How to prepare for a wave of foreclosures

Question

BP community- when the moratorium on foreclosures ends, do you expect a wave of properties to become available for auction? If yes, as an investor how should I prepare to buy? Do the auctions happen in person or can I bid out of state? Do I need to have my funding (conventional loan)ready before the auction? How do I find the best deals and decide how much to bid (is the list of properties shared in advance so that you can do the deal analysis)?

I know these are a lot of questions. Hoping to get started in REI journey. Thanks

Marcus Auerbach · Answer

From the data we have seen so far only 15% of forbearance have actually defaulted and are in trouble of some kind. The rest resumed payments, refinenaced or restructured. A lot of people applied "just in case" and never lost their job. As we are getting to the last 2 million, the bottom of the barrell, the hard cases if you will, I would expect the percentage to increase. But even then, when you devide it by 50 States, it is not enough to make a dent in the market.

The vast majority has positive equity, so they can easily avoid forclosure by selling the property on MLS, walk away with a check and save their credits. The main driver for delinquencies is unemplyment - we should see new numbers tomorrow on July 2nd. Nationally we are down to 6% unempyment, my home State Wisconsin even to 3.8% (under 4% is basically full emplyment) and we will therefore see viewer than average distressed sales compared to the nation.

There will be some, but not a wave and most of them will pop up on MLS as REO listings. And from what I have seen in the last years, banks like to price them at top dollar, even do some light fix up before listing.

Marcus Auerbach · Answer

Well, your observation seems correct: California reports 8.3% unemployment rate, Wisconsin just came out with 3.9% for June.

Milwaukee reports 4.7% (that is only for Milwaukee County, not for the 5 County metro area, 1.6 million people in total, which would bring it down some more, the city core has high unemplyment - so details matter!). I agree with you that the way data is measured is always part of the understanding - never trust a statistic you have not faked yourself. But at least you can see change, up or down.

Wisconsin is doing economically better than the national average. We also have plenty of fresh water, fertlie soil and basically no natural desasters. We do have snow in the winter. But while the pacific northwest is setting 120F heat records and the SW is having a mega drought we are in the mid 70s today.. I think the midwest will be a beneficiary of climate migration.

Joe Splitrock · Answer

@Pretty Khare if there is a wave of foreclosures, you will need cash and lots of it. Get in line behind more experienced investors who have more capital.

@Yue Lehman my state refused the first wave of bonus unemployment last year. COVID restrictions were removed and businesses went back to normal. By December 2020, our unemployment was lower than December 2019. We are now around 2.8%. There are help wanted signs everywhere and fast food places are hiring for $15 an hour. Some restaurants can't even open regular hours due to having trouble finding staff. All I can say is that in my state unemployment is about the lowest I have ever seen. One of two things is happening nationally:

1. States like CA that remained closed longer and kept bonus unemployment in place are just lagging in the process of reopening. If this is the only issue, then theoretically they are just 6-9 months behind my state in recovery.

2. Population shifted and the states seeing low unemployment are benefitting from their pro-business policy. That could mean even in 6-9 months that some areas will be struggling. It is possible that some states just stayed closed too long and in the process lost businesses and population that will never come back. I think CA will be fine, but some other states will be in trouble.

Eric James · Answer

There will be a wave of evictions. Not foreclosures.

Yue Lehman · Answer

@Marcus Auerbach

Just curious how you (and everyone) actually reads the "low unemployment" news headline. In CA, it seems like a lot of people are sitting at home claiming COVID, and not wanting to work, yet national unemployment rate is getting lower. I don't trust how it's calculated and/or what actually constitutes unemployment.

Walter Calderon · Answer

Unemployment rate is only a good indicator for default rate not foreclosures, specially due to the pandemic.

There won't be a "wave" of foreclosures since most loans now are on a better position to be modified due to the incredible jump property prices had in the last couple of months, plus most unpaid balances will be applied to the end of the loan after the forbearances.

It will look like a "wave" due to the backlog, new cases and the courts (at least in some places in Florida) are streamlining hearings.

Expect a more than usual amount of cancelations and a huge increase on are Short-sale options and sales on distressed props (props with equity).

With that said the properties left sold at auction are going to be a huge opportunity since most lenders will not adjust their bidding amount to account for the big spike in property values that is why we are seen a lot more properties going to 3party.

Joe S. · Answer

There’s no guarantee of a wave of foreclosures. Maybe the people that are so sure that there’s going to be a wave should know how to handle one.

Michael Plante · Answer

I don’t believe wave of foreclosures nor a market crash now if ever

Theresa Harris · Answer

At least where I am, the payments have been added to the end of the mortgage.  People have had enough time to get their finances sorted, so I doubt there will be a wave of foreclosures.

Pretty Khare · Answer

Thanks for the interesting analysis. Any thoughts on how an investor can position themselves to  identify and leverage any opportunities that arise?

How to prepare for a wave of foreclosures

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