After pulling back on investment property purchases in the second half of 2022, Paul Lizell has become “cautiously bullish” in early 2023.
“We’ve really shifted, and right now we’re very, very bullish, but cautiously bullish, too, because I don’t know what events are going to come in that could throw a monkey wrench into my plans,” said Lizell, a Florida-based real estate investor who has been buying properties primarily via online bank-owned (REO) auction for more than two decades.
Results from an Auction.com buyer survey conducted in March tell a similar story: 87% of buyers surveyed said they expect their 2023 purchases to increase or remain the same compared to 2022. That’s despite the fact that 32% of the same buyers expect home prices to decline in 2023, nearly twice the percentage that expected home prices to decline in 2022. Another 13% of buyers expect home prices to increase less than 2% in 2023.
But the risk represented by a potential price decline has been mitigated in part by market-driven pricing adjustments, particularly for distressed properties sold at auction.
“Over the past two months, we’ve been averaging about 15 deals per month, personally we’ve been picking up,” said Lizell, pointing out that he’s noticed REO asset managers have become more incentivized to offload inventory in the last few months.
More Favorable Pricing
Mortgage servicers selling properties at both online REO auctions and live foreclosure auctions have adjusted pricing lower over the past year as the retail housing market ground to a near standstill, according to data from Auction.com.
The average ratio of auction reserve price to estimated as-is market value dropped by 4 percentage points between February 2022 and February 2023 for online REO auctions. Combined with more conservative bidding on the part of investors like Lizell, that resulted in REO auction properties selling for an average of 22% below estimated as-is value in February 2023, up from 15% a year ago.
Pricing has dropped even further for live foreclosure auctions, typically conducted in person at the county courthouse. Foreclosure auctions are conducted online in two states—Ohio and Florida—and are available for remote bidding via the Auction.com mobile app in 15 states. The average ratio of credit bid to estimated as-is market value dropped 12 percentage points between February 2022 and February 2023. The credit bid is the minimum amount the servicer will accept to sell the property at foreclosure auction, and it is capped at the amount of total debt owed to the servicer.
The price drop combined with less frenzied bidding at the foreclosure auctions has resulted in properties selling for an average of 15% below estimated as-is value in February 2023, up from just 9% a year ago. That’s good news for foreclosure auction buyers like Francois Delille, who has been purchasing foreclosure auction properties in the Houston area since 2016.
“I’ve seen a lot of my competitors just stop buying,” said Delille, who owns a real estate investing company called Cozyhomes that employs about 10 people. “I have an ongoing business, so I keep buying, but I am buying less.”
Affordable Housing Safe Haven
Even though Dellile is buying less, he’s still confident in the longer term health of the market, especially in the more affordable price points that he targets for his rentals.
“As far as the long-term trends, I think they are still there, especially in the entry-level price point, which is our price point for rentals,” said Delille, who both holds properties as rentals and resells to owner-occupant buyers. “The demand is there, but it’s harder to make the numbers work.”
Lizell agreed, adding that he is expecting at least a short-term boost in the 2023 housing market as mortgage rates stabilize and even drift lower.
“We’re going to have what I think is a nice temporary boom in real estate as interest rates get into the fives, a magical number for people,” he said. “We have extraordinarily low inventory, and we have interest rates trending in a better direction, which is why I’m picking up a lot of properties and building my rental portfolio more as well as doing more flips. A lot of other investors are pulling back right now, and they are not buying. I just can’t understand that because I can’t just shut down business.”
Volatility in the macro housing market does not generally impact distressed property buyers as much, because they are selling and renting at more affordable price points, where demand is more consistent. That’s especially true for buyers like Austin Kerr, who purchases properties at auction for $50,000 or below and resells typically around $70,000 to owner-occupant buyers.
“We’re at the bottom of the market. The bottom of the market is kind of a funny area because it doesn’t follow the general market trends. So when you talk about values dipping, that dip is going to be felt the least or sometimes felt the opposite way in the lower-end properties,” said Kerr, senior vice president at Florida-based Equity & Help, whose mission is to “to stabilize families and revitalize neighborhoods while raising consciousness of help in the investment world.”
To find those low-priced properties that are less susceptible to the whims and waves of the larger housing market, Kerr is going to rural areas in the Midwest and Northeast, often overlooked by other investors.
“Being in a place where you can take foreclosed properties, especially in these rural areas where flippers aren’t going to be breathing new life into them, and being able to find and connect with homeowners who are going to be putting a lot of time and attention into them—these types of things, they make a difference,” he said.
The average sales price for REO properties located in rural areas was $112,195 in 2023, more than 30% below the average sales price for REO properties located in cities and nearly 50% below the average sales price for REO properties located in suburbs, according to Auction.com data.
Avoiding Riskier Markets
While Kerr relies on the affordable value range to protect against the vicissitudes of the market, Delille relies on his deep local knowledge of the Houston market where he lives.
“The magic formula is it’s got to be within an hour of our office. And traffic has gotten worse over the years, so let’s call it an hour and a half,” he said. “Our bread-and-butter property will be a one story, three bed, two bath, in a decent school district that’s kind of the entry point of the neighborhood in terms of price. … Houston is one of the places where that entry-point housing is still affordable for people making the median income.”
Lizell’s cautious bullishness, meanwhile, stems from his retreat from more at-risk markets and concentration in safe-haven markets.
“What markets do we see that got trashed the most last year? Raleigh, North Carolina; Denver, Colorado; Austin, Texas; California up around Oakland and San Francisco, and Idaho. All those were big tech markets. So those people getting laid off … have to sell the property or lose it to foreclosure. So those are the markets that are getting hit,” he said, noting that he is avoiding those markets and buying in Florida, Tennessee, Wyoming, South Carolina, Indiana, and Ohio.
Although he’s bullishly buying in some markets, Lizell is staying vigilant for any market changes that could once again shift his strategy.
“If I see any semblance of increased job losses in other sectors, I’ll start pulling back in different markets. And if I see companies moving to particular regions … I’ll buy in those markets for potential future growth,” he said. “But right now I’m bullish—at least through I would say August.”
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.
