millionaire, but if the market takes a 10 percent haircut — combo of depreciation and bad rehab estimates — you are instantly broke.” Caution is fueling Medley’s advice to members of his mastermind group: “Get back down to the basics: underwrite your deals better, get into a position of cash, look at your bottom 20 percent of homes that give you trouble, and liquidate your bottom 20 percent so that you have a cash position, so if foreclosures do surge you can participate as a victor rather than a victim.” INCREASING INVESTOR ACQUISITIONS Medley’s perspective along with the shrinking prof- its data from ATTOM points to investors fleeing home flipping as an investment strategy; however, other data suggests that real estate investors are not just clearing out their flip inventory, but also ramping back up on their acquisition of investment properties. The share of homebuyers purchasing with cash — a good proxy for real estate investors — increased to a three-year high of 25.9 percent in the first quarter of
2019, according to an Auction.com analysis of public record data from ATTOM. Additionally, more recent proprietary data from the Auction.com marketplace shows an increase in demand from real estate investors buying foreclosure and bank- owned (REO) properties, following a slowdown in the second half of 2018. The rate of sales to third-party buyers — primarily real estate investors — at the foreclosure auction in- creased to a 20-month high in April 2019 on the Auction. com platform, which accounts for more than 40 percent of all foreclosure auction sales nationwide. The foreclo- sure auction sales rate dipped slightly in May compared to April but was still up three percent compared to a year ago, marking the third consecutive month with an increase following seven consecutive months with year- over-year decreases.
INVESTOR DEMAND RISING AS FLIPPING PROFITS DIVE FORECLOSURE AUCTION SALES RATE
ANNUAL HOME PRICE APPRECIATION
AVG GROSS FLIPPING ROI
14.0%
65.0%
60.0%
12.0%
55.0%
10.0%
50.0%
45.0%
8.0%
40.0%
6.0%
35.0%
30.0%
4.0%
COUNTING ON A COMEBACK A similar pattern played out back in February 2015, when the sales rate for foreclosure auctions on the
25.0%
2.0%
20.0%
0.0%
15.0%
INVESTOR DEMAND PICKING UP
CASH SALES SHARE
FORECLOSURE SALES RATE
Auction.com platform jumped to a 19-month high fol- lowing 15 consecutive months of year-over-year de- creases. That spike in demand at the foreclosure auction occurred even as average home flipping profits were trending lower — down on a year-over-year basis for the fourth consecutive quarter in Q1 2015. But home flipping profits soon rebounded, increasing on a year-over-year basis for six consecutive quarters starting in Q2 2015. In this case, real estate investors started acquiring distressed properties at a higher clip before flipping profits had picked up, in essence specu- lating that the market would improve over the next six months it would take to renovate and sell the properties they were acquiring in the first quarter. And the market did in fact improve, with home price appreciation accelerating from a post-recovery low of 2.7 percent in July 2014 to as high as 8.6 percent in May 2015 and continuing between five and eight percent for the re- mainder of the year, according to an Auction.com analysis of ATTOM data. That accelerating home price appreciation rewarded investors who had acquired homes to flip at the foreclosure auction earlier in the year, despite declining
flipping returns at the time of acquisition.
FLIPPERS LEADING THE MARKET The 2015 pattern aligns with findings from an ex- tensive home flipping analysis published by CoreLogic in April. The analysis looked at home flipping activity across the country between 2002 and 2018 and con- cluded — among other findings — that there is a causal relationship between home price appreciation and home flipping activity. “As it turns out, both sets of Granger Causality tests show that not only can house price changes be used to forecast both the levels and change of flipping activity, but that higher levels and changes of flipping activity can also be used to forecast changes in house prices,” write authors Ralph McLaughlin and Arthur Jobe in the pub- lished findings from the analysis. “In other words, these results suggest that house price appreciation leads to increases in flipping activity, which then recursively leads to additional increases in home prices, that again leads to further increases in home prices.”
45.0%
29.0%
27.0%
40.0%
25.0%
35.0%
23.0%
30.0%
21.0%
25.0%
19.0%
20.0%
17.0%
15.0%
15.0%
52 | think realty housing news report :: august / september 2019
thinkrealty . com / hnr | 53
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