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SHOW NOTES FOR EPISODE 484: FORECLOSURES AND OTHER REAL ESTATE INVESTING OPPORTUNITIES
2020 was a really tough year for the economy and the real estate market, but even in down markets there’s still opportunity for prime real estate investing. In today’s podcast, Bill looks at 2021 and some of the unique real estate investing opportunities that are sure to benefit savvy real estate investors.
Tip of the Week – Always Buy Below Market
Investing in real estate and investing in the stock market has at least one thing in common: you’re always looking for the best deal. Obviously, a discerning stock market investor wouldn’t buy stocks while their prices are high if he is planning on holding them for a while. Instead, you might want to follow the Warren Buffet principle of getting greedy when everyone else gets fearful. He’ll buy stocks that are beaten down and make a killing when they turn around.
The same principle applies to real estate investing. Try not paying the full price when buying properties. Look for foreclosures, distressed, FSBO (for sale by owner), and wholesale properties whose prices come with insane discounts. Of course, they will absolutely need some work. Do the math and see if your investment in rehab is worth the final selling price.
Foreclosures and Other Opportunities for Real Estate Investors in 2021
2020 was a really tough year for real estate, but even in down markets, there’s still opportunity for prime real estate investing.
Economic shutdowns relating to the coronavirus resulted in millions of unemployed Americans. Thankfully, the CARES Act extended some relief to property owners, but despite these efforts and the gradual reopening of the economy, there are still 11.1 million people out of work as of November 2020.
High unemployment is often linked to high mortgage delinquencies and eventually, foreclosures. Black Knight’s (NYSE: BKI) October Mortgage Report found 3.4 million delinquent mortgages 90 days or more delinquent. However, despite high unemployment and a surge in mortgage delinquencies, foreclosure activity has improved in 2020, with a nearly 90% year-over-year reduction in foreclosure starts. The reduced number of foreclosures despite high mortgage delinquencies is largely due to protections granted by foreclosure moratoriums enacted by state and federal agencies.
Where will activity go in 2021?
But as these protections are set to expire at the end of 2020, many real estate investors are wondering what foreclosure investing will look like in the coming year. While many signs point to an increase in foreclosure properties hitting the market, in reality no one knows for sure.
I personally feel there are two likely scenarios for what foreclosure investing may be like in 2021:
- An increase in foreclosures due to the large number of homeowners still out of work.
- A decrease in foreclosures due to new policies that could extend foreclosure moratoriums.
Scenario 1: Increase in foreclosures
Right now, all signs point to an increase in foreclosure activity. With many forbearance periods expiring at the end of 2020 and early into 2021 and the high number of people unemployed, it’s unlikely many of those currently delinquent will be in a different situation in order to reinstate their debt obligations. Without extended foreclosure moratoriums or forbearance periods, it’s extremely likely foreclosure starts will start to increase steadily over the year.
Since foreclosure timelines vary by state and can happen as quickly as a few months up to a few years depending on the state, if scenario 1 does play out as described, investors can expect to see an uptick in foreclosure properties hitting the market around late summer 2021 to early spring 2022.
It’s unlikely pricing for foreclosures, particularly at first, will be reflective of large discounts like we saw after the Great Recession. Right now, demand for real estate is still high in many markets, with values being driven up. An increase in foreclosure properties would help balance demand and supply and likely slightly lower values a bit. I personally think dramatic discounts even with foreclosure properties are unlikely in 2021.
Scenario 2: Decrease in foreclosures
The other potential outcome for 2021 is a decrease in foreclosures reflective of what we saw in 2020. This would happen if the new Biden administration extends forbearance and/or foreclosure moratoriums or offers new protections that limit a lender’s ability to foreclose in the coming year. In this scenario, mortgage delinquencies will remain high, but foreclosure starts will continue to decline, and real estate values will continue to rise as demand outpaces supply.
Right now, there are still a great number of unknowns that will affect the outcome for the next year. I personally think scenario 2 is the likely outcome for 2021 because of the change in administration, but we’ll have to wait and see how the year unfolds.
Other Opportunities
Investors should be prepared for a large uptick in commercial real estate (CRE) foreclosures despite continued protections. Current regulation isn’t offering the same foreclosure alternatives and protections to investor-owned real estate, and with such a tough 2020 for many commercial sectors, I expect 2021 to be just as prevalent for CRE foreclosure.
If I’ve learned anything in my career as an investor, it’s that the real estate market is constantly changing. An investment strategy or market area once ripe with opportunity can quickly dry up. A big part of being a successful real estate investor is being able to identify present market opportunities and having the flexibility and forethought to pivot to take advantage of them.
Here are the five more big real estate investment opportunities for 2021.
Adaptive reuse of unwanted retail, hotel, and office space
Adaptive reuse, the process of converting and redeveloping unwanted real estate into a different type of real estate that better serves current and future market demand, will undoubtedly be what saves many commercial investors in the wake of the global pandemic. Hotels and entertainment venues, office buildings, and retail were severely impacted by the coronavirus crisis. Recent reopenings have helped subside the impact a bit, but unprecedentedly low demand has resulted in a number of businesses closing their doors or filing bankruptcy.
Recovery is inevitable, but it will take time, and suffering property owners will need to get creative in the meantime. Affordable housing and industrial real estate are two sectors in high demand. Turning an old hotel in the heart of the city into an affordable housing project or converting an old retail building into an industrial distribution center or warehouse may be a more profitable long-term solution. While there are definitely a number of hurdles to overcome in this process, including zoning and city regulations, I think there’s a lot of opportunity here.
Industrial real estate
Industrial real estate has been one of the top-performing sectors of commercial real estate for the past several years based on returns and demand. In many ways, the global pandemic accelerated the demand for industrial space, putting pressure on cold storage, warehouses and distribution centers, and data centers in particular. While this recent demand is likely just a temporary surge, it’s very likely this sector will continue to have a strong year and opportunity for continued growth in 2021.
Nonperforming mortgages
There’s talk of a potential foreclosure wave coming in 2021, pending no national foreclosure moratoriums or protections enacted by the incoming Biden administration. As of October 2020, 4.57% of all residential loans are 90 days or more delinquent, which equates to about 2.258 million, according to Black Knight (NYSE: BKI). This number doesn’t include the 202,000 forbearance plans that were set to expire in November 2020.
There’s tremendous pressure on lenders and servicers to maintain these debt obligations, which is why the government has been using quantitative easing, the slow and steady influx of cash into the financial markets to help keep them afloat. But that can only last for so long.
Eventually, banks will be forced to reconcile their books and either foreclose on the delinquent loans or sell the loans at a loss. Neither scenario plays well for the banks, but in most cases, the mass sale of delinquent loans is the easier route, giving them the cash they want and need now while reducing their overall burden.
Before the foreclosure wave that followed the Great Recession, millions of nonperforming mortgages were sold on the secondary market. Investors large and small were able to purchase these loans at a steep discount, working to find a long-term resolution for the delinquency, which can include a forbearance plan, modifying the loan, a deed in lieu, or foreclosure.
Foreclosures take time, and investors hoping for a sudden spike in foreclosure properties to hit the market in 2021 may missing this opportunity. I personally know people who got their start in real estate investing with nonperforming notes (NPNs) just after the Great Recession, and I’m seriously watching for the wave of NPNs that could potentially hit the market both in the residential and commercial markets.
Rental property in depressed markets from tight-strapped landlords
While many rental markets are seeing an uptick in demand and rental rates, others aren’t so lucky. High-density urban areas are experiencing a mass exodus of residents fleeing the expensive and populated metro centers for more space and budget-friendly accommodations in the suburbs. Eviction moratoriums have left hundreds of thousands of landlords in the dust, unable to evict nonpaying tenants but still responsible for maintaining the property and paying taxes, insurance, and their mortgage.
Many tight-strapped landlords will eventually be forced to sell. Investors with the patience and capital to ride out the current wave can possibly pick up these rental investments at a discount.
Fix and flip
The fix-and-flip market has been super active in 2020. Initial worries about another real estate bubble were quickly put to rest as home values increased dramatically and demand outpaced supply in most markets. At the end of 2019 and the start of 2020, fix-and-flip activity was up, but profits were down. Things reversed in the second quarter of 2020 as some investors took a step back from the market to see how the coronavirus pandemic would play out.
Considering demand remains high for newly renovated homes, I believe 2021 will be another active year for investors looking to fix and flip. Investors will need to be diligent with their numbers, as I predict the hot real estate market will drive investors back into the business, increasing competition and pushing returns down.
The bottom line
I personally believe these six investment sectors hold the most opportunity in the coming year but realize everything could change quickly. If things continue on their current track, however, I believe 2021 could play out to be a very profitable year for investors who are informed and ready. As always, investors should conduct their own due diligence about each investment.
Data drawn from articles at Fool.com
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