#135: The Now & Not Yet of Post-COVID Investing – Part 2

Welcome to The Accelerated Investor Podcast with Josh Cantwell, if you love entrepreneurship and investing in real estate then you are in the right place. Josh is the CEO of Freeland Ventures Real Estate Private Equity and has personally invested in well over 500 properties all across the country. He’s also made hundreds of private lender loans and owns over 1,000 units of apartments. Josh is an expert at raising private money for deals and he prides himself on never having had a boss in his entire adult life. Josh and his team also mentor investors and entrepreneurs from all over the world. He doesn’t dream about doing deals, he actually does them and so do his listeners and students. Now sit back, listen, learn, and accelerate your business, your life, and your investing with The Accelerated Investor Podcast.

Josh: Hey, welcome back to Accelerated Investor. This is Josh. I am so excited that you’re back with me and I’m excited to introduce part two of my interview with Daren Blomquist. In this second piece of the interview, we’re going to specifically talk about the foreclosure inventory that is currently being suppressed by foreclosure moratoriums. We’ll talk about where foreclosure inventory is slowly ramping back up. We’ll be talking about banks clearing the decks of their foreclosure inventory to get ready for new foreclosures that are happening.

Josh:We’ll also talk a little bit about how confident investors are in their ability to buy and do fix and flips versus fix and rents. And some of the confidence that’s happening in the marketplace. And finally, we’ll discuss our projections for foreclosure inventory over the next two years. How does 2021 and 2022 and the opportunity to buy foreclosures, how does that compare to 2007 and 2008? So I hope you enjoy the second piece of our interview with Daren Blomquist V.P. at Auction.com Take a listen.

Josh:So everybody, welcome back to Accelerated Investor. I am back with Daren Blomquist, V.P. of market economics at auction dot com. We are here to continue our conversation. This is part two of our implications for investors The Now and Not Yet opportunities. So let’s jump back in the first part that we had of this interview.

Josh: We discussed all the data in the market. All the metrics, the trends, home prices, home units, forbearance agreements. What we’re going to talk about next is the actual opportunity for real estate investors. There’s obviously thousands of investors are on your platform at auction, dot.com, buying inventory. And so let’s talk a little bit about what do we see on a go forward basis? What are some opportunities right now and what are some opportunities, maybe not yet, that are coming down the road? Tell us a little bit more about foreclosure inventory. What’s going on there?

Daren: Yeah. We actually have a couple of million folks who are registered on Auction.com using our platform. And from a data perspective, it’s a great place to look at in terms of a marketplace for distress. But what we’re seeing on the supply side is, this is the supply side, is that because of the foreclosure moratoriums, there is not a lot of supply of foreclosure auctions specifically. These are the auctions that occur on the courthouse steps. The red line is 2020. The gray line is 2019 week by week. We saw week 13, which is mid-March. The heartbeat basically stopped in terms of foreclosures auctions. Now, what’s still happening that’s exempt from the foreclosure moratoria are the vacant or abandoned foreclosure properties.

Daren: And I think that was wise of policymakers to exempt. Those servicers were still nervous about foreclosing on even those early on. But we’ve started to slowly see them put those up on the auction block, which I think is a good thing for the market. You don’t want those vacant and abandoned properties just sitting there in foreclosure limbo. All that said, those are still a very small sliver of the inventory that we were seeing available at those auctions a year ago. About 16 percent of the inventory a year ago is available today in terms of those sales.

Josh: Wow. Sixteen percent. Wow. It’s really amazing what the market’s done that just jumps out at me is such a big drop. Only 16 percent. So if there were 100 properties going to auction a year ago, there’s only 16 today. It’s interesting. I was talking to my friend who’s also in commercial real estate, specifically apartments, and he said there was an eighty two percent drop in the number of transactions. So very similar number in that if a year ago there were a hundred apartments that traded and sold, today, there were only about 18 that sold.

Josh:So the number of apartments, you know, changing hands is way down the number of properties, that auction is way down. And my buddy used the term sort of pencils down where a lot of people are just taking a break from the market to kind of see how things flush out. But it’s obviously creating now. It’s going to create over the next maybe year or two a tremendous amount of pent up opportunity. This stuff has to work its way through the system eventually.

Daren: Yeah, this is the kind of normal state of foreclosures before the pandemic is the gray line. 2018, that was pre-pandemic. You still have even on just our platform, about fifteen hundred properties a week that are being brought to auction. And that’s about 50 percent of the total volume nationwide. So, yeah, assuming that most of those are not going into forbearance, which the numbers bear out, those are just a backlog that’s eventually going to hit when the moratoriums are lifted. And so that’s been that’s the not yet opportunity. The now opportunity is there are still some of these happening. Some people think foreclosure moratorium: No foreclosures happening and there are these vacant and abandoned ones, which are typically the most appealing to investors as well.

Daren: And the next slide shows by state where we see some of that coming back faster than others. So orange is where we see the foreclosure inventory returning fat a little bit faster. Blue is where it’s not returning very fast there relative to the pre pandemic levels. Yeah, South Dakota looks like they’re hustlin 50. Yeah, a little bit of the low numbers there. One state that surprised me was California that we are seeing a little bit of a pickup in California, whereas Florida we’re back basically at zero foreclosure actions relative to the pre pandemic.

Josh: Gotcha. Daren, I do want to back up to the previous slide real quick. Just clarify something that was on my mind. You said that of all the foreclosure sales in the country, Auction.com represents roughly 50 percent. That’s a huge percentage. And if you guys are typically selling fifteen hundred a week, that obviously equates to about three thousand roughly thirty-one hundred total foreclosure sales per week in the country. So, first of all, I didn’t realize that Auction.com had such a huge market share. It’s amazing. I didn’t realize you had millions of users. That’s amazing.

Josh: But it also puts in a very real perspective, a very real number to know that there’s about three thousand auctions a week of foreclosures, which is about?

Daren:So you get to 12000 a month, which adds up to close to a hundred fifty thousand a year.

Josh: People keep asking me. That’s even in a good market, in a really strong economy. They’re like all the foreclosures are dead. There’s no foreclosures. Well, what I just heard you say was there’s about one hundred and forty-two hundred fifty thousand a year, even in a normal good economy like we’ve had for the last five or eight years.

Daren: Yes, absolutely. And so we see the strongest demand in a good economy because people are wanting to find those deals. But just to clarify that one hundred and fifty thousand number we’re talking about. That includes both properties that sell to investors and the ones that go back to the banks. So those two sides of the coin, but they’re both. We consider both are completed foreclosures. Either the person loses their home to have it being bought by an investor or it goes back to the bank. And it’s about the sales rate on our platform is about 40 to 50 percent of the property sell to investors nationwide. It’s a lower sales rate. More like 20 to 30 percent. Just to give you give you some clarification there.

Josh: And we just heard numbers from the banks. We heard a number. I think it was it was about two months ago, Daren, it was something like twenty-nine billion dollars was set aside on banks balance sheets to get ready for upcoming foreclosures. And obviously, your slide here. Banks are clearing the decks for coming distress. So tell us about this.

Daren: Yeah, I’m glad you brought that up. That’s something I don’t have in here. But that’s a headline. I took note of that. The banks themselves are, you know, realize that as the short term may look good, but in the long term, there’s going to be this distress that’s likely to be hitting their balance sheets. So preparing for that. Another way that they’re preparing for it is selling the properties they already own, which are the ones that have already been foreclosed, the REOs. So we do see evidence of this on their platform. Those are those are still selling on our platform. And those are the most accessible to investors because they’re online auctions. You don’t have to go physically to the location and you can bid from anywhere in the country.

Daren: So those are very appealing given the pandemic and the ability to invest remotely. But we see the banks continuing to sell those. And this V shape, you see is the percent of those with multiple competing bidders on the orange line. It indicates, you know, while supply is down and overall distress, there is a lot of still strong demand from investors who are buying. And this quote I had is from one of the larger….Most of our investors are small investors but we do have some larger investors on our platform. And this particular one buys fifteen hundred to two thousand properties year. So it’s pretty, pretty big. From their bidding. So they’re doing their bidding. They know the platform very well and they know how the banks are responding. I was just on in a way that the banks are responding to it. It looks like they’re trying to make room on the balance sheets and are motivated to sell.

Josh: That’s good news. I mean, if you’re more of a mom and pop investor, one of our students, maybe you do 10 to 50 deals a year, Auction.com becomes a real opportunity because you have a massive institutional investor saying, look, looks like they’re willing to deal. Maybe sell a little bit lower, a little bit looser on the price in order to clear their balance sheet to get ready for future coming distress stuff that might be coming in a year from now, indicate some opportunity to buy properties that maybe a slightly lower price. That’s great stuff.

Josh: So below retail opportunities. That’s what all of our investors want to hear is what can I get that’s off market? Below retail? That already has some built in equity? Tell us what we’re looking at here.

Daren: Yeah. So just to hit home the point you just made is that even though there is limited supply and strong demand for these distressed properties, they are still selling well below the retail market. And so the retail market is just non distressed sales there on the left that at that I pulled from public record data average. This is average price. The NAR puts out, medium priced. That’s why this looks quite a bit higher. But I just want to compare apples to apples. Average price there, three hundred eighty-five thousand for a non-distressed. I excluded all distressed sales there. Whereas with the properties specifically that are selling as REOs, Auctions on our platforms, they’re selling one hundred and thirty-three thousand on average. Eighty-one dollars a square foot.

Daren: Similarly, the foreclosure auctions, which I mentioned earlier, also selling eighty-one dollars a square foot, slightly lower average sales price there. But this is just the point that there are opportunities now, even though they’re somewhat limited because of the foreclosure property, foreclosure moratoriums. Got it. And we did a quick analysis of, you know, if you bought a property at the average sales price in each of these counties across the country, it’s not obviously every single county that we looked at a few hundred county counties with a lot of volume. And you turned around and held that property as a rental using fair market rents in those areas what would be your potential returns.

Daren: And this is another one of those interactive maps that I think your listeners and viewers would love to look at for their area, because you can see the specific details. If you bought a property at a foreclosure auction or, actually this is specifically online REO auction, what would be the average sales price in your market? What’s the average fair market rent? And the green is the better returns. And not surprisingly, a lot of green, the dark green is in the Midwest and the Rust Belt in your neck of the woods. A lot of the blue, which is not as good potential returns is in the coasts in the higher priced markets there for single family rental market specifically.

Daren: And I would say the single-family rental market, based on what we saw earlier with what we talked about in the last episode, the demographics, people are moving away from the coasts, away from these areas that are blue and more toward the green. And people want single family homes because the pandemic has accelerated that desire for living in a single-family suburban type of situation.

Josh: Yeah. Based on all this data, which is phenomenal. Again, I appreciate you coming back to share once again, because this gives me with these massive takeaways and I’ve been telling our members for a long time, you know, you don’t want to be in a boom bust market, so remove the pandemic for a minute. We talked about potentially being at the high point of an economy. Economy can’t continue to grow forever. And you want to be in places what we call price stable markets where you can get a good gross rental yield. And to look at this, you see price stable markets, which is typically the Southeast, the Midwest and potentially the middle part of the country. That’s where we have a lot of our apartments. That’s where we did a lot of lending in our private lending platform.

Josh: And this proves, again, price stable market, not along the coastlines. And then the gross rental yields a lot you see in the industrial Midwest and some in the Southeast, places where you can get good rental yield and it’s not a boom bust market. Now, Florida is definitely a boom bust market. Even parts of southern Texas are boom bust markets, like Houston for sure, in New York, New Jersey are boom bust markets. And of course, on the west coast, California, Oregon, Nevada, Vegas, Arizona, some boom bust market. So this is just another piece of data that tells me that we continue to count up. The numbers don’t lie. If we invest in areas that are price stable, that have a good gross rental yield and you invest for the long haul, don’t worry about the ups and downs of the market.

Josh: We’re not playing the market for momentum. We’re not playing the market to kind of hit it at the right spot. We’re buying for the long haul, buying price, stable markets, buying the industrial Midwest and the Southeast, and you’ll get a good price and price stable and a good gross rental yield. It just continues to prove what we teach. And it’s part of why we teach is because the numbers tell us what to do. So we love that. Tell us about new investors. Right. Newer investors versus more seasoned investors versus fix and flip versus people buying to hold. What are some of the different things that you’re seeing on your platform? And how has COVID, the pandemic impacted them?

Daren: In general, we’re showing that we surveyed our investors after the pandemic in April. Now, this was still when the shock, that kind of pencils down time you referred to a lot of investors put their pencils down and say, hey, we don’t want to do too much until we figure out what’s going on here. So with that caveat, though, in general what we saw is the hold for rent investors, folks who were holding this more for the long term investment as opposed to a quick flip, were more confident that they were going to keep acquiring properties at the same rate or even more properties than they had in 2019.

Daren: And the smaller volume investors who are less exposed to a market downturn were more confident as well. Fifty five percent of them said they planned to keep the same or increase their purchases. And then REO auction buyers. And that’s partially because there’s more inventory with the REO auctions as opposed to the foreclosure auctions. And so on the flip side, not intended, the fix and flip investors, people who said they were mostly fix and flip, were a little bit less confident. The majority of them said they plan to decrease their property acquisitions. And the majority of bigger investors, 20 plus, said they planned to decrease as well.

Daren: You probably know this better than I, but both of those groups had a little bit more risk if there’s a downturn in the market, if prices went down and you have 30 properties out there that you’re flipping as opposed to just one rental that you’re buying. You’re a lot more exposed to that type of a downturn.

Josh: No question. So this all this data proves that there’s going to be some backlog of foreclosures, some more forbearances that don’t work out. And we’re looking at, OK, again, that small example of New York, New Jersey hurricane. How did that work out a year or two from now? And we could start to see some numbers, some projections of what this is going to look like in 2021 and 2022. What does it look like from your perspective?

Daren:So these are some I would call these are a little bit more than back of the napkin numbers for sure. We’ve put a lot of thought into this, but I don’t want to claim to have a crystal ball here. But we do have a lot of good data here. And I’m looking at those. What will the volume look like when it finally hits of these delayed foreclosures? And so if you combine that what I call BAU foreclosure backlog. Business as usual foreclosures that were happening before the pandemic. I put it at twelve thousand a month. It could even more than that. We talked about that. And then you on top of that, then you had the forbearance volume, which right now  it’s hit as high as about five million people who are in forbearance. That’s come down a little bit.

Daren: But if you look at anybody who was ever in forbearance, it was over five million. And if you assume 20 percent of those folks, you know, at the end of forbearance, they have to go into similar type of loan modification because. They can’t just pick back up on payments right away. And we have some data to support that. So that’s one of the assumptions. And then we have a redefault rate, which is rate based on a redefault rate we saw during the last major loan modification program during the last recession, which is the HAMP program. Twenty four percent of those redefaulted within two years. Forty five percent redefaulted within five years.

Daren:So you throw all those numbers together, so I’m not actually even going out more than two years here. But that two-year tally is about six hundred thirty-six thousand over a two year period. And then we ran another regression model that was a little more sophisticated and we came up with between 575,000 and 625,000 in that two-year period. So on a little bit lower side, but still in the same ballpark of that. And actually, that model does point to after 2020, to a much steeper ramp up in foreclosures. So that, you know, and then to put it in context, and this does parallel with what you’ve said, I think that there’s going to be an event here. There’s going to be an uptick in distress. But at least over the next two years, it’s going to pale in comparison to the Great Recession.

Daren:During 2007 and 2008, there were one point five million completed foreclosures and we’re saying six hundred and change. So less than half of the volume that we saw in 2007-2008. Both in the case of just seven and eight. And here we think going out the next year and beyond, there will be even more foreclosure volume like there was in 2009 and 2010. But this is just to put some things in perspective over the next couple of years. Again, it’s not a crystal ball, but it’s helpful to just put some numbers down and say here’s what it’s going to look like.

Josh: Well, you know, by comparison, it’s roughly 35 percent based on the model that you did here, comparing the next two years to what we saw in 2007, 2008. And there was obviously still in a lot of foreclosures that rolled in in ’09, ’10. And, you know, that was what everybody referred to as, you know, a onetime lifetime event. I’ve been telling our audience for a long time, there’s going to be more foreclosures. It’s not going to be two thousand, seven, eight, nine again. But from the initial knee jerk reaction of this data, which is fantastic, looks like it’s going to be about 35 to 40 percent of what that massive foreclosure event looked like. And we’ll see. We’ll see based on unemployment, people getting back to work, this election season. Lots of different factors. It’s nice to see this time around, though, Daren. I think you’d agree, that back in 2007, ’08, ’09 we were really flying blind.

Josh: This data was not something that companies like yours or you aggregated aggressively on a weekly basis. Now we have companies and led by you, really kind of leading the charge for Action.com to pull this together and share it. And I think we’ll be much more equipped to deal with it, both on a political level, a government level and an investor level to identify where’s the risk and where’s the opportunity. So really, really phenomenal stuff. Last slide just can compare here, Ohio, New Jersey and overall foreclosure comparison from 2010 and a little bit more about the foreclosure moratorium. So just kind of explain this, kind of bring this to bring us to a final conversation here.

Daren: Now, this gets a little bit more philosophical here in terms of, and I think I mentioned this earlier, but what we’re trying to advocate with our servicers and with the policy makers who we interact with is that this forbearance. What we’ve learned from both 2008 and then 2017 was when the hurricane season was really bad, combining those two crises, which are very different. But what we found works is it’s proactive forbearance. What does not work as well is a blanket foreclosure moratorium. And this is just showing out in the last recession, you have two judicial states where the foreclosure process takes longer. Both Ohio and New Jersey are judicial foreclosures. But they behave very differently during the crisis.

Daren: And one of the main reasons, we believe, is there was this blanket foreclosure moratorium that applied to almost all foreclosures in New Jersey. But that took about a year. Basically, no foreclosures happened. Well, not no foreclosures, but very few foreclosures. And you see that that helped the New Jersey market in the short term. The foreclosure activity dropped dramatically in 2011, whereas Ohio kind of kept trending higher. But then you see in the aftermath, there is this long tail, more than a tail, line increase, upward increase in New Jersey foreclosures, whereas Ohio had this long decrease. On the right-hand side, you see home prices in Ohio have recovered much more strongly than in New Jersey. Not all of this ties to the moratorium, but I think a lot of it does.

Daren: This I think is the point we’re trying to make to services and policy makers, but also it matters to investors what’s happening in your state. If there is kind of this more aggressive foreclosure moratorium situation, you may not have as much opportunity in the short term, but probably you’re going to have more opportunity in the long term in those types of states. And, you know, another argument just that we’re making to with the servicers is, certainly you want to prevent the foreclosures that are unnecessary and preventable.

Daren:But for the ones that are going through the best avenue to sell that to a local and especially a local investor who will get that back into the retail market faster than you can some of these banks, do you think that maybe they can hold on to the properties and rehab them themselves? And our data shows that it’s better in most cases to sell this to an investor. It typically gets back into the retail market and rehabbed faster than the other route.

Josh: Yeah. Phenomenal stuff. I mean, I remember from when we first started doing private lending on more of a nationwide level, some friends of mine said I will absolutely not make a private lender loan in New Jersey. The foreclosure process takes a thousand days. And this is actually the data that shows why. You had a whole year of foreclosures that didn’t happen, that eventually get caught up. If you don’t have the budget to add more staff, to add more judges, more prosecutors, more processing staff, to do that, which most people, most cities or municipalities are not just increase their budget to process more foreclosures. Naturally, it’s just going to take longer.

Josh: And that’s what happened in New Jersey. So really, really good stuff there. And listen, we’re going to make this recording available. It’ll be on iTunes, YouTube. We’ll put those links to the interactive maps and the show notes, as well as the emails. Is there any kind of final thoughts or ideas or parting shots or anything that you’d like to promote for our members to go onto your platform at Auction.com

Daren: I mean, I would just like to say a lot of this research I’m doing is on our on our Web site at Auction.com/inthenews is the best place to find this. A lot of it, these heat maps and others that you can go in and interact with. And then, certainly just not to ignore the opportunity to promote the fact that if you are interested in looking at properties that are available on our platform we’re selling, especially a lot of those online REO auctions right now go on. And there’s no registration fee or anything like that. It’s free to to look and to browse and bid and all that. Of course, if you bid and you’re the winning bidder you have to pay. Just check it out. And I think some investors might be surprised to see the opportunities that are available.

Josh: Phenomenal stuff. Darren, thank you so much for joining us again at Accelerated Investor. We appreciate you.

Daren: Thank you so much. Good to be here.

Josh: So, guys, there you have it. I hope you enjoyed this interview with Daren Blomquist. I think the important piece is where Daren and I really discuss the foreclosure tide that’s finally rolling in. It’s been an amazing market for the last five to six to eight years. And based on Daren’s projections, we’re seeing this backlog of foreclosure inventory, between 575,000-625,000 foreclosures is going to be happening over the next two years compared to 2007, 2008 of one point five million foreclosures. It’s about 35 to 40 percent of the opportunity from 2007 2008. So here’s what I would recommend.

Josh: First of all, sell all of the fix and flips that you have. Fix them up, sell them, get rid of them while inventory is low. Secondly, be ready to buy. Keep a bunch of dry powder. Keep a bunch of private money ready and free and able to be able to pounce on opportunities in 2021-2022. I do think that there’s still going to be a lack of supply even with all these foreclosures coming. So it’s gonna be an opportunity to buy a lot of foreclosures are going to happen all over the country, not just in specific areas. So be ready for that opportunity coming in the next 24 months or less. And also, again, if you’re a cash flow investor like me, you ready to buy those at a discount and hold them forever.

 

Josh: I appreciate all of you engaging with us on Accelerated Investor. Please leave us a five-star rating and a review of my interviews with Daren. Also, share this on all the social media platforms. And if you do, we’ll send you a free T-shirt. Just send us a quick screenshot of your five-star review and your rating, and we’ll send you an Accelerated Investor T-shirt. Also, don’t forget to enroll in our free Facebook group. Find Accelerated Investor on Facebook. You can join the group absolutely free. And there I’ll answer your questions live inside of our live interactive private Facebook group for all of our free Accelerated Investor members. Thank you so much for joining me today. We’ll talk to you soon. Take care.

 

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You’ve been listening to Josh Cantwell and the Accelerated Investor Podcast. Leave a comment on our iTunes channel and let us know what you want to learn next, or who you’d like Josh to interview. While you’re there, give us some five-star rating and make sure to subscribe so you can be the first to hear new episodes. Follow Josh Cantwell and his companies, the Strategic Real Estate Coach and Freeland Ventures on all social media platforms now and stay up to date on new training and investment opportunities to start your journey toward the lifestyle you’ve always dreamed of. Apply for coaching at JoshCantwellCoaching.com.

One of the benefits we have as we go through this post-COVID world is that we’ve already seen a housing crisis on a much bigger scale in 2006-2009. During the Great Recession, we were unprepared for what happened, and so we were always reacting instead of being proactive. The coming housing crisis won’t have that element of surprise because we’ll be able to rely on weekly data from places like Auction.com.

Daren Blomquist, the VP of Market Economics at Auction.com joins me in the second part of my interview with him about the coming foreclosure crisis. We know from past experience that it’s an inevitable part of a crisis, but the current foreclosure moratoriums have changed the cycle that we would normally see. So what’s the actual opportunity for real estate investors?

Of all the foreclosure sales in the country, Auction.com represents nearly 50% of that business. And they can see from their numbers that 16% of the inventory is available today that was available a year ago. For example, a year ago there might’ve been a hundred houses on the market, but today there are only 16. That super low inventory is still holding up housing prices.

Daren’s slide show is available on our YouTube channel, and if you’d like to look around his heat maps, the link is in the show notes. Stay tuned to the end when I’m going to give you my personal advice on what you should do with all of your fix and flips and how you should prepare to capitalize on the coming foreclosure crisis.

What’s Inside:

  • Our projections for foreclosure inventory over the next two years.
  • What we can learn from judicial foreclosures in Ohio and New Jersey.
  • What the last housing crisis taught us about forbearance and foreclosures.
  • You’ll learn exactly what you need to do to prepare for the coming foreclosures.

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