Sales of foreclosure auctions are skyrocketing nationwide as foreclosing lenders tap into a growing pool of deep-pocketed investors with cash to burn on “Buy to Rent” single family homes.
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According to the RealtyTrac November U.S. Residential & Foreclosure Sales Report released today, the share of residential properties sold at the public foreclosure auction increased 63 percent from a year ago.
Granted, the share of properties sold on the courthouse steps is a small sliver of the overall residential sales market, representing just 1.3 percent of all sales in November. But the volume of properties sold at these auctions so far this year is nothing to sneeze at: more than 36,000 nationwide through November, up 167 percent from the same time period in 2012.
Top 5 Markets for Foreclosure Auction Sales
And some markets have much higher percentages of auction sales. The top five metros in November for share of auction sales were Miami (4.0 percent), Atlanta (3.9 percent), Jacksonville, Fla. (3.9 percent), Orlando (3.6 percent), and Las Vegas (3.6 percent).
All of these cities saw substantial increases in the number of single family homes sold at public foreclosure auctions in the first 11 months of 2013 compared to the same time period in 2012. In Miami there have been 2,707 auction sales to third parties so far in 2013, up 463 percent; in Atlanta the 3,474 auction sales in 2013 are up 1284 percent; in Jacksonville auction sales were up 542 percent to a total of 796 so far in 2013; in Orlando the 1,723 auction sales in 2013 were up 914 percent; and in Las Vegas the 1,424 auction sales in 2013 were up 401 percent.
Not coincidentally these are also some of the top markets when it comes to institutional investor purchases made by entities purchasing at least 10 properties in a calendar year. More than 20 percent of all residential property sales in Atlanta and Jacksonville in November were made to institutional investors, while more than 11 percent of all residential property sales were to institutional investors in Orlando, Miami and Las Vegas.
The foreclosure auction is a relatively quick and dirty way for these institutional investors to pick up homes en masse with less competition from other buyers. Historically the foreclosure auction was primarily the purview of local real estate investors who were willing to take on the extra risk of purchasing at the auction in exchange for a hefty discount, typically at least 30 percent below the estimated “after repair value” (ARV) of the home.
Many of these more mom-and-pop investors were buying to flip so they needed some built-in equity to make the flip profitable. But the institutional investors are not flipping so the upfront discount is not as important to them as the gross yields they are able to return by renting the home.
Dwindling Discounts at Auction
That means the institutional investors are operating on thinner margins and are often willing to push the bidding price at auction up further than the local investors are willing to buy. This is crowding out local investors — at least from purchasing at auction — and squeezing the discounts available at the auction.
One large local investor who has been operating in Jacksonville for several years told me at the IMN Single Family Rental show in early December that his company has pretty much stopped purchasing at the local foreclosure auctions because of competition from the institutional investors. Instead he is looking for more creative ways to source homeowners in trouble who may want to sell before they get to the auction.
The data in Jacksonville and the other four cities mentioned above bears out why his company is backing away from buying at the foreclosure auction: discounts are dwindling.
To measure discounts RealtyTrac looked at the average sale price at the foreclosure auction based on sales deed data versus the estimated market value of the home based on comparable sales. While 2013 foreclosure auction discounts were not down from a year ago in every metro, they were down in every metro from 2011 — before the big institutional investors moved into the single family space.
In Miami, the average price of a single family home at the foreclosure auction was $142,952 in 2013, 23 percent below the average estimated value of those same properties: $185,773. That 23 percent average discount was well below the 38 percent average discount in 2012 and the 43 percent average discount in 2011.
In Atlanta, the 13 percent average discount in 2013 was slightly higher than the 10 percent average discount in 2012, but still below the 17 percent average discount in 2011. Similar patterns played out in the other three metro areas, but the most dramatic drop in foreclosure auction discounts was in Jacksonville, where the 27 percent average discount in 2013 was half of the 54 percent average discount in 2012 and less than half of the 57 percent average discount in 2011.
These patterns show that institutional investors may be at risk for overpaying for auction properties, which often come with unforeseen problems that result in extra expense before the home can be marketed for rent.
It also serves as a caution to smaller investors, particularly those looking to flip. The foreclosure auction may not be the best place to buy right now: instead consider beating the bigger investors to the punch by identifying and contacting homeowners in distress before the foreclosure auction to see if they may want to sell. Thanks to rapidly rising home prices those distressed homeowners may not even need to do a short sale.
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