At the peak of the financial crisis in 2009 and 2010, the high volume of REO inventory created significant opportunities for real estate investors. With REO inventory having declined significantly from its peak levels of six and seven years ago, the REO landscape has evolved through online technology, innovation, and contingency financing. A recent online flash survey of 2,511 users of online real estate auction marketplace Hubzu provided an interesting window into the current state of the REO landscape, eight years after the crisis. According to the survey: 51 percent of respondents said they were concerned about new investors entering the market, 20 percent of respondents plan to diversify their portfolio beyond bank-owned properties, 45 percent of respondents plan to use cash over other financing options, and 31 percent of respondents said they will be much more price-selective in 2016. Steve Udelson, president of Altisource Online Real Estate, recently spoke with DS News about the findings of the survey and what the current REO landscape looks like for investors.
We hear a lot about how the amount of REO is declining. What is the state of the REO industry right now?
Prices are up. From an investor standpoint, cap rates and yields are coming down from where they were when the market was really attractive. But on the other hand, when you look at where yields and treasuries are, and other sources of fixed income, rental properties and purchase to flip still look pretty attractive even at the higher prices.
What we're also seeing is some additional investors coming into the market. With REO, it's a lot more attainable today for a buyer-occupant. You don't have to show up with all cash. It's becoming a larger market of potential buyers for those properties.
In the survey, 51 percent of respondents said they were concerned about new investors entering the market. What are they concerned about? Is it the competition?
Competition from buyer-occupants that are viewing REO as a more viable option. In the past, buyer-occupants kind of stayed clear. They assumed it was for the pros--they thought you need to show up with a bag of cash and take it as is, whereas now the difference between buying REO and buying a traditional property are not as extreme. So investors are getting crowded out a bit, or they perceive that there's a risk that they could be getting crowded out buy the in-buyer.
What do you think happened in the last few years to close that gap, so to speak, between buying a traditional home and buying an REO property?
That's a good question and I've thought quite a bit about it. My answer is that pre-housing recession, there wasn't a lot of infrastructure in place for foreclosure auctions and REO auctions. But after the glut of foreclosed homes that came online and REO properties, companies invested in platforms that warranted the investment to have a vertically integrated marketplace where you learn about, discover, bid, and go through the entire process.
You can complete the transaction in a lot of ways. Depending on your viewpoint, it's in many ways easier buying an REO property than buying your traditional listed home. It's definitive as to when the sale is going to occur, and transparency around where you stand compared to other offers. So it's that collective infrastructure that was built to address the housing crisis of 2009 and 2010 that is still standing today, and has really evolved the REO market from where it was before the crash.
According to the survey, 20 percent plan to diversify their portfolio beyond bank-owned properties. What other options are out there for someone looking to diversify?
For sale by owner homes have always been a source of properties that investors can go direct save on the transaction costs. Foreclosure auctions are another option—going right to the county steps and buying it before it becomes REO. Depending on the size and sophistication of the investor, buying non-performing loans is certainly another option and another angle to get in the market.
Looking at going upstream, in a way, if you think of REO as easier today for the reasons that I gave plus more generally advertised online—it’s easier to understand and find out the value—but you kind of have to go upstream a bit as a savvy investor to find more value.
The survey said 45 percent of respondents plan to use cash over other financing options. Is that a sign that institutional investors are still big participants in the market?
It is, but the fact that as much as half or more are securing financing speaks to the changing profile of the investor base. Somebody that relies on financing is maybe going to occupy it or get a purchase-money mortgage. That suggests that REO is being looked at by more of a traditional buyer.