Foreclosures are way up. According to HousingWire, they rose 14% year over year in May, while analytics and data site ATTOM reports a 26% jump in the first quarter compared to last year. That’s not a blip or a temporary correction but enough of a jump for investors to take note and strategize around it.
States Differ Markedly
Despite the knee-jerk reaction to proclaim an impending 2008-style financial crash, the first thing to note is that the rise in foreclosures is markedly different from state to state. ATTOM notes that the states most affected by the rise in defaults are Florida, South Carolina, Maryland, Nevada, and Indiana.
The Wall Street Journal points out that bad loans to unqualified buyers are not a primary driver of the spike but rather rapidly rising insurance and property tax costs. That’s a crucial difference because lending practices can be tightened with requirements for higher credit scores and increased down payments, but lowering insurance costs and property taxes is not as easily accomplished, which could hint at more foreclosures to come.
“Payment Shocks From Taxes and Insurance”
“They’re having payment shocks from taxes and insurance…along with potential job distress,” Marina Walsh, an economist at the Mortgage Bankers Association, told the Journal. For recent buyers, “it’s this layering effect that could create distress.”
Employment is also playing a big role. According to ATTOM’s Q1 findings, the riskiest markets were those with the highest unemployment rates.
“While home prices have eased slightly from last summer’s record highs, affordability remains a challenge in much of the country,” Rob Barber, CEO of ATTOM, said in a statement. “The greatest risk remains in counties where unemployment rates are above 5%, and homes are being foreclosed at greater rates.”
How Real Estate Investors Should Interpret the Data
Simply buying in areas with the highest foreclosure rates might not be a prudent move for investors, depending on your long-term goals. For flippers, buying in a market with high unemployment, taxes, or insurance costs may mean not being able to find a qualified end buyer. For landlords, a positive cash flow analysis may not be worth much if there is a low catchment of employed tenants.
Equally, each state needs to be taken in context. According to ATTOM, the state with the worst foreclosure rate in April was Delaware, with 1 in every 1,739 housing units showing a filing.
However, if you’re looking for cash flow, this is not the place to find a deal. The median listing price here is $500,000, which, with today’s interest rates, is a nonstarter, even with a modest discount on a short sale. And finding a foreclosure might not be as easy as you’d expect.
“A Math Problem”
Hannah Jones, senior economic research analyst at Realtor.com, said in the Realtor.com report:
“Delaware’s high foreclosure rate is partly a math problem. With a relatively small number of total housing units, it doesn’t take many filings to produce an alarming per-unit figure, so the rate overstates how dire conditions are for the average Delaware homeowner compared to a larger state with far more absolute filings.”
Also contributing to the Delaware foreclosure rate was a spike in property taxes. “Delaware recently completed its first comprehensive property tax reassessment in roughly 40 years, and many homeowners saw their tax bills jump, which pushed some over the financial edge,” Jones said, which again would kill cash flow for potential landlords.
Why South Carolina’s Data Could Be Misleading
Other states, such as South Carolina, which saw 1 in every 1,745 properties showing a filing, have a different problem. They have simply grown too big, too fast, driving up prices and creating affordability issues for some local residents.
Jones explains:
“South Carolina’s foreclosure pressure is largely a consequence of its own growth. Rapid in-migration drove home prices well beyond what local income levels could support, and many buyers who purchased near the peak of that appreciation, with elevated mortgage rates on top, are now left with high monthly payments and little equity cushion. When financial stress hits, those homeowners have limited ability to refinance or sell their way out.”
Demand for South Carolina Markets Is at a High Point
For potential flippers, this could be a scenario that works if houses can be purchased at a discount. Demand for the Palmetto State is at an all-time high, with recent Census Bureau data showing it as the fastest-growing state by population in the country.
Compared to other states, South Carolina’s main markets of Myrtle Beach, Charleston, Columbia, and Greenville tick many of the boxes both flippers and landlords are looking for: employment, affordability, and high demand. In November, Realtor.com ranked South Carolina among the top-performing housing markets in the country.
“New builds continue to become more available and more affordable to the American homebuyer despite subdued single-family construction trends,” Realtor.com senior economist Joel Berner said. “Southern markets like South Carolina are proving that steady building pipelines can preserve affordability even as demand grows.”
Thus, South Carolina’s status as a high-foreclosure state can be misleading for investors looking to lean into the recent foreclosure data; towns and cities in this state have homes that should automatically fall into the buy box.
Underwrite Carefully and Make Shrewd Offers
Before reviewing all the additional information on in-migration, employment, and median incomes, potential landlords should carefully underwrite using today’s actual borrowing, insurance, and tax costs.
If cash flow goes into the red, it’s a nonstarter, regardless of everything else. The longer the house has been in foreclosure, the lower the offer should be. There’s no harm in starting low, but banks are usually a little delusional to begin with. After a few months of tax, utility, and maintenance payments, they’re ready to cut their losses.
This is where an all-cash offer and a fast close win the day. If you don’t have cash, private money, or a short-term bridge loan to secure the property until you can make repairs and refinance, you can get a deeply discounted deal that cash flows from day one or that you can place back on the market with a decent profit attached.
This is important for flippers. You’ll have to create your own equity because relying on rapid appreciation won’t work in today’s market, where home prices, barring a few outlying markets, are hardly moving.
Final Thoughts: Short- and Long-Term Paths
It’s impossible to predict what will happen long term regarding interest rates, incomes, and the economy, so buying deals that make sense in the short term and could be held long term is the way to go.
Should insurance, taxes, and maintenance costs continue to rise, it’s likely that more foreclosures will come to market, offering more buying opportunities. What’s crucial is being able to buy when the right deal comes along—being financially prepared, either with a loan or cash, to survive a lengthy renovation or a slower sale.
Cash flowing from day one, if you are not paying all cash or putting down a large down payment at current rates, could be hard, so having the reserves on hand to withstand the ups and downs of being a landlord, praying for a brighter day regarding interest rates, is essential.
