Tidal Wave of Renters and Foreclosures Coming
It's clear that COVID has altered the market substantially, and in many ways, irreversibly. We've seen the sharp decline of commercial property value, increase of remote work, and growth of tech-based companies to name a few. But, is should be know:
COVID's Biggest Impact on Real Estate is Still Ahead
With the foreclosure moratorium in place, the impacts of COVID on the residential real estate market have not been eliminated - they have simply been delayed. With the federal government attempting to give homeowners time to straighten out their financial positions, the sad reality is that many of them either can't or won't be able to adjust in time. This exposes a significant opportunity for new and experienced real estate investors alike.
The Flood of Below Market Properties is Coming
Real estate investors should expect a tidal wave of below market properties and flood of renters to the market as the foreclosure moratoriums wear off. With the likelihood of the moratorium ending soon, homeowners are being forced to consider what to do with the loans they're buried under.
Many homeowners will sell on the MLS to capture as much equity from their property as possible. Others won't have enough time or equity available to list and will sell below market through wholesalers or to direct buyers. In selling off market, these properties will be sold at a minimum of a 10% discount.
3.4M People Behind on Mortgage Payments
But how many new renters and below market properties can investors expect? What's the magnitude?
According to recent report (Forbes) almost 7% of all mortgage borrowers are on a forbearance plan. That means about 3.4 million people in the US are behind on their payments and have appropriately been planning with their lender to address the payment lapse. This could be due to job loss, furlough, reduced hours, or any number of reasons affecting their pay. The stark reality is that many homeowners are unable to pay their mortgage and will have a decision to make once the moratorium is lifted. The majority of these homeowners can be expected to defer their payments to the end of their mortgage term, but still some will come to the realization that they either bought a house too expensive or their employment position has changed for the foreseeable future and they'll need to sell their property.
400,000 at Immediate Foreclosure Risk
In addition to the 3.4 million people on forbearance plans, there are about 400,000 homeowners that have fallen behind on payments and are not on a forbearance plan. This means there are 400,000 properties in the US that are currently at risk of immediate foreclosure once the moratorium has ended! Those properties and their owners have two options:
- Sell Below Market
- Proceed with Foreclosure (losing all their equity)
But, despite the seller having two options, the investor recognizes that both options result in the opportunity to obtain properties below market value.
When Will the Tidal Wave Arrive?
These 400,000 properties can be expected to start selling below market as soon as the foreclosure moratorium end is announced. Once the date is known, those in irreparable financial straits will begin selling rather than waiting until the date arrives, thereby providing more time for them to capture the most equity possible.
This is when investors can expect the beginning of the tidal wave. Once foreclosures start, investors will see a flood of below market properties with a corresponding increase in number of renters (directly related to the number of sellers). This increase in market availability (below market properties) and rental demand can be expected to result in moderately increased rental rates fueling uniquely strong rent-to-price ratios.
But the most important question remains to be asked:
The Main Question...
Are you ready?
Are you ready to capture this opportunity? Do you know how to identify below-market properties? Are you aware of remote investing opportunities that will allow you to invest profitably despite living in an expensive market? Do you know how to estimate rehab costs? Do you have the confidence to pull the trigger on a property when you think the numbers work?
If you answer 'no' to even one of these questions, you must prepare now. Now is the best time to get started in real estate investing.
Unsure where to start? Schedule a call for us to discuss your options and next steps.
