Local investors stay disciplined even as institutional investors continue to retreat.

Local real estate investors who started out the year cautiously bullish have become more confidently bullish as the housing market continues to prove its resilience in the face of elevated mortgage rates and slowing home price appreciation, according to bidding data from Auction.com.

After turning a corner in the first quarter of 2023, as buyers started to shake off the shock from skyrocketing mortgage rates in the second half of 2022, bidder demand metrics on the Auction.com platform continued an upward trajectory in the second quarter, both in terms of quantity demanded and price demanded.

Rebounding Demand

The average number of online saves per property available for foreclosure auction increased 4% in the second quarter compared to the first quarter and was up 3% from a year earlier. Online saves are a forward-looking indicator of quantity demanded from Auction.com buyers, the majority of whom are local community developers purchasing fewer than 10 properties a year within a 100-mile radius of where they live.

“We believe the market is absolutely rebounding,” said Tony Tritt, an Atlanta-based real estate investor who buys at foreclosure auction. “There is robust bidding at the courthouse steps. It came back in full force about two months ago.”

A more real-time indicator of quantity demanded is the foreclosure auction sales rate, the percentage of properties available for auction that sell to third-party buyers. This sales rate shot up 11% in the second quarter compared to the first quarter. It was the second consecutive quarter with an 11% quarter-over-quarter gain.

The sales rate in the second quarter of 2023 was still down 2% from a year ago, but it was a whopping 45% higher than the pre-pandemic average in 2019.

The sales rate was also boosted by an increase in the price that local community developers were willing to pay for distressed properties. The average winning bid as a percentage of estimated “after-repair” property value increased 9% in the second quarter on a quarterly basis, the second consecutive quarterly increase in this metric after it bottomed out in the fourth quarter of 2022. After-repair value is the estimated full market value of a property in good condition.

Disciplined Demand

The price-to-value metric was still down from a year ago, by 3%, and it was also 2% below the pre-pandemic average in 2019. This indicates investors are staying disciplined on their pricing, particularly in comparison to the buying frenzy that occurred in 2021 and early 2022. During that timeframe, the price-to-value metric averaged 9% higher than in the second quarter of 2023.

“Never get caught up in a personal battle at the courthouse steps,” said Jermaine Morgan, a Columbus, Georgia-based real estate investor who buys at foreclosure auction in the Columbus area where he grew up and also across the state line in Alabama. “There’s times when I got in a personal competition with another investor, and I went over what I said I was going to pay for it.

“I use the 75% rule,” continued Morgan, referring to capping his maximum bid at 75% of a property’s after-repair market value, minus any estimated repair costs. “Just from doing it so long, I have an idea of what my rehab costs are going to be. And if I can purchase that property within the 75% LTV rule—which I actually try to stay below that now—then I buy it.”

Institutional Demand

Not all categories of real estate investors are as confidently bullish in the market. The share of institutional investors—those buying at least 10 properties a year—dropped to a two-and-a-half-year low of 6.9% in the second quarter of 2023, according to an analysis of public record data from ATTOM Data Solutions.

This institutional investor category includes iBuyers such as Opendoor and Offerpad and single- family rental operators such as Yamasa, NVR, Tricon Residential, Amherst, and Progress Residential. The quick and light-renovation flipping strategy employed by iBuyers has proven more difficult in a market where home prices are flat or falling, and many of the single-family rental operators have turned their focus to building rentals rather than buying and renovating existing homes.

Resilient Demand

But local smaller-volume investors purchasing and renovating distressed properties are often insulated from the headwinds facing institutional investors. These local community developers typically purchase fewer than 10 properties a year, all within a 100-mile radius of their operating base, and add value to those homes through renovation. They don’t need massive acquisition volumes or rising home prices to fuel their business model or profitability.

The resiliency of the distressed property acquisition method is evident in flipping profit numbers from ATTOM. In these numbers, a flip is defined as any property sold a second time within a 12-month period.

Overall, gross home flipping returns, not including renovation and holding costs, dropped to 16% in the fourth quarter of 2022, the lowest they’ve been since the fourth quarter of 2009. Home flipping returns rebounded a bit in the first half of 2023, but they were still at a relatively low 20.6% in the second quarter.

Those low flipping returns were driven by a combination of compressed purchase discounts and thinner resale premiums. Homes flipped in the second quarter were purchased at an average of 90% of estimated after-repair value, well above the 75% rule cited by Morgan, and resold for 108% of after-repair value.

By comparison, second quarter home flips of properties originally purchased while in foreclosure were acquired for an average of 79% of estimated after-repair value and resold for an average of 104% of after-repair value. That resulted in a gross flipping return of 41.9%. Gross flipping returns for renovated distress dropped as low as 30.2% in the fourth quarter of 2022, but that was still nearly double the overall flipping returns for that same quarter.

The resiliency of returns for distressed property investors also stems from the stronger demand in the lower-priced segments of the housing market.

“I can sell a $250,000 property all day long,” said Tritt, the Atlanta-area investor. “So, I can be a little bit more aggressive.”

Local Market Demand

Tritt operates in the Atlanta area, one market where investors have become more confident in the last six months, based on bidding behavior on Auction.com. Home price correction risk was moderate based on bidding behavior in the second quarter, down from high risk in the first quarter.

“This year we started out a little hesitant, a little stutter stepping,” Tritt said, noting that he is particularly confident in the lower price point he sells at. “If I put a 250,000 renovated home on the market, I still have more people who want to buy it. … As long as that is the case, that is going to keep that price at 250,000.”

Other major markets where investors have become more confidently bullish, lowering the risk of a home price correction, include New York, Houston, Philadelphia, Las Vegas, and Pittsburgh.

But risk of a home price correction did not decrease in all markets. Major markets where the risk increased based on bidding behavior between the first quarter and second quarter included Washington, D.C.; St. Louis, Missouri; Virginia Beach, Virginia; Minneapolis, Minnesota; and Columbus, Ohio.

Categories | Article | Market & Trends
  • Daren Blomquist

    Daren Blomquist is vice president of market economics at auction.com. In this role, Blomquist analyzes and forecasts complex macro and microeconomic data trends within the marketplace and industry to provide value to both buyers and sellers using the auction.com platform.

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