Affordable Properties at Auction
An Urban Institute Report in Partnership with Auction.com
by Jung Hyun Choi, Laurie Goodman and Liam Reynolds
Distressed sales have declined significantly during the COVID-19 pandemic, reflecting the ease with which homeowners could access forbearance and the presence of the foreclosure moratorium (GAO 2021). This is about to change: the foreclosure moratorium expired in August 2021, and most homeowners remaining in forbearance are expected to exit by early 2022.
Most of these borrowers have equity and will opt for a deferral, opt for a modification, or sell the property themselves, but some borrowers do not have sufficient equity to cover the transaction costs of selling plus the deferred principal and interest payments. Many of these properties will be put into the market as distressed sales.
Distressed sales often flow into the auction market. Auction.com launched in 2007, during the early stages of the foreclosure crisis, and has provided a platform for distressed home transactions. The company has since expanded its market share and is now the nation’s largest online auction site for foreclosure and bank-owned sales, having sold more than 460,000 properties since it was launched.
All states require a public auction for any foreclosed property, and Auction.com accounts for close to 50% of these foreclosure auctions nationwide. If a property does not sell to a third-party buyer at the foreclosure auction, it reverts to the foreclosing lender as real estate owned (REO).
Auction.com estimates that 20-30% of REO properties are sold via online auction, with most of the remainder sold on the multiple listing service. The overwhelming majority of these properties needed substantial renovations, and the properties sold at a fraction of the automated valuation model (AVM) price.
In 2021, the Urban Institute partnered with Auction.com and obtained data on foreclosure and REO sales. Because distressed properties may offer access to very affordable homeownership, we were interested in the share of properties homeowners purchased and whether there are ways to increase that share. We found that most properties are initially sold to mom-and-pop investors, while a smaller share went to owner-occupants who had sufficient cash.
Key Excerpts (Bold Added)
“Distressed sales could provide a cost-effective way for owner occupants to buy a home. But few distressed homes that trade at auction initially trade to owner-occupants; most trade to mom-and-pop investors. The properties often trade to owner-occupants at resale because distressed properties tend to require major renovations, and most owner-occupants do not have the expertise or inclination to undertake major renovations. And potential owner-occupants who can handle major renovations will find two additional obstacles: financing issues and a lack of access to the properties to estimate repair costs. Neither of these dimensions has an easy solution.”
“But even within the present framework, policy actions could make these properties more accessible to owner-occupants at initial sale. States can make small but valuable changes to the existing foreclosure auction system. Most foreclosure auctions require potential buyers to be physically present at the auction; transferring this process online would make it easier for individuals, including owner-occupants, to attend and would encourage the owner-occupant base to buy. Second, requiring broad marketing of properties before auction would help. These actions could increase the share of owner-occupant purchases at foreclosure auctions.”
“In addition, one could envision a first-look REO auction for properties that do not sell at foreclosure auction. The first-look auction would give owner-occupants—along with mission-driven nonprofits and mom-and-pop investors who agree to provide high-quality affordable housing for low- and moderate-income families—the ability to bid on a home before it is available to other potential bidders. Nonprofits and mom-and-pop investors would go through a certification process to qualify as local community developers who can bid during the first-look auction. This would likely increase the share of homes owner-occupants could purchase directly, or indirectly through a nonprofit or local community developer.”
Additional Key Findings
Auction Sales to Owner-Occupants Are Low but Increase for Resale Properties
A quarter of Auction.com sales were sold to owner-occupants, with a higher share of foreclosure sales (30.1% ) than REO sales (20.5%) sold directly to owner-occupants, according to public tax assessor data. Nearly all owner-occupant buyers used cash rather than financing for their purchase. On average, REO properties are older and are likely to require more repair, which is a burden for homeowners, especially with a lack of financing options for rehabilitation. Additionally, about half of all REO properties brought to auction during the pandemic were occupied, compared with 45% in 2019, before the pandemic. This requires owner-occupant buyers to navigate the current occupant’s exit from the property, which can sometimes entail a long and complex eviction proceeding.
About 46% of properties sold on the Auction platform from January 2019 to December 2020 were resold by September 2021. The original buyers, overwhelmingly mom-and-pop investors, renovated the properties before resale. Resale rates vary by state: in Arizona, California, and Nevada, more than 65% of properties were resold, but in Kansas, Missouri, and West Virginia, less than 20% were resold. In general, states that have experienced faster home price growth have a higher resale rate. Additionally, the resale rate is higher for properties sold on Auction in 2019 (49.3%) than in 2020 (38.9%), which is to be expected, given the time it takes to renovate properties before resale. Owner-occupants purchased 68.8% of the resold properties. Again, foreclosure sale properties had a higher share that were resold to owner-occupants (71.3%) compared with REO sale properties (65.1%).
Properties Sold to Owner-Occupants Are Larger and Are Newer Than Those Sold to Investors
Properties sold at auction to both owner-occupants and non-owner-occupants—who are mostly mom and-pop investors—are substantially older than the median home in the United States (built in 1978) and tend to require considerable repairs. As a result, the distressed sales price is substantially below the AVM price.
“No matter what I’m buying on Auction.com, that thing ain’t pretty,” said one real estate appraiser and investor who owns 11 rental properties in the St. Louis area. “Whenever I fix something, I want it fixed for 20 years.… I’m going to spend a little extra today to avoid a phone call from the tenant tomorrow.”
But even within this universe of foreclosure and REO sales on the Auction.com platform, owner-occupants typically buy newer properties than non-owner-occupants. They also tend to be larger and have higher distressed sale prices. For example, the average year built was 1971 for the foreclosure properties and was 1965 for REO properties that were bought by owner-occupants through Auction.com, compared with 1967 (foreclosure sales) and 1958 (REO sales) for those that were bought by non-owner-occupants. If property age can be used as a proxy for condition, it indicates that at initial auction, owner-occupants gravitate toward newer properties, which are in better condition.
For the resold properties, there is an eight-year age difference between those that were resold to owner-occupants and those that were resold to non-owner-occupants among the foreclosure properties and a 10-year age difference in the REO sales. Although the distressed sales price is substantially lower for purchased properties than the average market price, the resale price (generally after repair) is similar to the AVM price. This indicates that if some of the properties non-owner-occupants purchase at Auction.com are purchased by owner-occupants, they will likely take on the extensive renovation and potential risks associated with these properties.
