A little more than 25% of housing units in Detroit are vacant—a staggering 92,000 units. For longtime Detroiters bearing witness to this in real time, a number of this magnitude carries complex weight.

Few would fault residents for feeling compounded emotions after years of population decline, overtaxation, and foreclosure followed by land bank auctions, property speculation and more than 19,000 residential demolitions. Nevertheless, residents have not succumbed to the overwhelm. Instead they have never ceased trying to acquire and rehabilitate homes and small-scale commercial properties in neighborhoods throughout the city.

It’s fraught with challenges. The reality is that the bare minimum of a successful development anywhere else—a project where the post-rehab value will exceed the cost of construction—is a unicorn in Detroit. Those low property values and high renovation costs also create a vicious cycle.

In October 2020, Detroit Future City, a Detroit-based think tank, released a study that summarized the problem well. 

“In many Detroit neighborhoods, low property values are a barrier to financing home purchases and renovation,” it reads. “When the cost of renovation exceeds the resale value of the property, banks are reluctant to lend and many home buyers are reluctant to invest.”

Andre Perry, author of “Know Your Price: Valuing Black Lives and Property in America’s Black Cities,” has led research that shows that properties in Black neighborhoods are undervalued by appraisers and financial institutions in cities throughout the United States as compared with white neighborhoods with similar characteristics.

The challenge of low property values is exacerbated by the demographics of Detroit itself, a city whose population is nearly 80% Black. Research led by Andre Perry, a senior fellow at the Brookings Institution and author of “Know Your Price: Valuing Black Lives and Property in America’s Black Cities,” shows that properties in Black neighborhoods are undervalued by appraisers and financial institutions in cities throughout the United States as compared with white neighborhoods with similar characteristics. He estimates that the collective impact nationally is $156 billion worth of devalued assets, simply because of the race of the population in an area.

Roadblocks to development financing

Detroit is no different. At last year’s Mackinac Policy Conference, Perry explained. 

“In Detroit housing devaluation is about 37%, about $28,000 [per home]… so, we are extracting wealth every day in Michigan and blaming Black folk at the same time,” he said.  

Traditional banks and credit unions still offer very few loan products for rehab projects unless the property is the rehabber’s principal residence. This leaves the task of financing development—not just home renovations—to community development financial institutions (CDFIs), lending institutions certified by the federal government to address unmet credit needs at the community level. 

CDFI financing is more available in Detroit than in other places, but it is also more expensive. Unlike traditional banks CDFI’s don’t take deposits or have access to very low-cost capital from the federal reserve, for instance, they can then lend out. CDFIs commonly explain that they need to charge higher interest to cover their costs, including amounts they borrow from large banks and must repay. 

Mortgage lending rates on principal residences nationally are around 3-4%. Small-scale developers in Detroit borrowing from a local CDFI will pay more than double that, between 6-9% in interest. The high financing costs mean a lot of good projects just don’t get done in Detroit. 

But to access cheaper financing, some rehabbers perform a “house hack,” living in a rehabbed property as their principal residence before moving on to the next rehab..

For Kirk Welsh, a Black native Detroiter, it all comes down to access. Welsh purchased a two-unit residence on the city’s northwest side using the “house hack” method. 

Kirk Welsh, 30, of Detroit purchased this residence on the city’s northwest side using the “house hack” method. 
Photo credit: Chase Cantrell

“I’m going to use my personal funds—everything that I get from my job,” he said. “And invest it right back into my property so that I can get to a point where I can take some equity out of the house or get a home equity line of credit and move onto the next property.” 

His ultimate goal has been to finish his first property quickly so that he could immediately move onto the next project.

Welsh seemingly did everything right as an emerging developer. He purchased a property in a neighborhood where market values were rapidly rising. He took a real estate training course based in Detroit to understand the risks inherent in development and supplement his knowledge. (Note: This is the training that I lead as my day job.) He has a professional background in architectural design and a stable job with strong financial indicators (e.g., credit score, debt-to-income ratio and salary history). He even has active revenue from a tenant in the second unit of the duplex. But when Welsh approached a bank headquartered in Southeast Michigan to scale his real estate practice his worst case scenario unfolded.

“When we were getting ready to close the home equity line of credit, the bank actually pulled it off of the table,” he said.“They had been giving me a super hard time the entire time.They said they didn’t want to take a risk with me because I didn’t have two years’ worth of experience, even though everything else checked out.”

Welsh not being able to get past the bank’s underwriting process is a common example of dreams deferred. Without access to financing, he must either wait until a financial institution concludes that lending to him meets a reasonable level of risk, or he must continue to save his own money until he can pay out of pocket for another project. Either way, he must wait.

Big obstacles for residential rehabbers

For small-scale rehabbers like Welsh in many Detroit neighborhoods, this confluence of market devaluation and lack of access to financing means cash remains king. Residents wanting to rehab, redevelop or even buy a new home are pitted against institutional investors and deep-pocketed investors outside of the city with easier access to large amounts of cash. Those same investors have already hoarded properties sold in the Wayne County Tax Auction or bundled by the city’s largest landowner, the Detroit Land Bank Authority.

Those larger investors also have more of a cushion to ride out other disruptions in the rehab process. The cost of materials, most notably lumber and steel, has skyrocketed in the past two years causing material shortages, construction delays and budget shortfalls. Labor costs also continue to rise due to pre-existing labor shortages, now made worse by the ongoing COVID-19 pandemic. Issues like these can stall a self-financed project or keep it from ever being completed.

All these obstacles exist against a backdrop of a clock counting down. The scale of vacant property in Detroit means thousands of buildings are open to the elements and degrading quickly, most likely ending up on the City of Detroit’s demolition list. Under pressure from local activists, community development organizations, socially conscious developers and others, in 2020 the City agreed to perform stabilization work on 6,000 homes in the hopes of slowing some degradation. This work includes patching roofs, not replacing them, to slow water infiltration. However, even these properties remain at risk of being permanently lost without a clear path to full rehabilitation by unlocking more public or private financial resources.

Navigating an inhospitable ecosystem

Until there is more systemic change, Detroiters can at least make sure they are as prepared as possible to navigate such an inhospitable ecosystem. Real estate training and technical assistance programs for Detroiters, like the one Welsh took (Building Community Value’s “Better Buildings, Better Blocks” and Capital Impact Partners’ “Equitable Development Initiative”), cater to Detroiters showing interest in transforming their neighborhoods. These programs teach key principles and provide mentorship and help to connect and grow networks of residents who wish to work together and share resources. 

The City of Detroit is also preparing to deploy up to $5,000,000 from American Rescue Plan Act funds this year on training for landlords and property managers in the hopes of improving the quality of housing in the city.

Although knowledge is power, it can’t remove all of the barriers to entry standing in the way of Detroiters wanting to get involved in redevelopment projects. The system dynamics, including governmental policies and widespread disinvestment, that devastatingly transformed the physical and social fabric of Detroit neighborhoods were inequitable. In many ways, the slow recovery of the city’s built environment has shared the same quality. We need to provide Detroiters what they deserve the most: responsive tools that reinforce the self-determination of our citizen builders, block by block.

Chase L. Cantrell is the founder and head solutionary at Building Community Value, a Detroit-based nonprofit specializing in real estate training, and is a lecturer at the University of Michigan’s A. Alfred Taubman College of Architecture and Urban Planning. Get in touch via email at chase@bcvdetroit.org.