It’s not universal but there is a shift occurring in how large all-cash buyers are purchasing foreclosed properties. Nationally, houses completing the foreclosure process in October were down 29% compared to a year ago. The number of houses entering the foreclosure process has steadily decreased for 15 consecutive months. The result is that there have been fewer and fewer foreclosed houses brought to market for 11 consecutive months.
Institutional investors are particularly interested in foreclosed houses because they cost much less than owner sold houses. As the inventory of foreclosed houses shrinks, these mega-investors are changing their strategy. Instead of buying houses after the foreclosure is complete, many are now buying at the sheriff’s auction.
Risky But Effective Strategy
Buying at the sheriff’s auction significantly increases the risk that you are buying a gutted and heavily damaged house. Typically, you are only allowed to inspect the outside of a house prior to a sheriff’s auction. You have no idea if the previous owners took the kitchen sink along with all of the light fixtures and sold the hot water heater as scrap metal. Or if they left amicably and even cleaned the house on their way out.
When the house doesn’t sell at the sheriff’s auction, for the minimum bid the lender places on it, the house transitions into the traditional real estate market. The house becomes what is known as “real estate owned” (REO) by the lender. They hire a local real estate office to list and market the property. At that time, all potential buyers have the opportunity to inspect the interior of the house to know exactly what they are buying. Prices for good house go up. Prices for damaged house decline.
Once the property hits the open real estate market, institutional investors have to compete on an equal footing with small investors and owner-occupied buyers. It’s not the same at the sheriff’s sale. The sheriff’s sale requires an all-cash purchase. A large deposit typically must be made at the end of the sale and the full balance paid in a couple of days. This obviously locks out smaller investors and owner-occupied buyers that need to arrange financing. Thus, cash-rich institutional investors are moving towards buying at the sheriff’s sale where there is much less competition for a shrinking inventory of foreclosed houses and at lower prices based on the risk being taken.
All Markets Are Not the Same
Although foreclosures are down significantly at the national level, according to Realty Trac, there are still substantial foreclosures occurring in some states. If you are looking to invest in states that still have large foreclosure inventories, you want to be looking in:
- Florida – where foreclosures are up 22% from a month ago.
- Maryland – where foreclosures are up 10% month-on-month and 201% from a year ago.
- Ohio – 1 in every 525 housing units has received a foreclosure filing.
- Illinois – 1 in every 552 housing units has received a foreclosure filing.
If you are looking for specific metropolitan areas, consider Miami, Tampa, Baltimore, and Riverside, CA.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.