The New Normal – Inland Empire Real Estate Margins

A friend of mine just email me the attached graph.

To complete a lenders foreclosure process the bank must go to an all cash auction at the court house.  The opening bid is typically simply the loans outstanding balance, but since 2008 the banks have been “dropping” their opening bid to sell the asset directly to an investor.

Purchasing homes at trustee sales come with a lot of risk:

  • You buy the property with no warranty
  • You are responsible to get the occupant out of the house
  • You are responsible for back taxes and possibly other liens

According to the chart in April buyers paid 92% of retail value at the trustee sale.  On top of paying 92% the buyer has to catch up taxes, remove the occupant (usually by paying cash-for-keys) and repair the property. Paying 92% essentially means the buyer will have a total cost over market value.

Clearly these are landlords… but how long can this last?

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6 Responses to “ The New Normal – Inland Empire Real Estate Margins ”

  1. YIKES – this confirms my thoughts! New money has entered into the game and these guys aren’t as concerned about short-term dollars.

    Question = how has this effected your business model? Are you doing less deals (only the high cash deals) or are you doing more with less margin? Lastly, has this changed your lead generation model – from MLS to direct marketing?

    Sorry, just curious how you are adapting to this.

  2. It’s weird that these margins can be so tight when the market is still falling. It “feels” like these buyers are creating another round of future foreclosures. Any idea whether the numbers make positive cashflow sense?

  3. Steve says:

    Art-
    We have slowed down a bit and chased from some different ponds. We are not really excited about huge volume and tight margin business model.

    Right now we don’t do any direct marketing and I am not sure we will in the near future.

    Tiffany-
    Retail prices are flat in the markets I follow. The transactions are “all cash” so I don’t see it increasing foreclosures. It seems the problem is there is a lot of institutional money chasing the buy-and-hold model and only looking for a 6% annual return.

  4. Steve says:

    I guess by the title of this chart, I should have called in The New Normal – Southern California Real Estate Margins. As this price hike is obviously beyond the Inland Empire.

  5. Chuck says:

    Steve,

    Very interesting.. I am getting outbid on everything lately – I see what they finally sell for and the margins are way too thin. I assumed it was just dumb money and I think there is a lot of that out here now too.

    Your article is saying less inventory is even hitting the general market. I would say there is less inventory, but it has not dried up by any means. It has been a couple of years since I went down the courthouse to watch the sales. Last time I went there were hundreds of properties, but I bet less than 5 actually sold. The bank maintained almost all of them. Which made sense…Maybe I need to attend another sale and see what is going on down there.

    Dropping the opening bid to sell to the investor directly makes a lot of sense. But banks don’t do things that make sense…

  6. CA appraiser says:

    I saw a bank owned listing for a fixer listed for $75,000. I offered $100,000 cash, 10 day close, as is, no inspections no nothing. I check back it shows pending….bummer I guess I got outbid I think. fast forward 2 weeks I check back again. Listing agent double ended the sale….final sales price $25,000…..$25,000!! Shows you the sales are either overbid so theres no money left…or they are sold inside/illegally. That is our market, this house was a small SFR in north San Bernardino. Only needs about $20K in work and it’d be worth $175,000. Its good to be a banks listing agent…

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