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Inflation. It feels like it’s out of control, and there’s no escaping it in this news cycle. The reality is that the Fed would likely prefer to have a recession than runaway inflation, and we’re in danger of having an overheated economy. So, what does this mean for real estate investors?
To help answer this question, it’s my pleasure to be joined by Daren Blomquist, VP of Market Economics at Auction.com and a regular contributor to the podcast. Daren and I have seen it all–market run-ups, fix and flips, the pandemic–and I rely on him just as much as CNBC, CNN, and Fox do for data and information.
In this conversation, Daren and I dig into the potential for a recession and how inflation affects us all. We’ll also talk about how issues affecting single-family residential home development might impact multifamily apartments. You’ll find out where Daren (and the buyers on Auction.com) are seeing great opportunities, even now.
Key Takeaways with Daren Blomquist
- Why the yield curve is a good predictor of potential recessions.
- How inflation is impacting the housing market and why we’re at very high risk for a recession.
- The distress signals we’re seeing in the housing market.
- The factors that are creating investment opportunities in the midwest and the Sun Belt.
- How populations have migrated pre and post-pandemic.
- The areas where there are opportunities to make a profit right now.
Daren Blomquist Tweetables
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Josh Cantwell: So, hey, everybody. Hey, Josh Cantwell here with Strategic Real Estate Coach and Accelerated Investor. Super excited to be with all of you today. My guest on the podcast is Daren Blomquist. Daren is the VP of Market Economics at Auction.com. He’s a regular contributor to our podcast. We have him on pretty much every single quarter and Daren and I were just reminiscing about when we first started working together about six years ago. I used to do a number of live events in-person in Vegas and Dallas, and me and Daren shared the stage with Kevin O’Leary and Daymond John and a number of celebrities that have come and spoken at my events. And Daren and I have seen it all the last couple of years, the market run-up, fix and flips, the pandemic. Just a ton of great stuff going on and Daren is just one of those guys that not only me but also the regular kind of enterprise-level news channels. CNBC, CNN, Fox, all those rely on Daren and rely on Auction.com for data. So, he’s regularly in the news with them as well. Check out Auction.com/InTheNews for more information. And I want to welcome Daren Blomquist to our podcast today.
Josh Cantwell: Daren, what’s happening? How are you?
Daren Blomquist: Thanks, Josh, for having me. It’s always good to be on here and just enduring a little bit of a heatwave here in California but other than that, doing well.
Josh Cantwell: You just had to stick that one right on my back. We’re still waiting to get into spring in the Cleveland area. Daren and I, listen, we have a lot of stuff to cover. We’re going to first talk about this potential looming recession and inflation. We’re going to talk about the migration of the population pre and post-pandemic. We’re going to talk about sort of the building distress in the marketplace for single-family residential homes and how that might impact multifamily in apartments. And finally, we’re going to talk about profits. We’re going to talk about the profits that Daren is seeing, the buyers on the Auction.com platform, and where they’re making their money. So, Daren, why don’t we jump right in and talk a little bit about increased risk of recession, how the inflation is really impacting, and if the Fed can manage a soft landing which they have not been able to do in the past? Let’s see if that is an option. So, from your perspective and, Daren, with all of your data, what are you seeing in the marketplace? How should we be looking at this data?
Daren Blomquist: Yeah. I think that if we look at the chart on the left-hand side and I know not everybody’s going to be looking at this but basically, we’re looking at the two-year and 10-year Treasury spread, which is the yield curve that is very predictive of recessions in the past. And when we see that yield curve go below zero, in other words, the two-year Treasury yield is higher than the 10-year then so it’s negative in a sense. We do almost always and this chart goes back to the 70s, almost always see a recession in the next 12 months after that yield curve inversion going negative. And so, we’re not there yet with the yield curve. At least this chart doesn’t show it but we’re very close. And this is a result of the inflation which has triggered the Fed actions to start to signal that they’re going to start raising interest rates. And in fact, they have started raising interest rates, which is causing this. And so, all this to say I do think increasingly we are at very high risk for a recession in the next 12 months. In fact, the Fed, I would say, would rather have a recession than runaway inflation, and I would actually agree with that.
I think we’re very much in danger of an overheated economy which is not what you want. You don’t want to be in a Venezuela type of situation. And so, yes, I think the increased risk of a recession is a concern but it’s actually the lesser of two evils in this scenario. And then the chart on the right there is looking at also the impact on home prices during the recession. And you don’t typically see a huge drop in home prices like you saw in the 2008 recession. That was an anomaly where nominal home prices, the actual home prices went down close to depending on what metric you look at but nationwide at least 15% to 20%, in some markets more like 50% to 30%. That’s an anomaly. But that said, you do typically in a recession see a slowdown in home price appreciation. And if you look at real home price appreciation, which is taking into account inflation, you do see that and more typically going negative during a recession. So, all this to say is all the things that we’re seeing on a larger macroeconomic level is pointing more and more toward a recession in the next 12 months, which then would also indicate a slowdown in the housing market, at least when it comes to home price appreciation.
And I’ve talked to some investors, what does this all mean for real estate investors? I love to get your take, Josh. Does this scare you as an investor? Does it change what you’re going to be doing if this turns out to be true, this type of scenario, or what? And then I can chime in with what I’ve heard as well.
Josh Cantwell: Well, there’s a couple of things to unpack there. So, the first thing I think that Daren said that was really important is recessions don’t usually cause a dramatic drop in nominal home prices, meaning I bought a house for 300 and all of a sudden it’s worth 250. What Daren really focused in on, I want to make sure we’re focusing in on the words because the words are really critical is that a slowdown in home price appreciation. So, if home prices have been jumping by, in some cases 9%, 12%, 20%, I do feel like it’s necessary to slow down that home price appreciation. The way it’s helping me as an investor right now is because single-family homes are getting so expensive, the down payment is getting so expensive, and now the cost of capital, because interest rates are going up, is more expensive. It’s pricing so many people out of the market. It’s actually helping me to lease out my B-class workforce housing. Matter of fact, that one of my buildings, it’s a 220-unit, I just had to lease out the model unit because everything else in the building is full and we’ve been working on that value-add for a long time.
So, that’s a real scenario where houses in this particular sub-market of Parma, Ohio used to sell for $100,000 to $125,000. That’s an affordable house that everybody can afford. That same home today is now selling for 175 to 190 and the house is not any different. It’s still Cleveland, it’s still Parma, but it’s significantly more expensive. And to make a down payment to make a payment on a $190,000 house is a lot different than a $120,000 house, so it’s really helping with renting. So, another thing to unpack here, Daren, is we don’t expect home prices necessarily to go backwards. We just expect them not to appreciate as fast. I think that’s great for the market. I don’t think we can continue to have these prices just run away the way they’re going. I think that’s helpful. And also, we’re going to see some more inventory come because if there’s a recession, guess what happens? People lose jobs. Companies cut back. More people don’t have a job right now. Your unemployment rate is almost back to within 10 or 15 bps of where it was pre-pandemic. So, everybody that wants a job can get one right now.
If there’s a recession, the more people that get laid off, companies will cut back, the cost of money will be more expensive. People will cut back and some people will lose jobs. Some people will then go into more foreclosure distressed scenario, and that will create more inventory. That will also put some downward pressure. There won’t be this growth anymore, this runaway growth. So, I think those are all healthy. Again, Daren, I think your point of the lesser of two evils, meaning do we want a massive depression, a massive mass chaos because we overheated and now the bubble burst? Remember guys, we used to have a recession every five to seven years. It was pretty normal, right? I’d rather have that recession than have runaway growth and a massive bubble that burst. So, I’m frankly fine with it. I think as an investor, look, last piece, Daren, I’ll turn it back to you, as in 2008, 2009, and 2010, we were investing in pre-foreclosures. We made lots of money. We did really well. We held massive live events and there is money to be made even when home prices are stagnant and even when there’s more distress. You just have to be on the right side of the market, right?
So, all those things, I think that’s okay for the economy. I think it’s healthy for what we’re going to do and there are still opportunities as an investor in a recession. So, that’s where I’m at. Daren, what do you think?
Daren Blomquist: Yeah. I think that’s right. I mean, we do see a start. You know, the big picture is in our data back in 2019 when we saw mortgage rates go above 4.5% for an extended period of time, we definitely saw demand on our platform from investors weakened. We look at something called the sales rate, the percentage of homes that are available for auction that actually sell. That sales rate is a key determinant of demand, and that did slip. And I would attribute it to investors being more cautious of – because the majority of folks on our platform, Auction.com, buy the properties, renovate them, and then resell actually to owner-occupant buyers. And so, they’re thinking, “Well, if those mortgage rates are higher, I’m buying with cash typically a lot of times on the front end, so that doesn’t affect me but when I’m selling that property to an owner-occupant, if that mortgage rate is higher, then that’s tough.” So, we do see at the big picture investors do pull back a little bit. However, when I talked to some investors who are more long-term and have been doing this for a long time, they see this, they frame this a little bit more like you’re framing it, which is an opportunity to think ahead.
I talked to one investor in the Atlanta area who’s been through, who started buying in 2000 and is now still doing it, buying off at Auction.com as well as other sources. But his one regret from 2006 to 2009 was, “I wish I had bought more houses during that time,” because there was a lot available. And, yes, it’s harder to turn around and resell those homes but you can hold them as rentals. And I actually just yesterday talked to an investor in Memphis who was similarly, he said, “Yeah, for a recession.” I was asking him this question, “If a recession comes, I see it as an opportunity to…” He typically resells his homes as well but he said, “Back in the last recession, we just held a lot more homes because there wasn’t that demand for the resale but it was an opportunity to acquire more.” And so, with those types of investors who have been doing this for a long time and have kind of are thinking more long-term that they see this as an opportunity to acquire more inventory.
Josh Cantwell: I love it. And look, guys, flipping real estate is great. I’ve done lots and lots of it. I’ve done hundreds and hundreds of those deals. But you get rich owning real estate long-term. That’s the game here, right? So, buy and hold, whether it’s apartments, whether it’s single-family rentals, duplexes, multifamily, small multifamily, buy and hold for long-term wealth and flip some real estate for income. Right? You need to do both. I think that’s the message here. Daren, let’s talk about migration. This is relative not just to flipping homes but to multifamily apartments, to single-family rentals. All of this migration of people moving from certain states to other states is going to impact investment strategy. So, where are people moving and where is there even more demand?
Daren Blomquist: Yes, absolutely, and it’s kind of this theme of thinking long term as opposed to just short term as an investor. What drives the housing market long-term even more than recessions or interest rates is demographics. And we could talk about the whole millennial thing. That’s a big part of this, too, but this is the slice of demographics that looks at within the country, where are people moving to and from? This is domestic migration from the Census Bureau looking at – and if you go to this heat map on my, it’s on Tableau where I’ve created this, you can actually look at the migration trends from 2010 to 2020 but then you can also flip it to during the pandemic, which is this view right here, which is April 2020 to July 2021. And for the most part, what we saw is that trends that we were seeing in the decade 2010 to 2020 were just accelerated during the pandemic for the most part. There are some exceptions to that. And so, the point is for an investor or at least an investor who has the flexibility to buy in different places, you want to go where the people are going. And that’s not to say you can’t do a good job in places where there are decreases in population.
And just to explain this a little bit more is this is not just straight population but these numbers are the increase or decrease in population caused specifically by domestic migration, people moving from one state to another. So, you look at New York and California and Illinois, those three states during the pandemic, just those, what is that, 18 months or so, 15 months, saw triple-digit in terms of hundreds of thousands of people leaving those states, more people leaving than coming. So, California was 322,000. People left the state, then came to the state. New York was over 300,000. So, those are the states where you have to be a little bit more cautious because there is some maybe risk of demand for housing slipping. The states that are booming are the states that were booming before the pandemic, places like Texas, Arizona, Florida, with those big increases in population due to domestic migration. Idaho doesn’t have as big of an overall number but it’s the darkest green because it’s got the highest percentage increase.
Josh Cantwell: What’s in Idaho that’s so attractive?
Daren Blomquist: I don’t know. Well, I don’t know exactly if I can answer that question but I do know that a lot of, you know, I personally know as a Californian, people moving to Idaho and people moving inland, it’s this idea of more affordable living, more affordable housing. Also, it’s a no income tax state. That’s another big attraction that you see is pretty common theme with a lot of these states. So, tax is a big factor. So, I think investors who are looking at this and going to the places and the census also just released this data at a county level, which maybe is even more valuable to an investor like, say, an investor in Ohio, where overall the population is going down due to domestic migration but there are counties within Ohio where people are moving to and from. And you can focus in on those markets and say, “Okay.” And I think one of the trends is that you’d see, especially in the county-level data you see a little bit here is kind of the suburbanization, people moving from densely populated urban areas like New York and into the more suburban areas where they can raise a family and work from home has accelerated that as well. So, that’s I think a big theme here is find those markets where people are moving and then that’s where you want to buy.
Josh Cantwell: No doubt, no doubt. I would love to see that on a county level. We can get that. We can see that on the census link that’s in this presentation. If you are just listening to this, maybe you’re on Spotify, maybe you’re on iTunes, this is available with the screen share on YouTube. So, go ahead and look up Accelerated Investor with me and with Daren Blomquist, and you’ll find that in YouTube. I do think Daren’s point about just looking let’s say at Ohio, my hometown, the total migration is small. We’ve lost 5,700 people migrating out of the state. However, you look at Cincinnati and Columbus, and there’s a stat that we track, which is new project starts. And if you look at Cincinnati and Columbus based on new commercial project starts meaning new hotels going in, new industrial plants going in, new hotels, new apartments going in. Cincinnati is number two in the country on a prorated basis, meaning based on their population. So, based on their population, they have the second most project starts in comparison, and Columbus is number nine in the country.
So, total project starts in Cincinnati, total project starts in Columbus. Of course, Columbus also has a semiconductor plant, the world’s largest semiconductor plant, going in the New Albany area. Those are those micros that Daren is talking about on a county level where you’re seeing explosion of population, whereas the state as a whole could be going down. So, it’s not important to just look and say, “Oh, Idaho, it’s growing in population. I’m going to invest there.” It’s much more important to look at on a county level and see where are those people moving to. Really great data there. Daren, let’s move on to the backlog. I remember a year ago, two years ago when the pandemic happened, we recorded and we talked about, “Hey, is there going to be a backlog of stress because there was all this foreclosure moratorium, eviction moratorium? Is there going to be a backlog of distress?” And then we looked at, well, I don’t think there’s going to be a lot of distress because prices keep going up and up and up. So, even if somebody gets in trouble, they could sell their home because their home is worth more.
But now here we are, bumping up against a possible recession. There’s going to be some layoffs and some of those types of things. Interest rates are going up. Hopefully, the housing market cools off like we talked about before, and some of this distress is starting to take shape. So, tell us a little bit more about what’s happening today versus what we talked about a year or two ago.
Daren Blomquist: Absolutely. And this is really focused in on that. You know, there was that sharp spike in unemployment. There was a sharp spike in delinquencies right after the pandemic hit but it was very short-lived. Just like the recession, the pandemic recession was really less than a quarter, which is crazy. It was a very short piece, and a lot of it had to do with some of the stimulus pumped into the economy, as well as the forbearance and programs given to people that really just calm things down. And so, if you looked at this at the start, if you look at the big pie, there’s 8 million people, which is a huge number, that went into forbearance over the course of this. So, if you just looked at that and said, “Well, 8 million,” you know, we had about that many total foreclosures during the last crisis, that’s a huge number.
Josh Cantwell: Huge number.
Daren Blomquist: But what happened is that because of some of these long term, because of the stimulus, along with some of these long term trends that we’re talking about, demographics as well as supply and demand going into the pandemic, the vast majority of those 8 million people who maybe had a hint of trouble, had a hint of distress were able to just get back on their feet if they ever even were off their feet. And so, you look at the green there, that’s 53% of those people went into forbearance that is now out of forbearance and they’re performing. These are performing loans. They’re fine. And that’s over 4.2 million. The next biggest chunk of it is 2.2 million who paid off their loans. So, these are people who may be refinanced or sold their homes but they’re fine. It wasn’t a distressed sale. So, that’s the vast majority. There are still there about 700,000 to 800,000 who are still in active forbearance. So, that’s the remaining piece of people who are kind of we don’t know what’s going to happen with them but that’s very low. You know, it’s 10% of the original total.
The distress that we’re looking at really is the, and if you’re looking at the slides, it’s the red and the orange and the dark kind of bright blue there. Basically, people who have exited forbearance and are still delinquent, if you add up all those categories you get 450,000 people who are still delinquent but they’re an act of loss mitigation, so at least they’re trying to get their loan performing and then the highest risk is there’s, well, 345,000 loans that are still delinquent, they’re not in any type of repayment or loss mitigation plan and some of them are in foreclosure, in fact. So, that’s at 345,000. That’s the number I want to hit home on. Out of 8 million people who are kind of at risk at the beginning of the pandemic, we only really have 345,000 who now still are high risk, which is not nothing but it’s in the context of back in 2019, for instance, we had about 200,000 foreclosures. It was at a record low pre-pandemic. You know, even if all of these 345,000 went into foreclosure, that would be an increase but it would not be or were foreclosed on. It would not be a massive wave of foreclosures.
The thing I do want to point out is this number is rising. As most of the forbearance program is kind of winding down and we’re past the foreclosure moratorium, which ended in July of 2021, at that point, we saw 222,000 in that high-risk category. Now, it’s up to 345,000. So, that high-risk category has increased since the end of the moratorium. So, all that said, there’s volume there, there’s going to be, and we’ve already started to see the headlines saying, “Foreclosures are increasing,” and some of that percentage increases are pretty eye-popping. But in the context of that 8 million, this is a pretty small piece of the pie but it does mean more inventory. I guess the good news for investors is there’s more inventory coming. We are seeing that in our own data as well. But I would describe it as kind of a gradually rising tide of foreclosure inventory rather than a tsunami that we saw in the last downturn.
Josh Cantwell: The other thing, Daren, I’ll just add to that briefly, is during the last downturn, we were in some points I think it was 2009, 2008, we were processing a million foreclosures a year. So, to put this in context of pre-pandemic kind of all-time low of distress and foreclosures of 200,000, it was really small right now at 350,000. It’s definitely jumped. And you might see on the news, right? The news, the chaos news saying, “Oh my god, there’s a 50% increase in mortgage delinquencies,” which technically is true to go from 222,000 to 345,000, that’s more than a 50% increase. But in the grand scheme of this, that’s almost kind of just around what used to be normal. And it’s way less than what we were processing during the 2008, 2009, and 2010 crises. It’s not even one-third of what we were processing, and those were true foreclosures that were actually going to the courthouse steps. Some of these 345,000 are delinquent in foreclosure but could still be rescued before they get to the courthouse steps. So, the amount of foreclosure activity is starting to creep up but it’s nowhere near where we used to be.
And again, we have the benefit now of we don’t have a banking crisis like the last depression or the Great Recession, whatever you want to call it. It was a banking crisis and the banks had no liquidity. Right now, the banks have tremendous amounts of liquidity to help these people out to make new loans, to refinance, et cetera, et cetera. So, we have a lot of tools now that we did not have 10 years ago. Moving on, Daren, how big and bad is the backlog of pandemic distress? And you know, what is Auction.com going to see do we think of additional properties? And where are these new foreclosure starts happening? What cities are we seeing more and more foreclosure starts kind of heating up?
Daren Blomquist: Yeah. So, I would say that keep that 345,000 number in your mind, that’s really the… And that may grow a little bit but that’s really what’s coming out of the pandemic is that’s the high-risk loans, and it’s hard to know what percentage of those will actually end up in foreclosure. I would say it’s a 50% to 75% of those because these are people who a lot of them were actually delinquent before the pandemic. And so, these are not easy to solve loans. So, that’s the number I have in my mind. And then if you look at in terms of your question about where this distress is showing up, on the map that I’m showing here, there’s an or – we were looking at this by metro area and it’s looking at specifically foreclosure starts in February of 2022. And the orange is where we’re seeing foreclosures starts relatively high even compared to their pre-pandemic level, February 2020 levels. And so, you see markets like Indianapolis, Phoenix, Columbus, Ohio, actually Tucson, and Orlando with the highest percentage relative to their pre-pandemic levels. And a lot of that has to do with not that there’s a lot of underlying problems that most of those markets are very strong markets, places like Phoenix. I mean, it’s one of the hottest markets in the country. You were just talking about Columbus. It’s a very solid market. It’s actually that there tends to be a more streamlined foreclosure process in these markets, and so we’re seeing that distress come out of the forbearance more quickly in those markets. And so, that’s some of the places where we’re seeing that emerge. In terms of just the volume, sheer volume of distress, it’s the biggest markets in the country where we’re seeing that. Chicago is number one. New York, Los Angeles, Houston, Atlanta were the biggest in terms of just sheer volume of foreclosure starts. But those markets are expected to have that because of just larger population.
But I would see where we’re going to see this inventory emerge first and where we’re starting to see it emerge first is those markets with the more streamlined foreclosure process, which actually I think will be good for those markets in the long term. Assuming that everything has been done to prevent those foreclosures, these are what I would call necessary foreclosures that would have happened anyway. And so, to the extent that those are not just sitting around turning into vacant blighted properties, that’s actually good news for those markets.
Josh Cantwell: Yeah. I love it. ATTOM Data Solutions, where Daren actually used to work when Daren and I were first connected, showed that in February of 2022, that foreclosure starts were up 40% from January, in 176% from a year ago. That’s where some news channels that are just focused on like leading with the negative. Then we’re going to say, “Oh my God, foreclosure starts are up 40% January, 176% from a year ago.” Sure, that sounds terrible but it’s still 40%, 39% below where we were in February of 2022. Now, remember, the last piece of all these levers that are being pulled is that in February 2022, we were at still like almost an all-time low of number of foreclosure starts. Because the market was so good and the interest rates were low, there was very few foreclosures pre-pandemic. So, you had an unusually low number of foreclosures back in February of 2020 and we’re still 39% below that because we’re still coming out of these moratoriums and people right now still have the benefit of rising prices and low-interest rates. But again, we’ll see three months from now when Daren comes back on, we’ll see how this is starting to flush out, and I think that will be important.
Last thing we wanted to cover today, Daren, was really talk about what types of deals. We talked about the opportunity that it’s okay if there’s a recession. It’s okay if market prices slow down a little bit because I think that’s going to normalize what we’re doing. Like, we got a really hot market from 2015 to 2020. We got a really bad market with COVID. And then now we have very little inventory, so prices have skyrocketed. Those all just feel like peaks and valleys on a roller coaster. It would be so nice to just see some more normalcy. But who knows if we’ll ever see normalcy? What is normal? Who knows. But the question becomes is, as this recession maybe takes hold as things slow down, where are people making their money? What types of deals are people doing? Where are they making their profits? How much profit are they making? You obviously get to see a lot of this because of the data that you track. So, based on region-by-region, kind of property-by-property type, whether it’s a flip, whether it’s a rental, what kind of profit are people making and where should they be focused on making money?
Daren Blomquist: Yeah. So, this is data that we looked at going back so we can look at what happened with the properties, about 27,000 properties that sold on Auction.com platform in 2019 and 2020 that then we look at public record data and see if those properties were subsequently resold or flipped after they were sold on our platform. And so, there was about 27,000 of those that we looked at and we just looked at, okay, what did folks buy them for? What did they then subsequently resell them for? And what’s that kind of gross profit potential? And the numbers we don’t have, which are important, of course, to investors are how much are spent on holding costs and rehab. So, we don’t have that baked in here. But directionally, I think this gives us an idea of the types of deals that are available. And you know, of course, in our biases that at least in this hot housing market, especially, where you’re going to find the best deals is in the distressed market, even though there’s less inventory there as well.
So, what we saw is the average sales price for this cohort of properties that were subsequently flipped was $155,000 that people bought off of our platform. When we look at the four regions of the country, the lowest price point is in the Midwest, which is about 97,000. That would include Ohio. So, the best just nominal prices are in the Midwest. Not surprisingly, the highest prices buying just even distressed properties is in the West at nearly $260,000 average sales price. But I think more importantly than that kind of price point is the percentage, the discount basically is what is the percentage of the properties after repair market value, full market value, if it was in good condition? And actually, again in the Midwest, you see the best deals. The folks who are buying off our platform are buying at about 55% of that after repair market value. So, that’s a 45% discount after repair market value. In the West, it was 65% of after repair market value. So, a 35% discount is the range. Across all regions, it was an average about 62% of after repair market value that folks bought properties for.
But, you know, that is a significant discount, and investors then had an opportunity to add value through rehab renovations of the property. Of course, on top of the icing on the cake, there is the home price appreciation that occurs between when they purchased the property, when they sell it. What we’re seeing is when they sold the properties, they were selling it about 97% of after repair market value. So, close to 100%, meaning they were renovating these properties close to full market value. And so, that spread is where the investors are making their profits or potential profits. And if you look at it on a percentage basis, the Midwest stands out as the best market, 109%. And this is gross. I don’t want to be like the media. You know, it’s throwing out numbers that I don’t completely contextualize. But in the Midwest, these are actual sales that occur on a platform. They were selling for 109% of what they bought them for. Or, excuse me, 109% more so they were buying them for $97,000 on average and selling them for $173,000 on average.
Now again, that’s not taking into account any holding and rehab costs but that is the best region of the country in terms of just that raw gross percentage increase in and the price of the property. The West again is actually at the bottom with a 52% gross profit. Now, in the West, you’re making more money. You’re making in terms of just the dollar amount, $105,000 more is what you’re selling it for but the Midwest is the best percentage-wise in terms of those potential flipping profits.
Josh Cantwell: Yeah. And I could see too you can make an argument that in the West, you might have newer inventory, more recent housing stock, and you probably if we had access to the data of holding costs and rehab costs, I would say that the West is going to require less rehab cost and the Midwest is going to require more because the Midwest is going to have older housing stock built in the 50s, 60s, 70s. The West is going to be more newer housing stock. So, although the Midwest appears to have a larger percentage of profit, my guess is that there was more money that went into it. This is just my hunch that went into it from a rehab perspective but great to see that there’s opportunity all over the country. There’s opportunity in high price points and low price points. How about from a cash flow perspective, Daren, as far as gross rent yields and where people can make money from buying and keeping properties long term and renting them out?
Daren Blomquist: Yeah. We looked at another separate cohort of 25,000 properties that were purchased on our platform in 2019 and 2020 but they were not subsequently resold. So, our assumption here is these are held as rentals because we didn’t see any resale within one to two years of the property. It’s interesting. One thing that stands out to me here is the folks who are buying to hold properties as rentals and maybe this has to do with the types of properties in neighborhoods that these properties are in, the purchase price was lower, $132,000 on average versus $155,000 for the properties that were subsequently flipped. And the discount was also bigger, 55% of after repair market value versus the 62% of after repair market value. So, they’re purchasing at a bigger discount but then what we saw is the average rent on those properties just using some very basic numbers, they were kind of meeting that 1% rule where the purchase price of $132,000, the average rental estimate on those properties was $1,300 a month, $1,360 a month.
And so, if we put in some kind of basic assumptions there, well, if you look at what we would call gross rental yield, which is not a cap rate but just the total net income from rent divided by the purchase price, that ends up being about 12% gross rental yield on an annual basis. If we assume that 40% of the rent is going to maintenance cost, other expenses, possibly a mortgage, we end up with cash flow of about $816 a month, which ends up being close to $10,000 a year cash flow on each of these properties. You know, again, some basic assumptions here. But what’s interesting here to me is, again, the Midwest in terms of percentage is at least on paper stands out as the best but the cash flows, in terms of the cash flows, the best cash flows are in the Northeast with about $12,500 potentially a year with those properties.
Josh Cantwell: Yep, I love it. I think what I take away from this is looking at flips versus rentals, which goes along with my strategy that I’ve had for a long time, which is if I was buying single-family rentals, I would be buying them in kind of C class, maybe C+, B- type of areas where I could buy a nice property, relatively low crime but just a lower price point so I could get a higher return long term on my cash versus if I was flipping a property, I would buy more on that B class, maybe B+, maybe A- market because I’m trying to sell to an owner occupant. And if you’re in a C class or a C+, B- type of area, you’re not really looking to sell. So, you’re okay holding that asset, not having as many buyers that would be willing to buy it. A lot more rentals, a lot more landlords there buying at a lower price point so they could get more cash flow versus my flips, going to buy in a nicer area, maybe a little bit better schools, maybe a little bit even less crime, maybe some more retail so that I could sell to an owner-occupant, husband, wife, family, spouse, whatever, who cares about living in those areas out in the burbs and were going to pay more for it and ultimately sell it for more.
So, this really aligns with, I think, the strategy of flipping those B+, A, A- areas and hold in the C, C+, B- type of areas for cash flow. This proves exactly that type of model, and I love to see the data kind of backing up the strategy or the strategy backing up the data, however you want to look at it. It’s fantastic stuff. Daren, I know we’re short on time, so just talk for a second about where people can follow you, where they can follow Auction.com, where they can get more information, buy properties on your platform, where should they go to learn more about you and your company?
Daren Blomquist: Yes. Thanks, Josh. Auction.com/InTheNews is where we’re posting a lot of the slides that I showed today. We have a lot of that and more on the In The News section just tracking the market, what’s going on in the market, what are some of the trends that we’re seeing? And so, that’s a great place to follow me and the work I’m doing as well as feel free to follow me on LinkedIn. I am posting a lot on there as well. And then in terms of actually where the rubber meets the road, finding some of this inventory, and part of the reason I wanted to share those numbers is that, and even in this market, whatever the market is, there are opportunities available and we’re seeing that on our platform. And so, to find those, just go to Auction.com and you can just start searching. You don’t have to register. There’s no subscription. You can just start searching and finding properties and even potentially bidding on properties. We have a lot of properties you can bid on online and then a whole other segment of properties that are at the actual foreclosure auction.
Josh Cantwell: I love it. I love it. You know, people that say, “Oh my gosh, in 2019, 2020, the market was so good. There are no deals.” What I just heard Daren tell us is there was 52,000 properties sold on their platform. There were 27,000 flips and 25,000 rentals that were bought in two years. So, don’t tell me there’s no inventory because even pre-pandemic when the market was really hot, there was inventory. And the other thing is there’s more inventory coming. Daren, listen, fantastic job today. Thanks for putting together this data. And thanks for being with me today on Accelerated Investor.
Daren Blomquist: Thank you, Josh. Glad to be here.