Buying Foreclosures and Bank Owned Homes

On today's podcast I talk about the opportunity in buying foreclosures and bank owned homes. 

In order to understand why this opportunity is presenting itself, it is first important to understand what got us into this situation. The answer is record low interest rates, and the fastest and quickest rate cuts in U.S History as a result of the epidemic of March 2020. Interest rates were quickly lowered and effectively kept at zero for almost two years.

Keeping interest rates that low for that long had many uninted consequences. The fact that the government was handing out EIDL Loans and PPP Loans and sending checks to everyone just added more fuel to the fire. There was too much cash floating around, and not enough goods available. The net effect is that these interest rate cuts fueled inflation. Prices of every day items, groceries, real estate and rent all increased substantially. 

The economy was over stimulated to the point that we had rampant inflation. This inflation presented itself in higher real estate prices, higher rents, and higher prices for basic goods and groceries. Even luxury goods like Rolexes substantially increased in value. 2022 was the year that everything peaked. Commerical real estate, residential real estate, luxury goods, rolexes, Art, NFT's and Crypto all peaked in 2022.  

This all changed when the Federal Reserve began aggressively increasing interest rates in 2022. With higher rates, mortgages became much less affordable. This put the brakes on the rapid price appreciation which was happening in the real estate market. It also created a dilemna for home builders who were suddently stuck with too many homes to sell and not enough buyers.

These home builders were forced to start lowering prices and offering incentives like rate buy downs and seller credits to lure more buyers. As the home builders slashed prices, this effected the comparable sales and the prices of houses in the surrounding areas and prices began declining in earnest. Real estate prices peaked in July 2022 and are down around 15% to 20% (or more) in some areas. 

Hedge funds and private equity funds who had been buying properties when interest rates were low were now discovering that they were not making much money on their rentals. Borrowing money at 2% or 3% and investing it into a rental that yields 7% is a great deal - especially if home prices are increasing. But when prices start declining, and you are borrowing at 7% and yielding less than 7% and rents are declining then that is not a great formula.

The result is that these private equity funds and hedge funds started listing properties for sale. They were afraid of how much inventory they were holding and that prices would decline further. Large entities like Blackrock and many Hedge Funds started listing many properties for sale. In some cases the asking price is LOWER than what they paid for the property. I am seeing this everywhere. There are now more sellers than buyers and we are gradually shifting to a buyer's market.  

The Federal Reserve managed to tame inflation by increasing rates. They managed to cool down the housing market. But they may have acted too fast too quickly. People who had credit card debt had to suffer for too long at high interest rates. Consumers who were looking to purchase cars could not afford the high payments.

Now we have a situation where buyers are reluctant to buy. And savier investors who see prices declining have to build a margin of safety into their purchases and must be willing to buy deeper and at larger discounts. This has created a dilemna for wholesalers who are no longer seeing the huge profit spreads that they were seeing as recently as just one year ago when they were flipping and assigning contracts for huge profits.

And the economy is slowing down. Now the Federal Reserve has a different concern. They are worried about the U.S Economy going into recession. The