the seemingly good deals the organization is offering, growing your real estate portfolio with Land Bank properties is a complicated process. A little of what you can expect in the process includes:

Qualifying to bid. To start, you have to register with the Land Bank and provide documentation to support your right and ability to not only invest in Detroit real estate, but to buy and renovate properties according to the DLBA’s rules. You must be a Michigan resident, a non-resident who intends to live in the home, or a company authorized to do business in the state. You can’t have any liens or judgments against you in Wayne County from the last three years, nor can you currently be involved in a bankruptcy, owe back taxes, or have unresolved city code violations on your record.

You also can’t bid, buy, or renovate more than one Land Bank property at a time. That means you have to wait until your current property achieves DLBA compliance to purchase another investment property. It goes without saying that you won’t build a business very quickly this way.

Placing a bid. Properties are up for sale for only one day and bidding happens online in $100 dollar increments. But, you don’t have to sit in front of your computer all day. Instead, you can set your maximum bid and let the system bid up on your behalf as necessary. A $1,000 hold is placed on your credit card at the start of the day and, if you’re the winning bidder, your card is charged and the money is credited toward your 10% deposit. If you don’t win the bid, the hold is released within three days of the auction.

Winning the bid. Upon winning, you’ll get an email notifying you of your final purchase price and the remaining deposit amount that’s due. You must pay the deposit within three days and sign the purchase agreement or you forfeit the property. The DLBA also reserves the right to retain the original $1,000 charged to your credit card as a penalty if you pay late or fail to pay at all.

It’s critical that you don’t bid on a house that you don’t feel confident about buying. If you fail to close on the property within 30 days of winning and don’t seek an extension because you’re trying to secure lender financing, for example, you risk losing the house and the entire deposit. So, you’ll be better off if you find can funding, such as hard money, that lets you close fast.

Unfortunately, there’s more at stake than learning how to navigate the red tape involved in acquiring the property. Within 30 days of closing, you have to provide the DLBA with a plan of work and receipts showing that you’ve already purchased materials. Within six months of closing, you must have completed the rehab. In addition, you’ll need to provide the Land Bank with a Certificate of Occupancy from the city proving the house is safe to occupy, and demonstrated that the home is occupied by a renter or new owner.

That’s a lot to ask for, especially when the renovations alone can take anywhere from three to nine months on properties that aren’t major fixers. When you add in the time it can take to schedule inspections, file documentation with the city, advertise to renters or buyers, and move someone in, meeting a six-month deadline seems impossible to even begin.

If you fail these steps, you will lose what you thought could have become a great investment property, all the money you invested into the materials and the renovation, as well as your entire purchase price. That is a very stiff penalty for running late and, because of the shape these houses are in, falling behind on the rehab and not getting the property resold right away is a real possibility.

Should You Buy Detroit Land Bank Houses?

And, that brings us to why should reconsider buying Detroit Land Bank houses to begin with. While the Land Bank provides recommended renovations from a licensed contractor who has, presumably, already inspected the property, it’s also careful to make no guarantees. These homes are sold strictly as-is and the only time you’ll get access to the property before bidding during one open house. Of course, you can expect that these older, decrepit, and sometimes dangerous, structures will be difficult, if not extremely expensive, to repair on time. All you have to do is take a look at some of the pictures of these homes online. These houses are a lot to take on, especially under the time constraints that the DLBA enforces. You’ll want to be especially cautious if you don’t have experience taking on projects of this magnitude.

Don’t get me wrong, I think the DLBA is doing a great service for the city of Detroit but, in terms of what’s best for your portfolio, I think you can do better. There is another way to find fixer-upper homes for sale that doesn’t require that you cut through any government red tape and strict rules for what could be a potential money pit. Instead, you can build your portfolio by connecting with distressed homeowners directly before they abandon their homes or lose them to a government program like the Detroit Land Bank Authority.

Grow Your Portfolio With a Better Investment Strategy

Attracting motivated sellers of distressed properties directly to you is the best solution I’ve found to the problem of finding good qualified leads on potentially great investments. It’s also just a more efficient method for growing your portfolio than attempting to buy and renovate one property at a time through programs like the Detroit Land Bank Authority.

As an independently owned and operated HomeVestors® franchisee, I get better, qualified leads that turn into better investment deals. Why? Because, thanks to the marketing tools and resources that I have access to, like the nationally-known “We Buy Ugly Houses®” advertising campaign, homeowners in financial distress or just in an “ugly” situation know who to call when they need to sell fast. They turn to HomeVestors franchisees. And, when they call, it’s usually before their homes are so far gone that they’re too expensive to repair. Even so, I feel much better about getting a homeowner out of a bad situation before it gets worse—and on terms that we can both agree on.

If you’re looking to grow your investment portfolio, like Wayne, look no further than HomeVestors. Call the “We Buy Ugly Houses®” team today to get those leads coming your way.

 

Each franchise office is independently owned and operated.

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