The ease at which people could enter forbearance programs during the pandemic has caused a drastic drop in the number of distressed properties that are sold at auction. Now that many of these protections have expired some borrowers whom do not have sufficient equity to cover the transaction costs of selling plus the deferred principal and interest payments will have to put their homes up for auction.
Buy why do more first-time homeowners not consider auctioned homes into their home search? Well, the answer varies.
Recently, the Urban Institute partnered with Auction.com to explore this path to obtain a very affordable home and why more people do not explore this opportunity. The Urban Institute chose Auction.com as their research partner due to its market position: Auction.com has been around since 2007 and is now the preeminent auction platform for distressed properties in the country accounting for about 50% of all public auctions nationwide.
Auction Sales to Owner-Occupants Are Low but Increase Substantially for Resale Properties
According to public tax assessor data collected by Auction.com, a quarter of Auction.com sales were sold to owner-occupants, with a higher share of foreclosure sales (30.1%) than REO sales (20.5%) sold directly to owner-occupants. Research also found that nearly all owner-occupants chose to use cash to fund their purchase rather than obtaining some sort of financing.
Typically, REOs are older and require more repairs which may become a burden for new homeowners with nowhere to turn to get financing for the repairs.
Another reason buyers may be wary is about half of all REO properties brought to auction during the pandemic were occupied, compared with 45% in 2019, before the pandemic. Buying an occupied property means buyers must delve into the realm of landlord/tenant law to either get the occupants to move out, or force them out through eviction, which can be a drawn-out process.
“About 46% of properties sold on the Auction platform from January 2019 to December 2020 were resold by September 2021,” the Urban Institute wrote in their report. “The original buyers, overwhelmingly mom-and-pop investors, renovated the properties before resale. Resale rates vary by state: in Arizona, California, and Nevada, more than 65% of properties were resold, but in Kansas, Missouri, and West Virginia, less than 20% were resold. In general, states that have experienced faster home price growth have a higher resale rate.”
“Additionally, the resale rate is higher for properties sold on Auction in 2019 (49.3%) than in 2020 (38.9%), which is to be expected, given the time it takes to renovate properties before resale. Owner-occupants purchased 68.8% of the resold properties. Again, foreclosure sale properties had a higher share that were resold to owner-occupants (71.3%) compared with REO sale properties (65.1%).
Ways to Increase Owner-Occupant Participation in the Distressed Market
Distressed sales are one of the best ways for owner-occupants to get into the housing market. But that isn’t necessarily happening. Most distressed properties are sold to mom-and-pop investors then the properties often trade to owner-occupants at resale because distressed properties tend to require major renovations, and most owner-occupants do not have the expertise or inclination to undertake major renovations.
It should also be noted that traditional financing cannot be obtained on many of these properties because the renovations are too large for a mortgage and the inability to view many of these properties until the day of the auction further hampers buyers intentions because they cannot accurately estimate the cost of repairs.
But the Urban Institute does offer a few changes that could tip the scales in the buyers favor.
“Most foreclosure auctions require potential buyers to be physically present at the auction; transferring this process online would make it easier for individuals, including owner-occupants, to attend and would encourage the owner-occupant base to buy,” The Urban Institute said in their report. “Second, requiring broad marketing of properties before auction would help. These actions could increase the share of owner-occupant purchases at foreclosure auctions.”
“The experience of Ohio provides insight into the effects of online auctions. Ohio allowed online foreclosure sales beginning in 2017. The Ohio law did not require all foreclosure sales to move online immediately, but plaintiffs in foreclosure cases could request private selling officers, who could conduct online auctions. Of the Ohio foreclosure sales included in the Urban analysis, about two-thirds were conducted online and about one-third were conducted in person at the traditional sheriff’s sale. This provides a useful natural experiment to test the impact of online foreclosure sales on owner-occupancy rates. In Ohio since 2019, 47 percent were online foreclosure sales and 33 percent of traditional, inperson sales sold directly to owner-occupants.”
“In addition, one could envision a first-look REO auction for properties that do not sell at foreclosure auction. The first-look auction would give owner-occupants—along with mission-driven nonprofits and mom-and-pop investors who agree to provide high-quality affordable housing for low- and moderate-income families—the ability to bid on a home before it is available to other potential bidders. Nonprofits and mom-and-pop investors would go through a certification process to qualify as local community developers who can bid during the first-look auction. This would likely increase the share of homes owner-occupants could purchase directly, or indirectly through a nonprofit or local community developer. Ideally, a first-look program would give these buyers a 30-day exclusive period to bid on properties before those properties are made available to other buyers.”
“Although a first-look auction may not be helpful for all distressed properties, Jakabovics and Sanchez (2021) have shown that firstlook policies result in higher owner-occupancy rates, particularly in low-income minority census tracts. If the property does not sell at the first-look REO auction, the seller could allow the property to be included in a broader auction or sell through other channels.”
To read the entire nine-page report, click here.