The Next “Wave” of Foreclosures and Markets

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The next foreclosure wave is already brewing. Over the past few years, monetary moves and rash home buying decisions were made that could cause even more foreclosures to hit the market. The question is, which markets will face the most foreclosures, and how low will prices go? But that’s not all; foreclosure competition has started to spike as a new type of buyer enters the market for these deeply discounted properties.

And if you want to know about foreclosures, discounted properties, and data on the markets with the biggest price cuts, Daren Blomquist from Auction.com is your man. As VP of Market Economics, Daren knows where the foreclosure market is moving before the masses do. In this episode, he gives his take on the next “wave” of foreclosures that could be headed our way, when it will hit, and the investing areas already feeling the effects.

Daren also talks about the unexpected buyers entering the foreclosure market and how they could put investors at the back of the line for discounted deals. And if you’re in this specific state, prepare for your properties to be placed at open auction, as investors are forced to wait to acquire the foreclosure properties they rightfully won. Make no mistake; there are MANY deals out there for investors, but competition could start to heat up fast!

Dave:
Hey, what’s up everyone? Welcome to On the Market. I’m your host Dave Meyer, joined by Henry Washington. Henry, how are you man?

Henry:
What’s up bud? Good to be here.

Dave:
Yeah, we haven’t done one of these together in quite a while.

Henry:
I know. I missed you.

Dave:
I know, me too. We always have all those other weirdos here. It’s finally just you and me again. How’s business these days?

Henry:
Business is booming, man. It’s crazy. We’ve got tons of deals happening all at the same time. I can’t keep up with them all. I guess those are all good problems to have.

Dave:
Yeah, man. That’s awesome. Well, hopefully you learned something during the interview we had today. I saw you paying extra close attention to this one. For everyone listening, we have Daren Bloomquist on who comes from auction.com, and has some really unique information, advice, tips, specific markets to look at all having to do with foreclosures and distressed properties. So, if you are the kind of investor who wants to flip properties or even do a burr, any value add, this is going to be a very good episode for you. Henry, what did you learn from this conversation with Daren?

Henry:
Well, first of all, I learned that investors are getting some competition at the bidding tables here for these-

Dave:
That was crazy. Yeah.

Henry:
… Deals, right? That’s nuts. I don’t want to spoil it for everybody, but you should listen all the way through. But you’ve got some competition investors out there for buying some of these distressed properties. I obviously loved hearing about the markets where the best discounts are at. So, if you to really try to understand what are some of these good markets to get good discounts, then make sure you listen through. But it’s also just a lot of great market knowledge and when you guys compare some of the state and local laws and how they compare to what’s going on at a larger scale, and if you were thinking about, “Hey, I want to do a burr, or a fix and flip this year. But, I’m not quite sure where the market is going.” Well, this is going to give you a great place to understand how to go find and buy those. And then, where the market is headed, based on people who stare at the state in the face every day.

Dave:
Absolutely. We went out and we got Daren to join us today, because I think one of the interesting things about the way the market is working right now is, on one hand, things are kind of back to crazy levels where there’s bidding wars and everything. But as you’ll learn in this episode, the distressed property side of things is very different right now. And that to me, is where the opportunity is. And so I think if you are struggling, like you’re looking on Zillow or in the MLS and thinking, “Wow, things are really competitive. Everything’s going over asking again.” This is going to provide you with some really good information that might be able to help you find the deals that you’re looking for.
And if you appreciate the fact that we go out and find these excellent guests for you and bring wonderful panelists like Henry in to give you some context and ask great questions, please give us a good review. We always appreciate it, either on Apple or Spotify. We work very hard on this show and if you like what we’re producing here, we really appreciate you giving us a solid review. With that, we are going to take a quick break and then bring on Daren Bloomquist from auction.com. Daren Bloomquist, welcome to On the Market. Thanks for joining us.

Daren:
Good to be here. Thanks for inviting me.

Dave:
So you were a guest on the BiggerPockets Real Estate Show, but in case our audience didn’t listen to that, can you just introduce yourself please and tell us a little bit about what you do at auction.com?

Daren:
Sure. My name is Daren Bloomquist. I’m vice president of Market economics at auction.com, which is actually a really fun job. I get to look at the market trends. And also, we have a lot of data, and we’ll probably get to that later, but a lot of data internally in auction.com that I get to look at to interpret what’s going on in the market and what our buyers and sellers are saying about the market. I mean, we really have an amazing platform to look in to get real-time data about what’s happening in terms of buying and selling properties on our platform. So, I get to interpret that and spread that message out for both our buyers who probably are more going to be the listeners to this podcast, people who are real-estate investors buying properties on auction.com and other places of course too. And then also our sellers who are the banks who are selling the properties, who are foreclosing on the properties.

Dave:
Can you just give us a highlight of what the big trends you’re seeing in your work are right now.

Daren:
Well, what we’re seeing as a really big rebound and, I would say, the biggest trend I’m seeing in our data, and we also see it in bigger macro-economic data, is that the housing market is extremely resilient and there’s been a rebound in demand from our buyers very strongly in the first half of 2023. In the second half of 2022, we saw a big pullback. Our buyers said, “Oh, this market is scary. We’re going to pull back a little bit.” They were still buying of course. But they were buying much more conservatively. Their buy box had shrunk in terms of where they were buying and what types of price ranges they were buying in. But when we look at our metrics now, which are things like, what we call, the sales rate, the percentage of properties brought to auction that sell. And then also, the price execution, which is the winning bid on average to the estimated value after repair value of the property.
Those numbers have bounced back very strongly in the first half of this year, which is an indication to us that our buyers are very confident, have regained confidence in the housing market. And so, to me, that’s one of the best barometers of what’s going to be coming in the second half of 2023 as well, is that buyer confidence, because they’re buying these properties or distressed properties, they’re going to be renovating them and then reselling them back into the market within six months. And so, to the extent that they are accurate at predicting the market that they’re going to be selling into six months, which they typically are pretty good at that, then we’re going to see a pretty strong housing market for the remainder of 2023. It’s not to say, that prices… We can get into the whole home price conversation. They’re still being fairly conservative in terms of their pricing. But, that bounce back in demand is probably the biggest trend that we’ve seen this year and speaks to the resiliency of the housing market.

Henry:
Yeah. I have to say, I agree as being one of those people who is buying distressed properties and renovating them. We have bought more properties this year to flip than we’ve bought… Gosh, as a reference, I was doing about 10 to 15 flips a year. I’ve got 12 going on at the same time right now. And so, it’s very, very bullish on the market. And it seems like anytime we list something, it’s flying off the shelves, as long as it’s done. And so, everything I’m seeing echoes the data that you’re seeing. So it’s cool to see some of the numbers behind it. Makes me think I’m not crazy.

Daren:
Yeah, I mean, we’re seeing it pretty widespread across the country. Now, during 2021, things got a little crazy. And I would say, even dangerously crazy, buyers were… Typically on our platform, properties are selling for about 20 to 25% below the estimated as-is value of the home, not the after repair value of the home. So, I’m sure your viewers or your listeners will probably understand that. But, do want to make that distinction? So that’s the baseline is that 20 to 25% discount below as-is value of the home. During the height of the pandemic housing frenzy, the average bid was just 9% below that as-is value. So, our buyers were not building in a very big cushion. Now, it’s back to that 20 to 25% discount cushion, but they’re buying a lot more. So, to your point, Henry, is we’re seeing more buying activity but still more conservative on the purchase price, the acquisition price, than they were during the height of the pandemic.
And, to credit, where credit is due, I guess, our sellers, the banks are listening to the market. They realize that the mortgage rate spike last year affected the market and affected buyers. And so, they have also adjusted their pricing, not as quickly as we would’ve liked or our buyers would’ve liked, but they have adjusted pricing lower, and so the average… What we call, the credit bid, which is the minimum amount that they’ll accept to sell the property or reservation price you can call it as well, that has come down as well.
So, that is helping to spur this resurgence in purchase activity. And yeah, I talk to a lot of buyers individually to understand the color behind the data. So, buyers like you Henry, and they’re saying the same thing as they’ve ramped up, they use the word bullish, as you did. Sometimes they say cautiously bullish. But, they’re definitely bullish. And especially on the type of price range that we typically have on our platform, which the after repair value on these homes is around that 250,000 to $300,000 range. The average purchase price, I’m just looking at the data here, what is it? A $193,000 as of April of this year, or May of this year, sorry. But then, they’re turning around and selling them for 250 to $300,000. In that price range, they’re very bullish. They can sell those homes all day long, basically.

Henry:
Yeah, there’s multiple exits with that price range, because even if they can’t sell for what they want, they can stick a tenant in it and at least break even. It’s a less risky strategy. Are you seeing more inventory on your side? Meaning are you seeing more foreclosures, and is there more opportunities out there now, is that what’s driving this?

Daren:
That’s the rub it. There’s really not a huge rise in inventory. It’s gradually in increasing. I’m sure you guys were probably aware of the foreclosure moratorium in the second half of 2020. And then, throughout 2021, basically through the end of 2021, we had this foreclosure moratorium. It didn’t stop every single foreclosure, but it stopped the vast majority of foreclosures on government backed loans, basically FHA, FA, which is Fannie Mae and Freddie Mac. Starting in January of 2022, we’ve seen this gradual rise in foreclosure inventory, but its emphasis is on the gradual. And so, we’re at now, on our platform, which accounts for about half of all foreclosures nationwide, we’re just shy of 50% of 2019 levels. So, we’ve come back, but we’re still 50% below where we were in 2019, which, 2019 was not a huge, huge year for foreclosures. It was just a normal healthy housing market type of year. And so, that’s what we’re seeing nationwide.
Now, in some states, we are seeing the inventory come back more quickly. Places like Indiana actually sticks out, it’s at 124% of 2019 levels. So they have actually exceeded 2019 levels. Oklahoma is at 155%. And this is as of the first quarter. Actually Colorado, it surprises people at 97% of pre-pandemic levels. Now, what I would say about Colorado is their numbers were extremely low, foreclosure numbers were extremely low in 2019. So, getting back to 2019 levels is not necessarily a huge milestone.
But if you look at a map of the United States, we see the foreclosure volume is coming back. It seems to be more on the rust belt coming back, but the rust belt through the Midwest, not so much in the northeast. So, taking out Pennsylvania, New York, and New Jersey, but places like Indiana, Ohio, Michigan, Illinois, Wisconsin, we’re seeing foreclosure inventory coming back, getting, approaching, or exceeding 2019 levels, whereas in parts of the northeast, as I mentioned, and then the southeast, actually Florida is still at 26% of 2019 levels. So, there’s actually a pretty big variance across the country, and we can get into that more if you’d like.

Dave:
I am curious about that, Daren. But first, I wanted to know, do you have a sense of what a normal level of foreclosures is on a national level? Because when you look at the historical chart for the last 20 years, it doesn’t seem like there’s ever been a time where it’s just been flat. It’s been up and down, up and down. So, do you guys think about that? What we could expect it to, or what it should look like?

Daren:
Absolutely. That’s a great question, I think. And actually, I spend personally quite a lot of time thinking about that. It feels like foreclosures are either rising or falling. They’re not just really just humming along flat. But, I mean, I would say, 2019 is a good benchmark for what you would consider potentially normal levels of foreclosure activity. You had about 200,000 properties foreclosed on nationwide, 200 to 205,000 in 2019. And so, it’s not a huge number, given that there’s 5 million homes that sell approximately a year. So it’s a small slice of the overall market for sure.
Now, to put that in perspective or in context, in 2009, which was the peak of the great financial crisis foreclosure event, we saw over a million. 2009, 2010, we saw over a million properties foreclosed on those two years. And then, there was this gradual down slope from there, from 2009 through 2019. And 2019 was the lowest in a decade. So, that’s where I’d put it, is that, 200,000 mark. And also, to put it in context, in 2022, we’re at about 85,000. And that’s not just our platform, that’s looking at public record data.

Henry:
85,000 total?

Daren:
Yeah.

Henry:
Wow.

Daren:
But in 2021, we were at about 60 to 65,000. So, we are gradually coming back up. But, the numbers are still even low relative to what I’d expect to see as normal levels of foreclosure activity.

Dave:
Do you see this recent increase as just the beginning of a trend? Or do you think this is sort of a return to normal in a way? We were artificially low probably for a while, and now things are probably going to level out.

Daren:
I see it more of the latter, is that, we’re returning to normal, and some of the, what you might call, backlog or deferred distress that was held back by the moratorium is slowly being released into the market. And so, we are starting to see that. And we actually had a summit just a couple weeks ago with our sellers. So the banks, the mortgage servicers. And we surveyed them. We asked them, “What do you think is going to happen?” And, the vast majority of them, about 80% of them are saying that they are expecting to see foreclosure activity increase slightly in 2023. There were about 20% who said they were expecting a substantial increase in their foreclosure activity in 2023. But most of them were saying just this continued gradual increase in foreclosures back to normal.
Now, I would say that there is the seeds of another maybe bigger foreclosure wave were planted during the pandemic because of all the stimulus that we saw. And the, what I would call, over inflated home prices, because of that stimulus that occurred. And so, for people who bought around 2021, especially early 2022, those folks are at higher risk for foreclosure going forward, because they basically bought at the top of the market. The other risk that we have that the seeds that were planted are the ultra low interest rates that occurred during the pandemic, and now are a thing of the past. And because of that, the folks who do get into trouble, who maybe lose their job, or have some other life event that triggers default, those folks are going to have a little bit harder time getting out of default because of those higher interest rates. They maybe have a 3% interest rate for the servicers in the toolbox for, what they call, loss mitigation to avoid foreclosure is refinancing or a loan modification.
But for these folks who have that 3% interest rate, a refinance or a loan modification is going to put them into a 6% mortgage rate that actually makes their payment go up, rather than down. And so, it’s on two fronts. It’s the folks who bought on top of the market who may be actually underwater now, because home prices have been coming down in many markets. And then also the folks who get into trouble who don’t have as many options to avoid foreclosure. And that would be more of an event that we might see materialize in 2024 or 25.

Dave:
For those people who don’t follow this as closely as you do, why do you think, or can you just tell us why you don’t think there’s going to be a big increase in foreclosures? What is different about the market now than it was in 2009?

Daren:
One of the main differences is the quality of loans that are out there that are active in the market mortgages. Credit quality is much better. We don’t have the, so-called, ninja loans, no income, no job.

Dave:
We have another co-host who used to be a loan officer who talks about this quite a lot. The ninja loans. Yeah.

Daren:
Yeah, there’s other names out there for them. And, if you could fog a mirror, you could get a loan type of loans. In this housing boom, which was a slow motion housing boom, over the last 10… Well, 2012 to 2019, where the housing market was doing well, and growing, and prices were going up, during that entire time, you never really saw that extremely risky lending materialize. The riskiest loan product that we have out there right now is FHA loans, properties which are the low down payment, and you do tend to have lower credit scores and higher debt to income ratios on those loans. And so, I would actually consider the FHA fairly risky and fairly at risk going forward, but that’s one you didn’t see the prevalent use of higher risk loans. FHA is about 15 to 20% of the market right now and leading into the pandemic. So that’s one big thing.
I think the other big thing not to be underestimated is the political will to not have another foreclosure crisis. And you saw that during the pandemic, the bipartisan effort to roll out programs that would allow people to, at least in the short-term, avoid foreclosure. And so, I do think that’s actually a big factor, that if we were to see some other crisis that could trigger foreclosures, you would see a lot of political will and policy pushed toward avoiding some massive wave of foreclosures. So those are a couple things that I would put… And the third one, actually, as I’m talking through this is the fundamental supply/demand landscape that we’re in. And you’ll probably hear a lot of economists talk about this. But, the fact that also during this slow motion housing boom that we’ve had over the last 10 years, leading into the pandemic, you saw fewer homes being built than household formation. Depends on who you talk to, but there was a deficit of potentially several million housing units being built relative to the number of households that were being formed.
And so, because of that low supply environment, you don’t have the potential for… On top of demand weakening, you don’t have… Which we definitely have seen demand weakened. There’s no question about that. Demand from buyer’s weakened, especially over the last year. But, you don’t have layered on top of that an overhang of supply that’s coming into the market at the same time. And so, that combination is also helping to prevent us thinking that there will be a huge uptick in foreclosures, at least in the short-term.

Henry:
So one question I have that I’m sure a lot of newer investors have as well is, where or what parts of the country are you seeing the deepest discounted property?

Dave:
Henry’s just writing down.

Henry:
Where can we go to get the good deal?

Daren:
Actually, I should have had this ready.

Henry:
Oh, take your time. I’ll just get my pen and paper ready.

Daren:
Actually, if you go to auction.com/inthenews, we have a lot of data on that, and heat maps, that sort of thing, that show you where some of the bigger discounts are. But, as a level set, I think what I was mentioning before is the nationwide… What I put at the discount as of May of this year, 21% below as-is value. That’s going to be more like 30, 40% below after repair value, maybe a little bit more. So that’s your level set there. And then, just give me one second here.

Dave:
Henry’s looking for zip codes. He’s looking for specific addresses.

Henry:
Yeah. If you can just send some direct leads right over to me. However you have to do this.

Dave:
“You’ve got names and phone numbers, even better.”

Henry:
Daren’s like, “I like my chow.”

Daren:
Yeah, that’s right. No, I mean, you can go on and you can find that pretty… We try to be transparent on the platform of where you can get those discounts. But, one key piece is, this isn’t so much as a specific geography as a type of geography is the rural geographies or where you’re going to find the deeper discounts, at least on our platform. And we do have a lot of buyers who actually specifically focus on rural areas in any part of the country, because that’s a lot of times where you can find those deeper discounts.
So, I actually was talking to a buyer recently who is focusing in on Peoria, Illinois, because that’s where they’ve just found a lot of properties at discounted price. And so, that’s one piece of it. And then, generally speaking, actually it does coincide with where we’re seeing some of the supply come back, the rust belt areas of the country is where you’re going to tend to see some deeper discounts. And part of that has to do with the age and the condition of the properties that you’re going to find. And are there places like Dayton, Ohio, other parts of Ohio, we do tend to see some really good discounts. I’m just looking here, I’m pulling up my list of where we’re seeing some of the biggest discounts. Yeah, Bloomington, Illinois comes up. So that’s not quite Peoria. But, as the the biggest discount below after repair value, and this is as of the first quarter of 2023.

Henry:
Is that one O or two Os?

Daren:
Unlike, Bloomquist, two O’s. It’s Bloomington. Actually, Manhattan, but not Manhattan, New York. Manhattan, Kansas.

Henry:
Oh yeah.

Daren:
The Little Apple. I actually grew up in Kansas, so somewhat familiar with that where Kansas State University is located. Johnson City, Tennessee. So these are not obviously huge markets. Asheville, actually North Carolina, which has a little bit of a surprise to me.

Henry:
Oh, that’s a great market.

Daren:
Because yeah, that tends to be a very hot market, as far as I know. And then, when you get into a little bit bigger markets, Detroit. And so, all of the ones that I mentioned so far, the average discount below that as-is value is actually 40% or more. Nationwide, we’re talking about that 21% discount. These markets all you have a discount of 40% plus below as-is value. And again, that may have some to do with the older properties that you would find in these markets, and the condition of those properties. But yeah, Detroit’s in there. Davenport, again, that’s in the quad cities area of Illinois. So, I could keep going. Peoria is in there, but it’s at about a 30% discount. I don’t want to give too much away, but.

Dave:
Well, Henry, I was curious for you, is that 40% discount what you’re looking for? What gets you out the door?

Henry:
Yeah. So typically, the general rule of thumb is a 30% discount, and then you subtract your repairs from that. So, that’ll sometimes put you right around 40%. So that’s a solid percentage. And that’s off of ARV. Right? So, that’s exactly where I’m looking to be.

Daren:
And, I keep on making the distinction, but this is off of as-is value, the discount’s going to be bigger off of after repair value. But the as-is value is what the bank tells us they think the property is worth, even in its current condition. Now, there’s limitations to that, because there’s usually no interior inspection of the property. So that’s a huge limitation. So yeah, there’s tons of opportunity for folks out there. There’s a lot of risk with buying a foreclosure, especially on the courthouse steps. I don’t know if you’ve ever done that, Henry, but.

Henry:
I’ve tried. I’ve tried and failed. I went to the courthouse auction, I’ve been probably four or five times. And I had my number that I wouldn’t go over. And it’s gone over every single time.

Dave:
Well, you got to be disciplined. Good for you.

Daren:
Yeah, that is good for you. And I was just talking to a buyer in the northwest suburbs of Atlanta, pretty far out. You’d almost consider it rural areas of Atlanta there, or outside of Atlanta. And he said he’s seen this… What I was talking about in the data, this resurgence and demand that we’re seeing in the data, he’s seen it on the courthouse steps. He’s bought quite a few in the courthouse steps. And, he said there’s bidders coming back now in 2023 that I’ve never seen before. And he’s been doing this for 25 years. And so, people are coming out of the woodwork. And so, it’s competitive bidding, which is good for our sellers, but maybe not always as good on the buyer side of things, because if you’re staying disciplined as Henry is, you may end up getting outbid by someone else.
One of the interesting things I was going to mention is that we’re actually seeing an increase in owner occupant buyers, which is crazy. And I think it’s a testament to the type of market we’re in with this low supply. If you go on the MLS, at least in many markets, there’s such low inventory. And, to be honest, auction.com has tried to make it as easy as possible for anybody to buy at the foreclosure auction. But there are still a lot of obstacles. You have to buy with cash. You have to come to that auction in most states with an envelope full of cashiers checks to buy at that auction. And yet, we did a buyer survey recently, and 15% of our buyers said they were owner occupant buyers, which is up from 8% a year ago. So about a doubling of the percentage of folks who are identifying themselves as owner occupant buyers. I thought that was really interesting. And those owner occupant buyers are inherently probably going to be a little bit more willing to bid a little bit higher than maybe an investor on a property.

Dave:
Yeah. That’s so interesting. Yeah. That’s definitely not the type of person you ever hear. Daren, I did want to ask you about some of these regional differences, because one thing you said is about the political will to avoid foreclosures. Are there big variances in local and state protections or incentives that either people who are interested in buying or selling these types of properties should know about?

Daren:
Yes, there are. And I think it’s becoming actually increasingly important, because states are starting to think about even passing laws that make it tougher, unfortunately, for investors to buy at foreclosure auction, which we are… To the extent that these laws make some sense, we are trying to find common ground. But, some of these legislators just have no idea how the foreclosure process works. And so, they’re trying to pass legislation that just doesn’t make sense, and actually is going to backfire.
And so, that’s something to be aware of. Probably not surprising, California’s on the forefront of some of this legislation. There was actually a law passed in California a couple years ago, it’s called an outbid period. So after the foreclosure auction occurs… So let’s say you’re an investor like Henry, you go to the auction, you’re the highest bidder, there’s a 45-day period after the end of the auction where a nonprofit or owner occupant buyer, speaking of owner occupant buyers, can come back in and bid $1 over what your highest bid was at the auction as an investor, and they can outbid you. They have a 45-day window.

Henry:
I like that.

Daren:
You like that?

Henry:
Yeah, absolutely. They should get first crack.

Daren:
Yeah. And actually, yeah, I mean, there was some other laws in California that were proposed that actually could have been very harmful not only to the market, but I think to even the previous distressed homeowners of the property that did not get passed. But that one was actually somewhat reasonable. It did have some loopholes. The first year that, that passed, we saw nonprofits coming in who were just basically nonprofits in name only, who were buying properties and taking advantage of that. And California has since closed that loophole, which is a good thing. The vast majority of those properties that we’re seeing getting outbid are actually owner occupants, rather than nonprofits now. So, that’s actually a good thing, I think, as Henry said. But, it’s an additional risk if you are buying at the foreclosure auction in California. You just have to realize that your money’s going to be tied up for 45 days before you want to start rehab on that property. Because, if someone outbids you during that 45-day period, you’re no longer going to own that property.
So, that’s one thing to be aware of. An important law that’s passed. New Jersey has been pretty aggressive on trying to pass some laws, but there was some legislation last year that got vetoed by the governor that has not passed. And so, right now, that type of legislation is just emerging. It hasn’t fully shown up yet, except for in California is the one place we’ve seen some concrete legislation pass that could affect investors. But it’s something to be aware of and to check on before you go to bid at foreclosure action. And then, I think the other thing to look at is eviction practices or regulations around eviction. In some areas it’s harder to evict than others.
Now most of our buyers, to be honest, don’t end up evicting. Henry, I mean, I would love to get your perspective on this, but when they’re buying occupied properties, which about half the properties on our platform end up being occupied, they do have to deal with the current occupant. Which is another reason it surprises me that more owner occupants are buying on our platform. But anyway, you have to deal with that current occupant. Eviction is a last resort for most of our buyers. Most of them can offer what we call a graceful exit to these homeowners. Offer them relocation costs, even lease back to them, which is not an uncommon practice for our buyers, lease back the property to the current occupant. But, it is important to have that stick of eviction to go along with those carrots of relocation costs.
And so, if you are in a market like say Cook County, Illinois is notorious for this, it’s going to take potentially 12 to 18 months to evict somebody if you have to go to that point. That’s going to, again, tie up your money for a longer period of time before you can actually start rehab on that property. So that’s another important local, jurisdictional type of thing that you want it to be looking out for as an investor when you’re buying these properties. Where there’s an obstacle, there’s always opportunity. And we have buyers in Cook County, Illinois who know how to navigate that eviction process and can bake it into their numbers. And so, when they’re buying a property, they’re baking in that 12 to 18 months that it might take. So it’s possible, it’s just something to factor into your numbers as you’re figuring out what you’re going to buy and how much you’re going to bid.

Henry:
You’re absolutely right. That’s exactly what we do. So, if I know I’m buying something that has a tenant in place, I am planning to have a longer holding period. It’s also dependent on what that lease is, because in my state, I have to honor whatever lease is in place. So if there is a lease in place, at least I’ll know how long that is going to last for. And if there’s not, then here we only have to give… Well, we have to give a four day notice, but technically have to give them a 30-day notice. And, we do all of the things that you’ve mentioned. We’ve moved people, paid for people to move. We’ve paid people. We’ve let people stay.
Matter of fact, I just bought a house a year ago that I planned to flip, and the tenants that were in the house loved it so much and they took care of it. I didn’t have the heart to put them out. And so, we just made it a rental for a year until now finally they’ve moved, and so now we’re going to flip it. So, we’ve done all those. It’s absolutely something you need to take into consideration. And that’s probably not something older occupant bidders are considering and thinking about, because that’s a different game.

Daren:
Yeah, absolutely. So, there’s a lot of political push to get more owner occupants into these foreclosure properties, because of the housing shortage, the shortage of affordable housing. So it’s understandable. But we are trying to make sure that folks at the FHA, for instance, and others understand that there is risk that comes with buying these properties and owner occupants. We want to make sure we’re not getting an owner occupant buyer in over their head and into a situation where they’re actually just going to end up losing the property themselves. But that’s really interesting. I mean, most of our buyers, Henry, are like you when we survey them. They don’t want to go to the eviction route. That is not good for them. So they’re doing the relocation costs, moving people, leaseback, even buyback for the current tenant in some cases.

Dave:
Well, Daren, thank you so much for this information. Is there anything else you think our audience should know about the research you’re doing in the housing market?

Daren:
Oh, man, there’s tons more.

Dave:
We can stay. We’ll hang out. We’re trying to let you leave, but if you want to keep going, we’ll keep listening.

Daren:
We haven’t really talked about the macro market so much. And, I think this is pretty brief, but even though we’re not expecting a huge surge in foreclosures, the consensus, and baked into our forecast for what we’re expecting over the next couple of years, is number one, a recession, a mild recession or what some economists might call a slow session. I’ve heard it called by the Moody’s economist recently. That’s what we’re expecting over the next 12 months. And we’re also expecting home prices to continue. We don’t think the worst of the home price declines are over, even though the market is rebounding right now. We are expecting that we’re going to continue to see over the next 12 to 18 months, some decreasing home prices in more markets. And so, that’s something to be aware of.

Dave:
Do you think it’s going to get may worse or just continue on this, what I would call, more of a correction than a crash?

Daren:
I think more of a correction than a crash is what we’re going to see. More of the slow moving, maybe flattening, slightly down home prices in a lot of markets, more of a stagnating type of thing. So, I think, even though I started out with this positive note of, “Our buyers are very bullish about the market.” I think what I’m saying doesn’t negate being bullish about the market, especially if you’re buying in the distressed space, where you’re not as dependent on home price appreciation for your profits. You’re more dependent on buying at a discount and adding value to the property through renovation. I just wanted to couch within that positivity the realism of at least what we’re expecting to see in the market is not going to be this booming market. It’s going to be a little bit more of the slow, maybe slightly downward type of market over the next year or two.

Dave:
Well, now I need to ask a follow-up to that. How do you say square that? Because right now, we’re hearing so much about how competitive the market is, and I just hear that from everywhere and the data bears that out. So, how do you see that coexisting with a continued correction?

Daren:
Yeah, I think, what we’re seeing is a little bit more of a short term response to… You you had the shock from the interest rate, the mortgage rate rise last year. Now, buyers and sellers are adjusting to that a little bit and getting a little bit more confident. And so, you’re seeing this little window of positivity and confidence in the market. I don’t think that necessarily goes away. But I think there is some reality that eventually more sellers are going to need to… They’ve been able to hold out and not list their properties for sale. But you are going to see at some point, the sellers are going to start putting more inventory on the market.

Dave:
Okay.

Daren:
And having to realize that maybe the price expectations that they had for the property are not realistic, given the mortgage rate environment. And, the foundational piece of this is that I don’t expect mortgage rates to go down. They’re going to remain fairly elevated for the next year or so, because the Fed needs to continue to fight the possibility of inflation.

Henry:
Assert its dominance.

Daren:
Yeah, exactly.

Dave:
That’s right.

Daren:
So that environment is going to lead to eventually more supply as sellers who have held out for a while realizing they do need to sell. I think this is colored a little bit what we’re seeing on our marketplace and I alluded to earlier, that we are seeing sellers are sellers capitulate on price, but these are institutional sellers who are less emotionally tied to these properties. And so, they do tend to be a little bit more willing to capitulate faster and respond to the market faster. But I do think, eventually you’ll see retail sellers responding to the market as well, and that will rebalance things, and keep us from seeing this trend that we’ve been seeing recently developing into another big boom in the housing market.

Dave:
All right. Great. Well, Daren, thank you so much. If people want to follow your work, where should they learn more about you?

Daren:
Best place is probably auction.com/inthenews. But also, check me out on LinkedIn and Twitter. I’m trying to post as much as I can in terms of charts and graphs and what we’re seeing on the market there. And, of course, check out just auction.com in general, if you just want to search around for opportunities in your market, in your zip code. So, yeah.

Dave:
All right. Great. Well, Daren, thanks again for joining us. We really appreciate you being here.

Daren:
Thanks for having me. Great to be here.

Dave:
On The Market is created by me, Dave Meyer and Kalyn Bennett. Produced by Kalyn Bennett. Editing by Joel Esparza and Onyx Media. Research by Puja Gendal. Copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

 

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