The Twelve Days of Christmas: The Arson Capital of the World

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Editor's note: If there's disgust, despair, and a general horrible attitude toward an investment, you can bet our resident contrarian, Tom Dyson, is ready to buy it. Naturally, Tom is bullish on Detroit real estate right now. Below are four separate May editions of DailyWealth that Tom wrote while risking his life researching Detroit real estate. It's some of the most entertaining financial reporting you'll ever read...

The Arson Capital of the World

Originally published in the May 3 edition of DailyWealth

On October 28, 1984, the mayor of Detroit announced a 6 p.m. curfew for all children under the age of 18.

The curfew would last for three days. Anyone caught breaking the curfew would be arrested. Then, he deployed additional police and firefighter patrols, planned school assemblies, and organized neighborhood meetings all around the town...

It was no good. Over the next three days, arsonists set 810 buildings on fire in Detroit.

It's called Devil's Night. It takes place the night before Halloween every year in Detroit. It started as a night of pranks and mischief for kids, but by the early '80s, the night had morphed into a citywide arsonfest.

Detroit rap star Eminem touched on Detroit's flair for arson night in his movie 8 Mile. His gang set fire to an abandoned house and then stood around watching it burn.

But, it wasn't just anarchistic youths setting fire to houses. Entrepreneurs started doing it, too. Their businesses were failing, so they'd set them on fire, blame the kids, and then collect insurance.

You see, in the early 1980s, Detroit's economy was in the dumps. The oil price shocks of the 1970s had given Japanese automakers a toehold in the market with their compact cars. The Detroit automakers laid thousands of people off. Detroit's inner city became violent and lawless. Detroit had one of the best highway systems in the country, so the middle-class fled to the suburbs and learned to commute.

Between 1900 and 1950, Detroit's population went from 280,000 to almost 2 million. Over the next 25 years, Detroit lost half its population.

As Mayor Coleman Young announced the 1984 curfew, thousands and thousands of houses stood empty. Businesses rotted. The city had no money to demolish the old neighborhoods, so I guess the people decided to clear the slums on their own terms.

These days, Devil's Night doesn't really exist anymore. Detroit's authorities rebranded it "Angel's Night" and enlisted 40,000 volunteers to roam the streets each year with two-way radios and amber beacons on their cars, keeping the peace.

The arsonists may have mellowed. But, unfortunately, Detroit's economic problems still burn...

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Detroit now has the cheapest property market in the country, suffers the highest rate of unemployment, and routinely gets the worst press of any big city in America. (Detroit is not the murder capital of the world anymore, but it still claims the highest rate of arson per capita.)

Here's the thing: The best way to make money in investing is to buy when things go from bad to less bad. I don't think the situation can get much worse in Detroit... in fact, it looks like things might finally be turning around...

Take property, for example. No one else is interested, so there's huge supply, and it's very, very cheap.

I spoke to a Detroit property investor the other day. He owns 40 properties. "The Detroit market is a fantastic market to invest in for foreclosures," he said. "I have never paid more than $20,000 for a home and routinely find deals for homes that appraise for $70,000 to $100,000."

Someday, the car companies will figure out how to wriggle out of their obligations and start off fresh. Maybe they'll declare bankruptcy... or maybe the government will bail them out. Who knows? One thing's for sure: Someday Detroit will recover... and clever investors – like the realtor I spoke to – will make a fortune.

Good investing,

Tom

Meltdown In Motor City

Originally published in the May 23 edition of DailyWealth

MapQuest can show you the fastest route... and the shortest route. But it doesn't warn you about bad neighborhoods...

I'm in Detroit to investigate the real estate meltdown this week. Last night, I had a dinner appointment with six Detroit businessmen. Roma Café was only two miles from my hotel, and I figured I'd see more with my boots on the ground, so I walked... taking the direct route MapQuest suggested.

Detroit is a bit like Baltimore. You can find yourself in a slum only a couple of paces off the main road. I was walking along when I started to notice lots of empty drug baggies scattered along the sidewalk. I looked up and saw a small gang of hustlers hanging out on a nearby doorstep. I felt them pointing at my chinos and Timberland shoes, so I stepped up the pace.

In the end, everything was fine, although I did glance over my shoulder a couple of times. When I told the guys at the restaurant I walked, they looked at me as though I were lucky to be alive and told me not to walk around Detroit anymore.

Anyway...

The businessmen I ate with confirmed my theory... that Detroit is a contrarian utopia.

 Four of the men were straight investors. They called themselves 'slumlords.' They buy property on the auction block, "rehab" it, and then rent it out or sell it. They also run property management companies and help people get title insurance and mortgage loans.

Next, you have Andy. At 24 years old, Andy moved to Detroit from Ohio 18 months ago to get into the foreclosure market. The banks repossess houses (from upside-down subprime borrowers usually). But banks don't want to be in the real estate business, they want to lend. Holding property ties up their reserves. And as they can lend $10 for each dollar of reserves they hold, a $100,000 property actually holds up $1 million of potential loans.

In short, the bank will do almost anything to get these houses off their balance sheets, including selling them at 40%-50% discounts... especially to people like Andy who can pay cash upfront. In effect, Andy makes 40% equity out of thin air the moment he buys the bank's property.

For example, he closed on a house yesterday. It was listed at $180,000. He bought it for $110,000. He'll sell it next week for $160,000. That's $50,000 created out of thin air. The bank wins, Andy wins, the homeowner wins, and Detroit wins.

Andy says he loves the negative press articles about Detroit. He clips them out and shows them to the banks to get better deals on the property. (As an aside, none of these guys wants me to tell this story. They don't want anyone to find out how easy it is to make money in this town.)

Lastly, we have Ken, a wealthy businessman. He grew up in Detroit. He already owns millions of dollars of property here, including commercial warehouses. Now he has his eye on the penthouse apartments of the 1001 Woodward – the skyscraper I inspected today.

Ken says there's plenty of old wealth in the suburbs. It's just downtown that's so depressed. But he says people are crying out for a downtown renaissance... with bars, clubs, nightlife, and retail. It'll come, he says. And when it does, things will snowball fast.

Ken says he wants to set up a Detroit property REIT. The first thing he'll do is buy the penthouse condo apartments. Then, he'll go into the suburbs and buy the vacant $2 million mansions on sale for $1 million. It'll be an easy investment to sell. Great yield, no downside.

Here's another thing to consider about Detroit: They're giving away huge tax breaks if you move here, live here, or invest in property here. If they're trying this hard to get people to live here, imagine what kind of breaks they'll give to businesses to come and create jobs here. Detroit will bounce back. It's just hard to imagine it right now, which is why investment opportunities are so bountiful.

These guys are all working hard and kicking butt in Detroit. My hunch about this city is right: Making money in real estate here is very easy right now, especially if you have ready cash to buy what no one else wants.

More to come on Detroit next week...

Good investing,

Tom

P.S. Did you know? Wayne County, home to Detroit, lost more people from the beginning of 2005 to the end of 2006 than any U.S. county except the four counties in Louisiana and Mississippi devastated by Hurricane Katrina, according to Census figures released in March.

 P.P.S. Click here to read a recent USA TODAY article about Detroit's meltdown.

The Cheapest Skyscrapers in the World

Originally published in the May 24 edition of DailyWealth

"The announcement isn't official yet," said the doorman, "but McDonald's is opening up a restaurant on this corner next month."

Walking around downtown Detroit, I almost felt like I was in Manhattan for a second. There are dozens of skyscrapers, the buildings are beautiful, and you can feel this place used to be extremely prosperous. But that's where the comparison ends.

For one, there are no people in downtown Detroit. It was midday on a Tuesday. Except for a few beggars, a handful of office workers, and some city employees, the place is empty. There is scant traffic. It's quiet. And weirdly enough, it's very green. Trees grow on the roofs of high-rise buildings, ivy grows on their facades, and vacant lots are covered in tall grass. They call them "urban prairies" here, and they attract the coyotes that keep showing up on city streets.

Another thing: Downtown Detroit has hardly any retail. Even the fast food restaurants that infest every other American city are missing. Why? Many of these beautiful skyscrapers are vacant. Windows are boarded up, smashed, or just swinging on their hinges. No office workers. Hence, no fast food customers, either.

But now McDonald's is coming back in. Could it be a buy signal? I think so...

"Leases Now Available," "For Sale By Owner," "Free Utilities" – everywhere you look, there's space available.

I met with a commercial realtor who showed me around town for a couple of hours.

"The Book Building is one to think about," he said. "Rumor is the owner is behind on his utilities and has stopped servicing the elevators."

The Book's tower is 38 stories high. A New York outfit bought it in 2006, but it's given up on the development plans and now wants to unload it.

I couldn't believe what I saw. You can buy entire towers for peanuts. I really liked the 37-story David Stott building, pictured below. It's on the market today for $3.9 million.

The 19-floor David Whitney Building is for sale, too. So is the 35-story David Broderick Tower. You could probably buy all three "Davids" for less than $10 million.

The reality is, dozens of skyscrapers are for sale in Detroit. In almost every case, their owners are desperate to unload them. And the best part? The city will beg you to get involved and bribe you with incentives.

The Book-Cadillac Hotel is a good example and a symbol of Detroit's downtown renaissance.

The Book-Cadillac is a gorgeous building – a 32-story 1920s Italian Renaissance-style high-rise made of granite and limestone. In 1986, the city shuttered it and abandoned it for 20 years. In 2005, Kimberly-Clark nearly bought it. When it realized how much the refurbishing would cost, it backed out of the deal. The city panicked, knowing if it allowed the Book-Cadillac project to fall back into disrepair, it would scare everyone away again.

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Instead, the city gave the property away to an outfit from Ohio. It followed that up by giving the new owners huge tax breaks AND huge subsidies to finish the work. The good news is, condos in the Book-Cadillac have sold out already.

Now consider the 1001 Woodward building, a sleek 25-story high-rise. Developers are converting this building into condos. Brave indeed. It's hard to imagine anyone will buy them, let alone rent them, but that's the sentiment I like.

The high-rise overlooks the Detroit River. From the 20th floor, I watched a 1,000-foot ore carrier chugging along the waterway, pumping out black smoke from its stacks as it pushed its load at what seemed a pretty good clip. It made me think: Detroit can handle huge ships. It has great rail and roadway infrastructure. This place has major advantages from a manufacturing point of view.

I'm going to keep a close eye on 1001 Woodward. It's the litmus test. It's at the very heart of Detroit, right in the center of the action. If they can't sell the condos in 1001 Woodward, then there's no hope for this city.

The opportunity in Detroit makes the hairs on the back of my neck bristle... and I'm drooling over the price tags on some of these skyscrapers, but I must warn you: It's a bit like buying a French chateau. The purchase is the easy part. The rehab and maintenance take the real money.

But if you have the expertise and real money to spend, it's a fire sale here in Detroit.

Good investing,

Tom

How to Invest in Detroit

Originally published in the May 29 edition of DailyWealth

Two weeks ago, when I first started investigating the Detroit real estate meltdown, I called up a Detroit realtor and posed as a buyer. His name was Jon.

Jon called me and left a message this weekend. "Hey Tom," he said. "A friend of a friend just forwarded me this little article about Detroit skyscrapers from a column called DailyWealth, written by you! And guess what? Our phones are ringing off the hook today with your readers. I like that. Give me a call."

It seems these "little" DailyWealth stories are generating waves here in Detroit. They should...

Last week, I found myself in Royal Oak. Royal Oak is a hip suburb of Detroit. The main road is packed with bars and nightclubs. On Wednesday and Thursday nights, everyone brings motorcycles. The bars all have outdoor patios, so everyone sits outside sipping cocktails and watching the bikes go up and down the street.

Having searched Detroit for four days, this was the first slither of vibrancy I'd found in the area... and I'm sure it would do very well in a Detroit property rebound.

Turns out, three new condo developments are going up in this hamlet and another one is coming. Just what I hoped to see... a few signs of progress.

My contact and I pulled up to the first development. A banner advertising the condos hung outside along with a sign to the showcase model. We went to the front door and found a piece of paper taped to the glass. "Information room is closed May 23 and May 24. Please come back next week."

We shrugged and drove to the next development. It, too, had a banner. "Phase II Now Open," it said. We parked the car and went to the door. Locked. The note on the door said, "Open weekdays 9 a.m. to 6 p.m. except Tuesdays and Wednesdays."

Getting frustrated, we drove to the third development. It had the biggest banner yet. It said, "Open everyday" in huge letters and gave a phone number. We called the number to make sure it was open before we wasted our time parking.

"We're sorry," said the automated message. "The number you are trying to reach has been disconnected. Please hang up and try again."

In Miami – where the condo market is alive – sales offices like these are open 24/7. In Detroit, they don't even open for business...

When I'd finished in Royal Oak, I spent the afternoon on a speedboat, weaving around giant Great Lakes freighters and studying the Detroit shoreline from the water. I saw more mansions and skyscrapers, plus some great views of the steel mills down river.

"Detroit is trying to position itself as a major port," said my guide. "You can sail a ship to anywhere in the world from here. We've got two great airports, the best freeways in the nation, and great railroads."

My guide used to manufacture auto parts. He sold his company in 1999. It's now publicly traded. "What they say about the Chinese is BS," he said. "If you've got it together, you can mop the floor with Chinese competition. The 5,000-mile shipping cost is a huge disadvantage for them. I beat them hands down my whole career."

With the dollar so cheap right now, and all the vacant land and skilled labor here, it's only a matter of time before manufacturers rediscover Detroit. And don't forget the mayor. He'll roll out the red carpet if you bring new jobs to the area.

One realtor I met told me she's dealing with Europeans more often. Bosch – the huge German auto parts maker – is building a new engineering center in Detroit right now. And last year, Google announced a new office with 1,000 jobs in Ann Arbor, just down the freeway from Detroit. Google currently has a sales office in Detroit.

I couldn't find any publicly traded Detroit investments, so if you want to invest in Detroit, you should buy property there and hire a property manager to rent it out for you. I think the waterfront mansions in Grosse Pointe and the condos in Royal Oak have great potential. There's hardly any downside risk, but if Detroit turns around, your investment could double in five years.

Good investing,

Tom

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