A value-added investment strategy for bad properties that does not rely on rapid price increases
According to Auction.com, more than half of real estate investors in the first quarter of 2022 said the local housing market was “overvalued and subject to correction,” but 9 in 10 Nearly 100 people expect property acquisitions to increase or stay flat this year. Buyer survey conducted in March 2022.
Another question from the same survey helps shed light on these seemingly contradictory answers.
Most investors believe that a price adjustment may occur at some point in the future, but few believe it will occur in 2022. This is up from his 12% a year ago, but shows more than eight in 10 buyers expect home prices to continue to rise in his 2022. .
strong demand for pain
Buyers like Virginia-based Rick Stearns, who is looking to secure three more homes in addition to the five he has purchased on Auction.com since 2018, have spoken out on aggressive acquisitions. It’s not just doing. They are doing well, as the Auction.com platform’s key demand and sales metrics show.
In Q1 2022, 61% of all properties put up for foreclosure auctions on the Auction.com platform were sold to third-party buyers, up from 56% last quarter and 59% a year ago. Third-party sales in Q1 are not far below the pandemic-time high of 63% in Q2 2021.
Third-party sales rates, a barometer of demand from property investors buying at foreclosure auctions, surged in late 2020 following the pandemic-induced moratorium on government-sponsored mortgages. Interest rates hovered near his 60% even after the moratorium expired in July 2021 and anti-foreclosure rules from the Consumer Financial Protection Bureau expired at the end of 2021.
In the five years before the pandemic (2015-2019), third-party foreclosure sales averaged 39%. A rate of nearly 60% over the last two years represents a paradigm shift in that rate.
Investors aren’t just buying a higher percentage of properties available at foreclosure auctions. They are willing to pay higher prices. The average sales price of properties sold via foreclosure auctions on the Auction.com platform in Q1 2022 was $193,597, up 4% from the previous quarter and up 41% from the previous year, tracing back to national data. We hit a record high. is available (Q1 2015).
More importantly, the average selling price to the estimated current market value of homes sold in foreclosure auctions. That metric is he was 89% in the first quarter of 2022. This means that buyers paid an average of 11% less than the current estimate. 89% in Q1 2022 is down slightly from 91% in Q1 2021, but still represents a significant increase from the pre-pandemic market. In the five years prior to the pandemic (2015-2019), sales prices at foreclosure auctions averaged 78% of estimated present value.
These paradigm-shifting tough demand indicators continued into the first quarter of 2022, despite a spike in mortgage rates near the end of the first quarter of 2022. Historically, higher mortgage rates have weakened demand for distress, as higher mortgage rates foreshadow slower demand in the retail market. Many foreclosure auction buyers refurbish and resell to owner-resident buyers or other buyers who are dependent on financing.
We believe there are three reasons why demand from real estate investors continues to be strong despite the headwinds of rising mortgage rates.
- Housing supply is in short supply across all market segments, but especially in more affordable market segments where most foreclosure auction buyers are reselling.
- A value-added investment strategy that does not rely heavily on rapid increases in housing prices
- A very hot rental market, offering investors an alternative (but still profitable) exit strategy in the event of a housing price correction
According to the National Association of Realtors (NAR), fewer than 1 million existing homes were put up for sale nationwide in the four months to March 2022. Monthly, this represents his 2-month supply or less, well below his 6-month supply, and is considered a balanced market between supply and demand.
Given that most foreclosure auction buyers resell to the retail market (61% of Auction.com survey respondents said their primary investment strategy is renovation and resale to owner-occupiers). ), and supply shortages in the retail market are working in our favour.
“We’re still in short supply,” said Atlanta-area buyer Tony Tritt.
Like most of Auction.com’s buyers, Tritt expects his market to slow down, but real home prices like the ones he witnessed in the aftermath of the 2008 recession are likely to continue. We believe the undercurrent of supply shortages will help soften the market from the crash of .
“I hope it doesn’t… this is a cyclical industry. We may see pain again. Slowing price gains won’t lead to a crash,” he said. “From now on, he looks six months into the future when it comes to buying properties.
The undercurrent of housing shortages is particularly favorable for local community developers like Tritt, who resell renovated properties at relatively affordable prices.
In 2020 and 2021, the average resale price of foreclosed properties was $261,543, 32% below the average selling price of all existing home sales of $381,850 during the same period. According to NAR data, home sales in the $100,000 to $250,000 price range fell 28% year-over-year in March 2022, and those below $100,000 fell 21%. In contrast, home sales increased on a year-over-year basis across all price points above $500,000.
Second, the value-added investment strategies employed by local community developers like Tritt are less reliant on rapidly rising home prices. Even if the market doesn’t appreciate it, these investors buy the distressed property at a price below its post-repair value, thanks to a quality renovation that enhances the property’s intrinsic value. Resell for more than worth.
“You make money in real estate when you buy a home, not when you sell it. If you buy it right, you can renovate it right,” says Tritt. “The market will tell us what the selling price is. We can’t choose that.”
Finally, a strong rental market will provide a buffer for local community developer buyers in the event of a housing price correction. According to the latest CoreLogic Single Family Rent Index, average rents rose 13% year-over-year in February 2022. February marked the 11th straight month of record increases.
Both Starnes and Tritt say a correction in home prices will also represent a more favorable property acquisition environment for buyers who have set aside some dry powder for such scenarios.
“If it happens again, I’ll set aside some money. I’ll go out and buy four or five,” Stearns said.
Daren Blomquist is Vice President of Market Economics at Auction.com. In this role, Blomquist analyzes and forecasts trends in complex macro- and microeconomic data within markets and industries to deliver value to both buyers and sellers using the Auction.com platform.