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 you’re investing with The Accelerated Investor Podcast.

Josh: So, hey, welcome back. Welcome back to Accelerated Investor. So excited that you’ve decided to join us again. And I am in particularly excited today because if you’re a real estate investor or you care about the economy, you care about your investments, you’re thinking, do I make additional investments in today’s market? And you’re specifically a real estate investor, you’re probably wondering, you probably have this question creeping into your mind of what’s going on with the market? Is the market starting to soften? Is the market getting better? What do I make of all of the data that’s out there regarding prices going up, prices going down, interest rates, what’s going to be happening over the next six months to a year to 24 months? Are we headed towards a recession? And wouldn’t it be great to have a crystal ball that would tell us exactly what’s going to happen?

Josh: And you can make your bets on what’s going to happen in the marketplace. Unfortunately this isn’t Back To The Future. If you’re familiar with the Back To The Future series, we don’t have an almanac that’s going to tell us what’s going to happen in 24 months. But we do have the next best thing. And I’ve invited my good friend Daren Blomquist, he is the vice president of Market Economics at Auction.com. And Darren has been a longterm friend and colleague and has provided us tremendous amounts of data and information for the past four to five years or so in his different roles that he’s had. And Darren joins us today from Auction.com from their beautiful offices in Irvine, California. And just to set this up a little bit, when you hear data and information coming from the major news outlets, the major news channels, MSNBC, CNN you know, Fox News, so on and so forth.

Josh: Darren has been quoted and interviewed and these major, major news outlets for the past several years. And they on the data that him and his team’s pulled together to find out what is happening in the marketplace. And I’ve invited Darren to come back. He’s been coming back, usually about three or four times a year to tell us about the trends in the marketplace. And hopefully, my goal in interviewing and talking with Darren today is that it gives you some insight on what you should do with your investing strategy. Should you continue doing fix and flips, should you continue investing in multifamily? Should you continue investing in cashflow or apartments? Should you keep raising money or not? Should you change to wholesaling? Should you focus more on large balance commercial? All of these things are questions that I’m having and questions that you may be having in your own business. So with that said, I want to welcome Daren Blomquist from Auction.com onto the line. Darren, thanks for joining us. How are you today?

Darren: I am doing well. I have a little bit of a cold here so I apologize I’m sucking on a cough drop so I don’t hack in and everybody’s here, but great to be here. Thank you for the invite my first time here under the Auction.com umbrella and happy to happy to be here and hopefully share some insight with your audience.

Josh: Yeah, you bet. So, Darren, vice president of market economics. Sounds like a really important role. Obviously Auction is serving the community, not only with sellers who are a lot of banks that own inventory, whether it’s pre-foreclosure or a foreclosure inventory auction inventory. Your company holds live auctions. You also hold online auctions and obviously these banks, these sellers are looking at the data to find out what’s happening in the marketplace. And then of course you have the buyers, the buyers are primarily real estate investors.

Josh: I’m sure you have some retail buyers as well, but primarily real estate investors buying properties. So you’re really serving both sides of the community, which is great. So let’s jump in and tell us a little bit more. We do have, if you’re catching this interview on YouTube, we are also showing a number of slides. So if you happen to catch this in iTunes or through our podcast, you can also check out the same exact interview in YouTube. And we have a number of slides that Darren’s prepared with a lot of the data that’s happening. And so Darren, why don’t you just start to step us through some of these important figures and stats and tell us what’s happening in the real estate market.

Darren: All right. Yeah. The first slide I have here is a housing market scorecard that prepared internally for us to know what’s going on in the larger marketplace. One of the exciting things about Auction.com it really is it’s own marketplace and from an economics perspective, you’re seeing transactions taking place, a large volume of transactions. And so you get to see the buyer and seller side of that. And it’s really its own a standalone marketplace, which is kind of exciting. There’s a lot of great data that spins off of that, that I can work with that’s actually predictive of the in some ways. So that aside though, we still want to look at the broader marketplace. And really, you know, the housing market scorecard is, are things getting, you know, it’s green or red, are things getting better or worse?

Darren: And there’s a really a mix here. You know if you’re looking at this slide or even if you can’t, there’s a good mix of green and red and it’s hard to know right now, which is going to win out. But we’ve seen the pendulum swinging back toward a market that is rebounding with the big catalyst for that are mortgage rates going down. And that of course affects the retail market, but it also helps out real estate investors who often are selling into the retail market after they flip a property. Employment is really strong. Affordability has been an issue with this market, but it’s actually showed some improvement and I’ll talk about that more in a second. When you get to the home sales, it’s, you know, one month home sales will be up and looking rosy and the next month there’ll be down.

Darren: And so it’s a little bit hard to know both on the existing home sales and new home sales, but existing home sales continue to be down. We’re seeing fewer home sales, but the one thing about that is the inventory is up. And so you can’t just blame this on an inventory problem, which was what the National Association of Realtors fell back on with or had been falling back on. But now that we’ve seen are starting to see inventory inch up even as home sales continue to decline, it is not just about inventory. New home sales are a little bit more volatile, but we have been seeing those, we have been seeing those actually increase one month and decrease the next. And then, but one of the things that stands out there is the median home prices on new homes have been falling for several months.

Darren: And I’ll talk about that in a second too. On the distress side of things there’s, it’s depending on how you look at it, we tend to look at it through the glasses. I think that a lot of real estate investors would, in some ways we want to see a little bit more investors may want to see a little more distressed in the market because that means more inventory as, as bad as that sounds. But we are from that perspective we’re seeing delinquency rates continue to fall for closure, starts continue to fall and so there’s less of that distressed opportunity out there in the marketplace.

Josh: Yeah, like your position on it Darren because coming from the auction perspectives, a lot of people may say well, you know the economy’s getting better. There’s the delinquency rate is down, the foreclosure starts are down. But for real estate investors that’s not necessarily a good thing, right? Because we buy a lot of distressed properties, but from a global economic perspective it’s good to hear that delinquency rates are down foreclosure starts are down because you’re hearing I think a lot of bad information or people overreacting and saying, oh my God foreclosure rates are up or you know, delinquency rates are up or housing prices are down. See stuff on social media. People are reacting very, very knee jerk to some data without knowing what’s really behind the curtain. This really helps us understand what’s behind the curtain. And so some of the things that you’ve mentioned, which are on your slides, which I really like is mortgage rates fell for the first time in 13 months.

Josh: That’s a lot lower mortgage rates, a lot of people to buy more properties and afford more, but the market is responding unevenly. Existing sales are down in March following a spike in February, so this is month over month. Really hard to predict the market month over month, but on a yearly basis, right. The theory was in the past, while a property, the number of existing home units has been down because there’s less inventory. Well now you’re saying that there’s actually more supply hitting the market. There’s 5% more supply than there was last year, but existing home sales are down, which means the market in general that tells me the market is just softening there’s less overall demand.

Josh: And even with that set though, what’s interesting is the market overall median price continues to climb. And I wonder, my take away from that is I wonder if some of the larger, more expensive markets, the California’s, the New Yorks, the Seattle’s, some of those larger markets because those properties are so expensive and they’re selling for more, maybe they’re dragging the existing median sale price up and that’s having a large pool on the marketplace. I don’t know if you have a take on that or any ideas around that.

Darren: Yeah, I mean the pace of price appreciation is definitely slowing. It’s down into the single digits below 5%, typically over the last six to eight months. And so and to me that’s a really healthy thing. The market is responding not by crashing, but by slowing down and taking the foot off the accelerator. I do think and we’ll see this actually in a couple of slides, is some of those really high priced markets on the coast that you’re talking about, we’re actually seeing decreases in medium prices there. And so those markets are the ones that are struggling the most in this environment.

Darren: Where really to me, it’s all about affordability right now. There’s no really strong Achilles heel that we can see in this marketplace. So I think that’s what when you said earlier, everybody’s overreacting, knee jerk, everybody’s looking for the next crash and they see one month of data and they’re expecting, oh, that’s a sign that the next crash, and I even fall into that trap sometimes, you know, because you want, we know that the market is cyclical.

Darren: And so we’re looking for that. But you have to be careful not to overreact and everything I’m seeing is that there probably will be a correction, if I were to have to put my cards on the table over the next couple of years in the market and correction meeting prices actually go down a little bit. But it’s not, it’s hard to imagine playing it out with all the data I see as well as just psychologically it playing out in the crash scenario that we saw from a 2000 around 2008 to 2012.

Josh: Yeah, I think from what I’m hearing from a lot of boots on the ground, investors from all over the country because we lend and we mentor people all over the country that they’re kind of expecting, like you said, a correction, but not a crash, a correction that the market softens prices maybe go down a little bit things slow down. There’s less people interested in flipping, or interested in investing, but nowhere near what we saw in 2008. One because I firmly believe that the, there is a lot more financing, alternative financing in the marketplace for flippers and for investors. There’s companies that are out there like Lending Home and Freeland Ventures and all this alternate finance that’s out there. But if you’re looking to sell the property, ultimately flip it, sell it to an end user, a retail buyer, the underwriting criteria for those end buyers from Fannie Mae, Freddie Mac or HUD, VA, FHA, etc, that criteria is still pretty strict.

Josh: And they’re not just giving away loans today like they were in 2004, 2005, 2006, 2007 that led up to the crash of 2007, 2008. That type of financing just doesn’t exist. Is there more subprime lending? Yeah, it looks like it’s creeping back into the market to a small degree, but there’s not that type of willy nilly crazy lending like you saw in 04-07 that caused Bear Stearns to go bankrupt and Lehman Brothers to go bankrupt. That does not exist in the marketplace today. And so long as Fannie Mae and Freddie Mac keep a tight purse string on those end buyers, I think that’s going to keep the market in check and you might see a correction, but nowhere near the crash. And I think a lot of my friends feel the same way. Are you seeing something similar there? Are you feeling the same way about it?

Darren: Yeah, I would agree. I would agree with all of that. Nothing really too much to add, but, you know, the market is circulatory. I do expect it to, the softening isn’t a huge surprise and in fact it might be a good thing because if the market kept going up, we would be experiencing a true bubble and an overheated market. So, you know, the slide we’re looking at now is about price appreciation, which you can see the blue bars have slowed down. We’re still seeing appreciating prices in most markets across the country, but it’s slowed down too the more reasonable pace.

Darren: And that I think a lot has to do with the mortgage rates up there in the market is extremely sensitive to mortgage rates. You can see this actually happened in the not too distant past. Back in 2013, 2014 mortgage rates went above 4% back then we saw the market respond the same way. Home price appreciation slowed down into the single digits. That time when we saw the mortgage rates go back down, well below 4% again, we saw the market pick up.

Josh: It’s amazing to see that direct correlation, right?

Darren: Yeah. So, we know the levers to pull I guess, but I don’t know if the market will respond quite so well this time because you know, there’s, as home prices continue to go up, there’s only so much a juice you can get out of the mortgage rate lever. I’m sorry to mix metaphors here. But it is responding to at least somewhat positively now with a home price appreciation starting to pick up a little bit. You know home sales are a different animal, but we, I mean, what stands out here as you see for the last five months, now the new home sales data just came out this morning.

Darren: I took a quick look at it. It’s not on this slide, but medium prices on new homes actually went up in April, but previous to April, there’ve been five consecutive months where new home prices have been down. The builders will tell you that’s primarily because they’re building in more affordable markets and smaller homes that are less expensive and so the mix is changing. As opposed to really there being a crash, which you might think, oh, home price is down. I mean we’re talking about double digits and some of these cases, but there’s a smaller pool of homes here then the existing homes and I do think that the mix is changing, which is influencing that price downward.

Josh: Got it. New construction trends, tell us about that. Builders are behaving cautiously. Obviously a builder is almost like not a speculative buyer, but they’re building typically when somebody builds a property, they’re going to be again, all in for about 70% to 75% of the after fixed up, you know, fully built value. So builders are going to be cautious, they’re going to act a lot like rehabbers do in the way that they can only build so much. They have to make sure the properties are affordable.

Josh: And that’s the lever that we talked about two slides ago where interest rates going down and prices going up is one lever. The other lever is if properties are already to the point where they’re not affordable, you can’t pull that lever and have that much juice, that much movement. So new construction is important but not as important as existing homes because the existing homes, there’s obviously a larger pool. But what are we seeing as far as new construction trends?

Darren: Well, yeah, we’re seeing the builders, through this whole recovery, the builders have been extremely cautious, I would say. And not trying to trying to not fall into the trap of overbuilding that they got into during the last housing boom. And we’re seeing that happen again over the last few months, really seven months. During this housing slow down, they have pulled back on taking out building permits, which is the earliest really indicator of they’re perspective on the market and so they’re pulling back, they’re not getting, they’re getting fewer building permits. Housing starts have been falling, which was when they’re actually breaking ground to start on a project. So they’re pulling back in response, I think to the softening market. They don’t want to get trapped with a bunch of inventory that they can’t sell as the mark, as they see signs of the market springing back to life. If that happens, they, I would expect that to bounce back as well.

Josh: Yeah, I could see that. I mean, if I’m a builder that’s going to take me time to acquire the land and get the permits, maybe take me 6 to 12 months to bring a property online and I’m looking at the market softening now. I have to project out 12 months or so or 8 to 15 months from now to see what the market’s going to look like. And if anything, I think the market’s the same or a little bit more softened 8 to 15 months from now, not necessarily continuing to appreciate at a rapid pace. If anything, it’ll appreciate at a normal pace of 2% to 4%, which I would love to see just normal, right? It’s like we haven’t seen the last 15 years a normal market like we used to experience in the 60’s, 70’s and the 80’s and the early 90’s where things just appreciate at about 3%.

Josh: You know, everyone’s in love with real estate these days and so the market has, because there’s so much more demand the markets experienced a lot more volatility since 2004. So I like normal and hopefully even if the market softens over the next 12 to 24 months, it just takes us back to normal. Even if there’s a little bit of a contraction in the market, a little bit of a correction, that’s fine. If that takes us to normal, I’d be great with that. Especially if you’re buying it wholesale prices, you know, my friends and I that are buying, whether it’s apartments, whether it’s small balance commercial, whether it’s fix and flips, you’re buying at a wholesale price, you’re buying on value.

Josh: You can always win in that market. I think where people become more taking on more risk is many people who are buying on the coast lines and traditionally the vacation markets of Florida, Arizona and Nevada, Seattle, California, New York, New Jersey, and they’re buying on speculation for prices to go up. That’s where the risk is because now you’re starting to see those markets affordability’s becoming a problem. The market can’t go up anymore and you’re seeing even some correction now in those higher priced markets. So that brings us to this next slide of home affordability and buyer behavior. So tell us what you’re seeing there.

Darren: Well, yeah, I mentioned affordability earlier and that is helping affordability. You’ll, hear it’s a buzzword out there, you’ll see it a lot that a lot of folks saying, you know, this is a market where there’s not very good home affordability and that is true. And we saw the graph basically is showing us that starting in the beginning of, near the beginning of 2018, in the second quarter we saw home affordability and this is using the Adam Measure where I used to work. So I help develop this, I’m very familiar with it is home affordability went below it’s historic level for the first time during this boom and in the second quarter of 2018 and that was a sign that hey, the market is getting out of balance. The homes are not, are less affordable than they have been historically for the first time going back to the last housing boom now.

Darren: So that was a bad time. And I think the market, the good news to me is the market responded and slowed down and because the market responded and slowed down, we actually now see home affordability in the first quarter of this year, jumped back down right in line with historic norms. It’s right on par with the historic level, which is a good thing. And a lot of that had to do with, well it had to do with the combination of falling mortgage rates, but then as we talked about slowing home price appreciation and wage growth actually is kicking in just a little bit. And so you have all of those working on behalf of affordability, which is a good thing. The other, the blue graph on here is looking some of our data from Auction.com and we think the buyer behavior at our auctions, the bitter behavior is a great indicator of market sentiment, especially from real estate investors.

Darren: And what we saw is when that affordability went above or got worse than it’s historic norms, bidders at the auctions pulled back, they were bidding close to, over 80% of the market value of the property to get a winning bid at the auction that slowed down and got down as far as low as about 76% which may not seem like a big thing, but you know, those few percentage points make a difference and so those bidders pulled back, but now we’re seeing as affordability has improved. Again, bidders back up close to that 80% bidding, 80% of market value at the foreclosure auctions.

Josh: It’s amazing to see the data in the levers that are being pulled here, Darren. When you look at affordability going down, you see people paying less for properties. You see affordability getting better, you see people paying more for profit. It’s really wild when you overlay this data on top of each other and what it tells you, it’s really, really, really great stuff. And since affordability seems to be getting better, especially because you said like in some of the highest end markets like San Jose and parts of California and New York, etc. Where prices are actually correcting to some degree, they’re actually down 5% or 10%, which means be they’re becoming more affordable. That should boost demand, right?

Darren: Yeah. That’s where we’re seeing that at the Auction. And this slide is just showing wage growth is coming more in line with home price growth. Home prices are still rising faster than wages. But I guess if you want a normal market, Josh.

Josh: I want normal.

Darren: You would see those two lines pretty much converge is, is wage growth is pretty much, home price for growth is pretty much tracking wage growth. It’s kind of boring, it’s like 3%. I mean it is really up that 3% to 4% a year, right under 5%. That orange line steady slow and steady. And if, yeah, if we saw a normal housing market instead of the blue line looking like a cardiac monitor, we’d see it looking more like a flat line, like the wage growth. But we are seeing the home price growth come down a little bit back down to earth, closer to that wage growth, which I think is a healthy thing.

Darren: But yeah, if you look at the next slide and you alluded to this a second ago, the lower mortgage rates were not enough to save some markets. I guess if you want to look at it that way, some markets had just gotten too speculative and so we’re starting to see them correct already. And I wanted to show that this is not just one set of data. This is because I think some of this data may be surprising to people, but both the NAR, which traditionally is very conservative and tries to spin the market very positively. And also the Adam data are showing about roughly 13% to 15% of markets that are correcting where prices are going down. And some of those markets that are common among both datasets are San Jose, California down 11% according to NAR, down 9% according to Adam.

Darren: Naples, which is one of those kind of luxury type markets. High end in Florida, down 8% according to the NAR data down 5% according to the Adam data, Bridgeport, Connecticut down 7% or 4% depending on which data set you look at. With those are significant decreases and we’re seeing other markets, you know, there’s a whole slew of other markets that are right close to the going negative. So don’t be surprised to see that and I think the common theme will be mostly in the higher price markets. It won’t be exclusively, but those are the markets that are most susceptible right now to a correction.

Josh: Got It. Yeah. I love it. I love the data because it’s the same kind of area as Bridgeport, Connecticut is obviously a high-end luxury market supported by New York City. Naples is Naples. Let people know about that and the luxury properties there. San Jose is either though, depending on who you talk to, is the most expensive or one of the top three most expensive markets in the country. And those are down. And I think that that’s actually going to help long term because we’re, hopefully again, won’t see any kind of bubble correction there. I’d rather see some sort of contraction, which we’re starting to see in some markets.

Darren: And Josh, meanwhile the Akron, you know, you notice probably Akron is one of those on the list.

Josh: Yes, I did.

Darren: That’s where we’re continuing to see pretty strong appreciation and those tend to be the more affordable middle America markets. Atlantic City might be an exception there, but Spokane Atlantic city, Akron, Omaha, Kennewick, Washington, which is an interesting one that I found that it was common on both lists with pretty strong, almost 10% year over year appreciation. So yeah, you see different behavior happening depending on affordability, demographics is a piece of this. And then in terms of population growth or decline and then of course jobs is a piece of that, but yeah, some markets are behaving very differently.

Josh: Yeah. Those are all the levers that Darren just mentioned, affordability, job growth, those kinds of things are all indicators of properties and how they’re going to perform as far as increased price, decreased price. I love to see Cleveland, Akron, Canton, continue to always be on this list in some positive way. Flipping profits, rental profits, price appreciation. And I’ll just tell all my listeners to stay out of my backyard, thanks. And so tell us a little bit more about this. This is interesting. This is the Auction.com a foreclosure sales and how it’s outperforming the market. This is an interesting slide that I don’t think that we’ve really looked at in the past.

Darren: Yeah, I don’t know how familiar your listeners are with actually the foreclosure auction. This is specifically if you go to the courthouse steps, although they just changed the in Ohio and this is starting to happen where you can do some of these formerly courthouse auctions where you physically had to go there, you can do them online and you can do that in Ohio now, Florida is another state where you can do that. So some of this foreclosure legislation was passed 150 years ago. They’re finally updating it to adapt to technology and the times. But anyway, these, basically what this is showing is the percentage, properties selling at this foreclosure auction. What percentage of estimated market value are they selling at? So I think in investor speech that this would be, what’s the percentage of after repair value and this, these are averages.

Darren: I know a lot of investors tried it to go for, Josh I’d be curious to hear your number on this, but what’s your target of after repair value when you’re acquiring a home? But we’re showing on average it’s between 75% and 80%. We compare the market Auction.com does about 30% to 40% of all of these foreclosure auctions across the country. But then there are another 60% to 70% that are done outside of Auction.com. We compared ourselves to the market and we’re out performing in the sense that our properties sell at a higher price relative to after repair value, which is good for the sellers. That may not be as good for the buyers, but there are definitely are still deals available.

Darren: But this gives you a range of if you’re going to the foreclosure auction, this is what you can expect on average is somewhere in the 75% to 80% range. And it depends on the ups and downs in the market. You notice in the fourth quarter of 2018 when the market was softening, people were getting better deals at the auction because a lot of people were scared of what’s going on in the market. And so it dipped down closer to 70% to 75% of after repair market value.

Josh: Got it. Yeah. I love to see this data and I think all the listeners have to mention this 70% to 80% of market value. We want to be typically all in for about 70%, you know, the max 75% of the after repaired value. But this is an average, you know, and we’re not investing on the average, we’re investing in those few deals that the lower percentage that we can get at a significant discount. Obviously there are properties that go to foreclosure auction that are in great condition that are in very expensive or very competitive markets. Those are selling at 100% of the property’s value because there’s less inventory, there’s a lot of job growth, there’s a lot of income growth and there’s not a lot of inventory. People are going to the auction and they’re paying full price and they’re moving their family.

Josh: And in that case there’s not a lot of spread there for an investor. And then there’s other markets where, you know, there might be a hundred properties that go to auction and a lot of them are selling at 75%, 80% even 90% of the after repaired value. We’re looking at as those 5 or 10 properties maybe out of a hundred that are going to sell for 50, 55, 60 cents on the dollar because maybe there’s more distress, they need more work. There are some unknowns, those types of things. And there’s a lot of value add that we can add to the property. So average is good, but we’re not investing on the average. Remember we’re investing at wholesale prices, so don’t freak out on the data. If you take a look at, you know, 75% of the property or properties are selling at roughly 75% of the after repaired value. That means that half the properties are selling for more than 75% but also half the properties are selling for less. So some of them are selling for 50% of their value. Some are selling for a hundred you average it out to 75% that means there are still good deals out there, which is fantastic to see.

Darren: Yeah. And the point being, if you go, if we did the same slide for property selling on the MLS, which actually I think in the next slide shows, you’re going to be closer to 100% of market value, there is a difference here. So the first slide was looking at those courthouse foreclosure auctions. The second slide here is looking at REO auctions or properties that sell as bank owned. And no REO is not the cookie, but it’s the real estate owned by the lender. And we compare it here is the ones that we’re selling on our online auction platform. It’s actually reversed.

Darren: There are selling at a deeper discount then the market REO’s are, the type of REO’s is the banks are taking back. And rather than selling them via auction, typically they’re going to do a little rehab themselves and put them on the MLS and list them for sale. And you see those are selling close to 100%, even in some quarters above a hundred percent of market value, which tells you there’s actually a lot of demand still out there in the marketplace. But then the properties that are selling on our platform, which are the online auctions, typically there’s no rehab done by the banks. Those are selling close to 80%, and hovering right around April 80%.

Josh: There was a good tip in there, Darren. And so if you look a, investors that are looking for more inventory, a lot of people said like the MLS is dead for the most part. It is because there’s a lot of competition and not a lot of inventory. This slide immediately tells us that you can get a better deal if you’re on a site like Auction.com 20% better deal to buy on Auction.com and take the property and buy it from there. And actually you’re getting the property quicker as well. Darren and I had a conversation offline before we get started recording this. And I said, well, why would a bank put the property on auction.com as opposed to the MLS? And Darren’s answer was, it was really speed the banking, get the property up on Auction.com much faster, typically 200 days faster.

Josh: So they may be willing to sell it for less and let it go because they’re not experiencing all the hard costs, the liability, the risk of owning the asset, putting it on the MLS, and then waiting for a buyer. And so there is more opportunity to buy on Auction.com then on the MLS. So definitely take a look at that. That’s a, that’s a great real tactical tip that you can use starting tomorrow to find better deals. And so Darren, I’m always curious to see what’s going on with foreclosures, what’s going on with short sales, what’s going on with flips, how much profits people are making, where they’re getting their inventory from this trend. As you know, this next slide is telling us a lot about that. So help us understand what’s going on, of properties that are being flipped, how much people are making, what’s the profit margin, what percentage are being sold at auction versus other methods?

Darren: Yeah, this side, it kind of just establishes that about 10% to 15% of all flips. So your audience that are flipping homes, probably, if they’re an average investor, they’re getting 1 out of 10 properties at a foreclosure auction. That’s one of the sources that investors use to find properties to flip. Because to your point earlier, you find that ability to buy at a discount, you find to add value, value add opportunities at auction. And so this, yeah, this is just establishing, that’s the trend out of all flip’s about 10% are being purchased back at foreclosure auction.

Darren: It was actually more back, this slide goes back to 2011. And you see it’s come down, it was up over 25%. That’s because we were still dealing with the hangover from the housing crash and there was a lot of foreclosure inventory available. So more of the flips were being acquired at foreclosure auction that has come down. It’s ticked up just a little bit in the first quarter of this year. We’ll see where that goes. But there is a limited foreclosure inventory out there.

Josh: What I think is interesting too is even though flips have become so popular and you know, different shows and different news outlets and a lot more people that I know, are investors, all of a sudden there’s all kinds of people who are investors who used to be in tech, who used to be nurses that all of a sudden they’re flipping properties. But you know, if you look at the trends since really 2013, in 2013 there were about 360,000 properties that were flipped. And in 2018 it looks like there was about 425,000 properties that were flipped. So in that five year window, the total number of flips only rose by about 60,000 properties. It’s been pretty, when I look at that, I’m not seeing a 50% increase in the number of properties being flipped. If anything, there’s more people buying properties and maybe holding onto them, which is obviously a great long term legacy wealth building strategy.

Josh: But the number of flips is not, you know, it’s not growing so fast, so much like it did in 2005 and 2006 so we’re going to just not seeing you look at the 2019 looks like there was about 85,000 to 90,000 flips and multiply that times four quarters and you’re going to be again back in that 360,000 to 380,000 maybe 400,000 range this year. And so that’s been not flat, but it’s been within this range, this kind of narrow sideways channel where it’s been relatively the same for almost the last seven years in a row.

Darren: Yeah, that’s a good point. Yes to say, and this is a pretty broad definition of flip too, I mean, you might, you actually might take issue with it, but it’s any property that’s sold within a two year time period twice. So we’re leaving two years. I mean it’s pretty broad. Obviously most professional flippers are going to flip within I think 90 to 180 days. But we leave a broader window for those outliers who take a little longer.

Josh: Yeah. Yeah. Even two years I think is fair because some people buy the property, they might rent it out and then sell it, but you know, obviously retail buyers, mom and pops that move their families into properties, they’re going to hold on to that property for typically seven years, eight years, nine years. So anything that’s bought and resold within two years, I definitely would still define as a flip and the flip rate, right? The properties that are being bought at foreclosure auction, it still looks like a lot of the properties that are bought at auction are intended to be flipped and resold. So tell us what’s going on there.

Darren: Yeah, was, you know, this was partly for our own internal market research. If you know, what are people doing with properties they buy foreclosure auction and 50% of them over, well over 50% of them actually getting close to 60% now are flipping those properties. Excuse me. So you know, this is just I think establishing that auctions are and established source of flipping, even though this is the reverse of the slide we looked at earlier. Auction purchase flips are 10% of the overall flips, but when you look at properties purchased at auction, over half of them are eventually being flipped by the investor. And then I think the money side is the next slide where we really get into the, you know, potential profits. And one of the things we did here is looked at gross profits and then we tried to estimate net profits.

Darren: That’s a tougher thing to do. The gross profits is a hard number based on simply looking at what the property was purchased for versus what it sold for, how much money, what difference was there between those two sales. And then the net profits we do take out an estimate for a rehab estimate for holding costs estimate for sales costs if you’re going to turn around and market it for sale on the MLS. And if you take out those estimated costs, obviously you have less of a profit. But one of the things we noticed is that folks who are purchasing and then flipping at foreclosure auctions, especially in more recent quarters starting or more recent years starting in about 2017 are outperforming the market. So you’re getting a better gross profit as well as a better net profit, estimated net profit purchasing it for closure auction than other flippers who are buying other methods.

Darren: And I think the reason for this is rooted in something you said earlier, Josh, which is basically back in 2012 to 2015 approximately, home price appreciation was going crazy double digits. And so flippers could buy properties close to market value and just rely on price appreciation to get them a good profit. And they didn’t have to necessarily, I mean this is overgeneralizing for sure, but they could rely more heavily on price appreciation. Now that the market has tightened up a bit in the last few years, flippers have to find that value. They have to find that discount up front in order to really turn a good profit.

Darren: And so that’s why we’re seeing that flip, no pun intended, to buying at auction actually is more profitable for flippers that buying other methods because at auction you can get that there is that opportunity and there are other methods as well besides auction. But there is that opportunity to buy the property at that discount and add value.

Josh: Yeah, fantastic. It’s interesting that the gross profit per flip has come down for sure. And that’s because people are willing to pay more for properties, more competition. So naturally their buying properties at a higher price and that’s for the overall market. So the average profit per flip is going down. The interesting thing though is that definitely the operators that I know and the students that we have and the borrowers that we lend to, there’s still a great demand for flip financing. There’s still a great demand for private money and hard money to buy properties to fix them and flip them. They’re still trying to find properties at big discounts. Their, you know, sifting and sorting through more properties, trying to find that sort of needle in a haystack that they can buy at a significant discount, rehab it, sell it for a profit. I also know a lot of flippers who are preparing for a potential recession or preparing for potential correction.

Josh: And they’re buying for cash flow. They’re buying to hold long term. It’s certainly something we’re doing more and more and more of and especially in the last six months we’ve bought into over a 1,500 units of apartments just specifically for cashflow. And so I think people are, they’re rounding out, I guess what I’m seeing is that they’re rounding out they’re offering or they’re rounding out their business. Whereas what I saw three, four, five, six years ago, it was just buy and flip, buy and flip, buy and flip. Because there was still was still a lot of inventory leftover from the, the, the great recession and properties were going up in value, like you said, double digits every single year. And they were putting some value add rehab into the property. So that was at that time the most profitable strategy to run, which was buy low, fix, sell high, get out of the deal. And you know, and that worked well.

Josh: What we’re seeing now is because things have tightened because people are seeing potentially, and you said the market is cyclical. So let’s talk about that. What’s happening in 2019 it’s a lot different than what happened in 2014 and so what people are seeing now is I can still do flips. I can still buy properties at auction. I can still buy properties that are off market. I can still get, there’s still a lot of great financing out there to still do flips, but that’s not their only strategy anymore. They’re focused on cash flow. They’re focused on value add. They’re focused on buying and rehabbing and keeping longterm both single family and multifamily and large apartments.

Josh: I’m seeing more and more discussion around that and more actual execution around that than five years ago when it was all just buy and flip buy and flip buy and flip, which is really, really good to see. I think it’s going to help with the health of the market for people to be ahead of the curve instead of behind the curve. That’s also the second thing I’m seeing now Darren, is more people are ahead of the curve preparing for a correction or preparing for a potential more larger recession, in which I think will soften the blow as opposed to everybody just full speed ahead 100 miles an hour and everybody’s running into the same brick wall that they did in 2007, 2008.

Darren: Yeah, that’s all good. Hey I had a question for you. That might be a gift for your listeners too, is like we had some estimates for taking out costs involved with flipping a property. I mean, is there any way you can provide like rough estimates of, you know, of how much you’re going to budget for rehab and holding costs when you’re doing a flip project?

Josh: Oh yeah, definitely. We in general, I would say that the flip costs, the rehab and holding costs about 30% of the purchase price. And so for example if somebody were to buy a property for $200,000 and they had $60,000 in expenses for rehab and holding costs be about $260,000, they would be all in and then sell that property for about $300,000, they’re going to walk away with a $40,000 profit after all they’re holding costs and all their rehab costs. So again, that lines up with our theory that we want to be, again, all in for just purchase and rehab only. You want to be all in about 70 cents on the dollar. So if for example, somebody buys a property for $200,000 and they’re all in and let’s say purchase and rehab for about $230,000 $240,000 and you’re adding about $20,000 more in holding costs are now all in for $260,000.

Josh: If they’re all in for $220,000 or $230,000, that is about 70% to 75% of the $300,000 after repaired value. And so those numbers kind of line up. So you know, without having actually looked back at my own data, I would think that if you look at purchase price and cost it’s going to be about 30% give or take. Obviously some people do massive rehabs where it’s much more, some people do a much smaller rehabs, you know, it’s lipstick on a pig and they just put $5,000 or $10,000 grand into a property and then put it into service and flip it. We’re definitely seeing people do prehabs now, which is just because there’s a lot of demand. They’re buying a property, they’re doing very minimal carpet and paint only. And then putting the property right back on the market on the MLS because we know that, you know, the MLS is a little bit of a feeding frenzy. So when you average all that together, you know, my best guess without looking at hard data would be around 25% to 30% of the purchase price.

Darren: Okay. Yeah. We estimated about 20% plus 6% for listing the property and then $35 a day for holding a property, which is based on data we get from the banks actually holding the property. So it’s somewhere in the ballpark there of what we’re making into those net profits there.

Josh: Yeah. I think my big takeaway Darren as we kind of round third base and head for home and wrap up here is, I think a lot of the data right now is, like you said, is the market’s responding unevenly, you know, interest rates go down, mortgage rates go down, demand goes up, interest rates go down. Profitability can go up existing, you know, interest rates go down. There’s more money to be made and things like that I think. So that’s one thing that we’ve got to watch is if interest rates were to go up for some reason, I think that’s going to create a more softer market. I think we know that those are inverse of each other. Home flipping is still a very viable strategy and there’s still a lot of investor confidence in the market.

Josh: That’s good. I do like with, speaking to my own students and my own members here. I do like the idea of not just flipping properties, focus on flipping for income, but also focus on cashflow and buying for cashflow. I think that’s great to see. And we do know that the market did soften in 2018, no question about it in the second or third quarter and fourth quarter. Definitely a softening in the marketplace. And I think the market doesn’t have necessarily jitters, but the market’s kind of preparing for a potential slowdown, correction and ultimately potentially a recession, but not something that we’re thinking, there’s not going to be blood in the streets and anybody that kind of is, you know I’ve seen some marketers now, some guys are really good at marketing, direct response marketing. One of the greatest marketing tactics is fear based marketing.

Josh: And I’m starting to see more of this creep into the market now where people are saying like, oh my God, it’s going to be worse than 2008. I do not see any indication at all, now this is just my opinion. No indication at all that there’s going to be more blood in the streets or anything near what we saw in 2008. Now, you know, certainly 12 or 24 months from now, the data could tell us something different. But as what we’re seeing here today, don’t buy in. What I’m telling my audience is don’t buy in to the fear based the fear mongrels that are telling you the market’s about to implode. Everything’s going to go to shit. Everything’s going to go to hell. Oh my God, it’s going to be worse than 2008. There’s nothing in the marketplace that’s indicating that that’s about to happen, okay. I’m not talking from opinion talking from data. So Darren, as we kind of wrap up, any final trends, data, parting shots, words of advice? What are your thoughts?

Darren: Yeah, I think I’m in agreement with you and, you know, part of my job here is to help prepare our business for the longer term and we’re preparing for exactly the same thing, a mild to medium recession really in the next 18 months to two years. We thin yeah, it’s probably going to correct, but it is going to be more on the mild to medium size as opposed to, you know, the scope of recession that we saw last time around. So that’s where our money is. It’s of course hard to predict. But I think proceeding with caution but also not being ruled by fear is probably the best avenue to go for investors going forward.

Josh: You bet. Now Darren if my audience and our listeners wanted to get more information about Auction.com using your services, some of your data, some of your free resources, what are some of the things that you guys provide to the marketplace and working? We find some of that information.

Darren: Sure. I mean just go to our website, Auction.com and you can start searching for properties there that are available for online auction. A lot of people really love the online auction aspect because you can do from anywhere in the country. And then of course there are some great resources there for how to buy at an auction because there are some barriers to it that investors need to understand the process. So we have some great educational components there, including videos on how to navigate the auction experience. But the beauty of this is you can start bidding today and you know, there’s no subscription fee or anything like that. You can go in and just start participating immediately on auction.com. It’s a live marketplace.

Josh: Fantastic. And based on the data, the data tells us that buying at Auction.com you’re actually going to get 20% better deal, which is if you’re looking at the hard numbers and the profit margin’s 20% it can be potentially a lot of money, so checkout Auction.com. Also, if you have any comments, questions, you can always leave that right here in the show notes.

Josh: If you catch us on YouTube or iTunes, leave us a rating or review or question or a comment and we’ll feed that back to Darren. He’s been very generous over the last four or five years that we’ve known Darren at his various different companies and capacities and sharing this information certainly makes me feel good about my investing strategy and hope it does for you too. So Darren, thanks so much for joining us again today and to my audience checkout Auction.com for better properties, better deals, more market research and more information. Thanks so much for being here. Darren, thanks so much for joining me today. I appreciate you.

Darren: Thanks Josh. I appreciate it.

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