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DS News November 2022

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60 As the housing market downshifts, sellers will need to adjust to three emerging distressed disposition trends going into 2023: 1. Downward pressure on sales rates at foreclosure auction 2. Home price appreciation switching to a headwind for REO 3. A shift in buyers toward local investors with a track record of converting distressed properties into quality, affordable housing for owner-occupants PRESSURE ON FORECLOSURE SALES RATES is trend is already emerging in the second half of 2022 as buyers at foreclosure auction bid more conservatively to hedge against slowing home price appreciation and even a possible home price correction in some local markets. e foreclosure sales rate, which represents the percentage of foreclosure auctions that result in a sale to a third-party buyer, dropped just below 50% in the third quarter of 2022—the lowest level since Q2 2020. at's according to data from the Auction.com marketplace, which accounts for close to half of all foreclosure sales nationwide. A 50% sales rate is still high relative to pre-pandemic levels. Between 2015 and 2019, quarterly foreclosure sales rates averaged 38% and stayed within a 10-point range of 34% to 44%, according to the Auction.com data. As with many trends, the pandemic broke the mold for what was considered normal when it comes to foreclosure sales rate. e supply of properties available to buy at foreclosure auction was severely restricted due to foreclosure moratoria and widespread forbearance early in the pandemic. However, demand for distressed properties barely skipped a beat as buyers quickly experienced a surge in demand for the well- renovated, affordable housing stock they deliver to the market. Additionally, the restricted supply was disproportionately weighted toward vacant properties, which historically attract higher demand from investors. e supply-demand imbalance in the foreclosure auction marketplace during the pandemic resulted in record-high foreclosure sales rates. Nationwide, the foreclosure sales rate hit as high as 63% in Q2 2021, and it was much higher in some local markets. However, the retail housing market is now quickly cooling in response to skyrocketing mortgage rates, causing distressed property buyers to recalibrate their calculations for maximum bid at foreclosure auction. A sales rate that continues to be near 50% despite these headwinds is a testament to increased transparency and buyer-inclusivity at foreclosure auction thanks to technology such as Remote Bid and Foreclosure Predict. "You have to be careful about fixing and flipping that you're not catching a falling knife," said Paul Lizell, a Florida-based real estate investor and coach who purchases distressed properties from Auction.com. Lizell said he's lowered the starting point for calculating his maximum bid by five points, from 75% of estimated after-repair value to 70%. Additionally, he's upped his rehab calculations by $10 a square foot, to $35 for resales and $25 for rentals due to the rising costs of materials and labor. Lizell's bidding adjustments align with overall bidding behavior on the Auction.com platform. Foreclosure auction buyers purchased at an average discount of 23% below the estimated as- is property value nationwide in the third quarter of 2022, an increase of 12 points from six months earlier, according to Auction.com data. e recent increase brings average purchase discounts back to pre-pandemic norms. e average purchase discount at foreclosure auction was 22% between 2015 and 2019, and the discount was relatively stable over that five-year period, staying within a six-point range between 20% and 26%. is reversion to the pre-pandemic mean is evidence that investors are not yet anticipating a nationwide home price correction. "I don't think we're going to see that big drop-off (nationwide) unless unemployment rises a lot," Lizell said, adding that he thinks some select markets will see a correction. "Where you'll see those prices fall … Southern California, Las SHIFTING GEARS Prepare for these three distressed disposition trends as the housing market downshifts. Feature By: Daren Blomquist

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