If you’re like most real estate investors, you probably began your adventure by looking into the opportunities presented by bank-owned homes (“Real Estate Owned,” or “REO” as the banks refer to the properties). And why not? Bank-owned homes were typically available to purchase at a significant discount compared to properties on the local multiple listing service (MLS), presenting investors with a healthy potential profit whether they choose to hold and rent or fix and flip the home.
REOs generally came with a clear title, and while these properties often required some repair to make them rentable or saleable, successful investors knew how to build those costs into their purchase offers, and were either do-it-yourselfers who could handle the repairs themselves, or had partnered with local contractors, carpenters, painters, electricians and plumbers who were ready, willing and able to handle whatever needed to be done at reasonable prices.
And if you’re an investor who started out in the last 10 years, it probably seemed like there would be no shortage of REO homes to buy. Foreclosure rates quadrupled from 1% to 4% at the peak of the crisis and the rates of delinquent properties not yet in foreclosure almost tripled, growing from 4% to over 11%. This meant that in 2010 and 2011 there were over 8 million homes either in foreclosure or about to enter the process, which would inevitably lead to a tidal wave of REO properties hitting the banks’ portfolios, which would need to be disposed of at a discount. And the discounts were significant – home prices fell over 35% from peak to trough, and in the hardest-hit states like California, Arizona, Nevada and Florida, prices in many markets fell by over 50%.
Institutional investors saw the market opportunity for single-family rental homes, and began buying REOs in large numbers, helping to reduce the inventory of vacant homes, providing rental units during a time when multifamily vacancy rates were at 3% – an all-time low – but also driving the price of REO homes up in the markets they’d targeted by competing for the rapidly shrinking number of assets. At the same time, the housing market chugged along through its fitful recovery, with median home prices hitting a new peak earlier this year, and home sales reaching about 5.5 million this year – heading back toward normal levels despite extraordinarily low inventory of homes for sale.
Where Did the REOs Go?
As the market has recovered, lenders have clamped down on credit, making it difficult for many potential buyers to get a loan, but also resulting in foreclosure rates and delinquency rates dropping below normal levels – according to a recent report by Black Knight, delinquencies are running at about 3.8% and foreclosures at 0.87%. Fewer foreclosure proceedings ultimately means fewer REO properties. In fact, according to Attom Data (formerly RealtyTrac), lenders repossessed just over 169,000 homes over the first six months of 2017 – a 14% drop from last year. And overall foreclosure activity in June was down 22% from 2016, and the lowest level it’s been since 2005, before the crisis began.
So what are successful investors doing now?
Clearly, buying strategies have begun to shift away from traditional REO to different types of distressed assets. For example, Attom Data also reported that there’s been a sharp uptick in the sale of homes at foreclosure auctions across the country; over 38% of the foreclosures completed at courthouse auctions were sales to third-party investors (the rest were repossessions), which is the highest percentage ever recorded by Attom Data. Auction.com remains the best resource for investors looking for foreclosure sales. As of this writing, 33,640 homes from across the country were in the Auction.com database, providing investors with the largest inventory of properties scheduled for sale, along with the information they need to make informed decisions.
There’s also a relatively new category of “newly foreclosed” properties, which are made available on Auction.com almost immediately after being repossessed at the courthouse auction. Many of these homes are part of the FHA’s CWCOT (Claims without Conveyance of Title) program, which provides investors with an opportunity to buy these properties months before they would if the assets went through the traditional REO process. These homes are priced to sell, but aren’t intended for traditional homebuyers or novice investors – the properties are often sold occupied, and without title being thoroughly researched. Seasoned investors know how to handle situations like those, and how to convert the homes into profitable rental or fix and flip properties.
With 5 million homeowners still underwater on their loans, investors are still pursuing short sales, especially in markets where property values still haven’t fully recovered from the market downturn. According to Attom Data, about 14,000 short sales a month have taken place through the first half of 2017. And many investors have shifted their focus from coastal markets to states where there’s still a backlog of foreclosure activity – generally in the Midwestern or Northeastern states.
Whether you’re buying REOs, foreclosures or short sales, this month’s newsletter has a wealth of useful data – sales and pricing trends, tips on which states deliver the best returns – and some exciting news about foreclosure sales moving online. As always, we hope this information helps you successfully invest.
Cheers!
Rick Sharga
