MORE CONSERVATIVE BIDDING Even within a smaller and safer buy box, investors are bidding more conservatively at distressed property auctions. That’s evident in the recent uptick in average purchase discount at auction relative to the estimated as-is value of the property. That as-is value is typically based on an exterior appraisal or broker price opinion, given the interiors of the homes are often not accessible. This discount represents the percentage below (or in rare cases above, in which case the discount would be expressed as a negative percentage) the estimated as-is value buyers are paying, on average. The average purchase discount rose to 14.7% in the second quarter for foreclosure auctions, up from 11% in the first quarter and up from a nearly nine-year low of 8.9% in the first quarter of 2021. Similarly, the average purchase discount for REO auctions increased to 15.3% in the second quarter, up from a nearly nine-year low of 13.6% in the first quarter. Lizell said he’s built in an extra 5% to 10% cushion when calculating his maximum allowable offer for distressed properties purchased at auction. Instead of starting his calculation at 75% of a property’s estimated after-repair value (ARV), he will start at 70% of ARV. Or
he’ll start with 75% ARV, where the ARV is based on a 10% haircut off comparable sales. “Just be a little more conservative,” he said of his bidding strategy. “Got to be nimble in this market. Super important. Otherwise, we’ll be out of business.” PURCHASE DISCOUNTS RISING Depending on the level and type of competition from other investors and credit strategy employed by foreclosing lenders, a more conservative bidding strategy by enough bidders could eventually raise the average purchase discounts at auction for a given market. That shift toward bigger purchase discounts is taking place in just over half (54%) of the 123 metropolitan statistical areas analyzed in the Auction.com data. Markets with the biggest increase in average purchase discounts between 2021 and year-to-date 2022 were Buffalo, New York; Knoxville, Tennessee; Kingsport-Bristol, Tennessee; Honolulu, Hawaii; and Lansing, Michigan. Average purchase discounts increased in five of the 10 markets with the most properties brought to foreclosure auction in the first half of 2022: New York-Northern New Jersey, Atlanta, Detroit, Chicago, and St. Louis.
Foreclosure Auction Purchase Discounts by Metro Annual Percentage Point Change in Purchase Discount at Foreclosure Auction
-0.1735
0.2226
MSA Richmond, VA
Jan-Jun 2022 Foreclosure Auction Purchase Discount Below As-Is Market Value
27.6%
8.0%
Annual Change in Purchase Discount
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