Outside buyers drawn to Detroit's foreclosed homes By JEFF KAROUB and COREY WILLIAMS, Associated Press Writers Jeff Karoub And Corey Williams, Associated Press Writers – Sun Mar 8, 6:14 pm ET

Landlord Nation DETROIT – Welcome to Landlord Nation, where foreclosure notices are plentiful and for-sale signs offer at least 1,800 homes for under $10,000 that once were worth at least 10 times more. In extreme cases, homes are on sale for $1 or less, which has enticed investors to Detroit from as far away as the United Kingdom and Australia. "In the past few months, I've picked up 10 new clients from out of state that are buying in bulk," said Mike Shannon, a suburban Detroit real estate agent. His office specializes in foreclosures in a city that's among the national leaders. "They're coming to us, saying `Look, I want to buy 50, 100, 1,000.' They want to own every decent and cheap house they can find." Despite a stagnant retail housing market, real estate sales of foreclosed homes are booming. Shannon regularly fields calls from eager prospects, and recently sold 30 homes in one day to one buyer. A trio of U.K. investors has bought a half-dozen and plans many more.

Outside Investors The outside investors aren't only interested in Detroit, but it's been targeted because of the sheer volume of homes and the fact that values have fallen so much more than elsewhere. Detroit now has the lowest ownership rate for single- family detached homes of the 20 largest cities in the country, according to data analyzed by longtime Detroit demographer Kurt Metzger. Even the sale of U.S. Housing and Urban Development homes has been impacted by the poor housing climate in Detroit. The average sales prices of such homes plunged from $46,702 in 2003 to $8,692 last year. Through the first month of 2009, average sales were $6,035.

Foreign Owners English investor Darren Veness said he sent 10 s to Detroit-area real estate agents after learning about the city's real estate bargains. He promptly heard back from Shannon, whose firm invited him to Detroit for a tour. Veness came for three days, and he and his colleagues bought their first two homes. Veness said they have considered other U.S. cities, but so far Detroit is it. For them, it's simple: The homes are cheap and plentiful. "Do the math, you can buy and rehab a home for $20,000, then rent for $900 a month," he said. "Three to four months of the year, rent is going to pay the taxes." Rentals typically range from about $800 to $1,000, and many are subsidized by the government. He rejects the label "absentee landlord," — or at least the image it conveys. He uses local construction and property management companies, and returned last month to take care of business and shop for new properties. He also takes a long-term view on investing. Besides raising its stake in Detroit, his group plans to buy, fix and sell groups of homes to other U.K. investors. "We just want to build our portfolio as big as we can," Veness said. "I know Detroit has been in a mess... and I think now is the time. The next 10 years, it's going to change. "If my investment still pays for itself, why am I going to leave it?"

Hope? The recent rush offers some experts hope for a housing market with no better options left. Property values drop when homes are rented, but in many cases the alternative is an empty house. "At times, it's the only way to get the homes occupied," said John Mogk, a Wayne State law school professor. Detroit began seeing more homes being rented in the mid-1960s as many white homeowners bought homes in the suburbs but kept their property in the city. It accelerated following the 1967 riot, when even more of the city's white residents moved out. A HUD program affecting more than a quarter of the homes in Detroit allowed purchases with no down payment to borrowers with reduced credit standards. "At that time Detroit was beginning to lose jobs and unemployment was building up," Mogk said. "Homes began to be abandoned, and then foreclosed on and taken over by HUD and sold en masse to investors.

The economics Start with capital market equilibrium: R =  V, Where  = user cost. Rent of $900/month is $10,800 per year. Leads to V/R ratio < 2. What is the meaning of a V/R ratio? Will it stay at 2? Why or why not?