A free house may be a lousy deal
2015-06-25Free — or cheap — homes are a way some cities and towns have tried to fight blight and revive neighborhoods. The New York Times this week reported on the efforts of Gangi, a small town in Sicily that last year said it had old houses “that will be granted free of charge to those who request them,” provided they are Italian or citizens of the European Union and meet other conditions. The homes, the newspaper noted, are generally dilapidated and in some cases were abandoned generations ago.
The sales are open to Michigan residents who owe no back taxes in Wayne County, non–Michigan residents who intend to move into a home once it is fixed up, and companies licensed to do business in Michigan that have no prior building-code or blight violations or tax foreclosures.
Auctions last just one day. You can bid up homes in $100 increments, according to the auction site.
Winners must move fast. The sales require a 10% down payment within 72 hours, while settlement must be made within 60 days, and in just 30 days if there is no financing involved. And you must have a certificate of occupancy and an owner living in the house within six months (nine months if it is in a historic district).
“We are not looking for speculators,” said Erica Ward Gerson, head of Detroit’s Land Bank Authority, the agency that will administer the program. “If you’re not going to act diligently to fix up the house, you’ll lose the house and your money.”
A $20,000 deal won’t cost much, at least on the surface. A 30-year mortgage at that price and national average 4.36% interest when the program was launched would just set you back $99.68 a month, including property taxes and mortgage and property insurance, according to Bankrate.com. The rate on a 30-year fixed-rate loan is now lower, making that monthly payment even lower.
But it isn’t a turnkey deal. Many of the homes lack water heaters and furnaces and need new roofs and windows, not to mention kitchen appliances and fixtures, and they generally could do with a new coat of paint. Rehab on the properties must also begin within 30 days after getting the deed and the keys.
So would flipping the house, even if you bought it for a few thousand dollars, turn a profit? Given that the average sales price of homes in the English Village neighborhood on Zillow.com is just $48,000, one veteran “flipper” says no.
“I just can’t see a lot of these deals working,” said Bill Kendall, a Keller Williams agent based in Pittsburgh who flips as many as two dozen homes a year around the country, some in as little as eight weeks.
But Kendall said that if many of the Detroit homes are missing furnaces and water heaters, the investors could be in for $20,000 in basic necessities before any cosmetic improvements were done. “Given the neighborhood where these homes are located, you’d be better off turning them into rentals,” he said.
That’s because rentals typically require only half the cosmetic improvements that a property intended for resale requires, according to Kendall, who has been flipping properties since 2006.
He said it’s also not clear whether the properties are free of mechanics liens, a type of lien placed by contractors when they improve a house value by 15% or more but aren’t paid by an owner. “You would need a really good title search first,” Kendall said. “Otherwise it’s opening a Pandora’s box.”
Buyers also need to be aware that they could be on the hook for as much as $5,000 to $10,000 in property taxes a year even though the properties are distressed, said John Dingell III, a scrap-metal dealer in Detroit and the son of former Michigan congressman John Dingell, in a phone interview.
“Under Michigan law, the property value for tax purposes does not reset to the sales price for distressed or foreclosed auction sales,” he said. “This is why there [will be] few takers on these houses.”
Source：MarketWatch
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