Detroit, in the mid 20th century, was a vibrant center of American industrial manufacturing with a prospering middle class. It is now the poster city of blight and urban decay. As industry has collapsed across the region, job scarcity, white flight, and soaring crime rates have driven hundreds of thousands of people out of the city. Thousands of homes, retail spaces, and civic buildings sit empty and dilapidated. Today, due to the faulty set of incentives implemented to encourage investment, real estate investment–a force that was once thought to have the potential to save Detroit–is worsening blight and costing the city millions of dollars.
After decades of declining investment in Detroit, locals were excited when, beginning in 2013, investors began to purchase large swaths of residential properties. Jimmy Lai, a billionaire based in Hong Kong, purchased 32 homes at a tax foreclosure auction. At the same auction, local real estate agent Wendy Briggs walked away with a staggering 428 properties. Despite the hopes of local residents, it became obvious right away that Jimmy Lai, Wendy Briggs, and the myriad others snatching up Detroit real estate had no plans to invest in their properties. Instead, they anticipated that Detroit would experience a real estate boom in the next several years, allowing them to unload their properties at a large profit.
Thousands of homes owned by speculators have fallen into disrepair as their owners wait for a real estate boom that does not appear on the horizon. In the meantime, a house at 3383 15th Street, owned by Jimmy Lai, partially burned down in 2015. To date, he’s made no effort to clear the wreckage, which poses a safety hazard in the neighborhood. At one point, Detroit paid over $200,000 demolishing a single speculator’s properties after they fell into disrepair and then into foreclosure.
So what factors are driving this mess? A big cause is real estate taxation in Detroit. Facing debilitating revenue shortages during the 2008 financial crisis, Detroit over-valued residential properties with the hope that increased revenue from property taxes could help the city stay afloat. They did this without the understanding that increasing property taxes reduces incentives to build or rebuild. Without this understanding, Detroit’s taxing strategy proved disastrous. In 2016 alone, the city sent 38,000 foreclosure notices due to unpaid taxes. The majority of tax bills totaled less than $2,000. If overdue taxes couldn’t be paid, the homes went up at tax foreclosure auctions, where speculators would subsequently make the majority of their purchases. It simply was too easy for speculators to game the system–with minimal cost to them and minimal gain for the city.
Many speculators fail to consider taxes in the total cost of their investment, now owing Detroit millions of dollars in back taxes. Wendy Briggs alone, who purchased 428 properties for just $379,000, owes $4.7 million in back taxes. 95% of her properties will be auctioned in 2016. In fact, nearly 80% of all properties purchased at the 2013 tax foreclosure auction are back in foreclosure. So not only do speculators let their properties fall into decay, they fail to pay their taxes, which deprives the city of a critical revenue stream and puts homes back into the tax foreclosure auction. This cycle continues to repeat itself.
Detroit and Michigan are taking steps to reduce the number of foreclosures and ability of investors to hoard properties. The state has cut interest rates on tax repayment plans by two-thirds, reducing the number of homes foreclosed due to unpaid taxes. Wayne County has closed a loophole that allowed speculators owing back taxes to purchase additional properties at auction. In addition, property assessments are expected to drop. The next step would be to eliminate taxation on buildings and focus solely on taxing land values. Both measures, if implemented worldwide, are predicted by experts to induce landlords to either immediately develop their properties or to sell to those who will.
These measures have cooled investor interest in Detroit. In 2016, the top ten investors bought nearly half as many homes than they did in 2013. Although housing activists applaud this progress, they believe more can be done. Local residents propose making it easier for people in poverty to file property tax exemptions and further decreasing the number of real estate investors in the market. However, this could have the opposite effect, as low property taxes decrease property owners’ incentive to develop their properties.
Detroit residents, having learned that speculators tend not to care about their communities, are thrilled to see them go. “They think Detroit is just a bunch of criminals who don’t care and the city is meaningless to them. The idea of a neighborhood or community is a foreign concept to these people,” says Bill Cheek, a resident in the North Corktown neighborhood. The challenge, some believe, will be keeping them out. By implementing sufficient land value taxation and exempting buildings from taxation, they should be able to do just that.