Most distressed sales are going to smaller-volume buyers and, increasingly, owner-occupants.

Large-volume homebuyers ramped up property acquisitions in the first half of 2021, but these are not your father’s institutional buyers.

Unlike a decade ago, when Wall Street-backed hedge funds and other institutional investors swooped into the housing market and scooped up hundreds of thousands of foreclosure properties, the large corporate buyers of 2021 are largely eschewing foreclosures. Instead, they favor newer, non-distressed homes that require little rehab to flip and represent low-maintenance rentals.

Meanwhile, foreclosures being sold in the post-pandemic housing market are older homes purchased primarily by smaller-volume local investors—and increasingly by owner-occupant buyers—who are willing and able to put in the work and time required to renovate these highly distressed properties.

An analysis of public record data and proprietary data from the Auction.com marketplace sheds light on the new brand of institutional buyer active in the 2021 housing market. That data also reveals the buying opportunities still available to individual investors, and even owner-occupant buyers, thanks to advances in technology and broader access to distressed-property financing. These are helping to level the playing field for local investors and owner- occupant buyers, allowing them to compete and often beat out institutional buyers in the context of a transparent, real-time auction marketplace.

MORE OWNER-OCCUPANTS BUYING DISTRESS

Proprietary data from Auction.com shows most distressed properties sold on its platform go to small-volume buyers. So far in 2021, 87% of foreclosure auction sales on the Auction.com platform have gone to buyers purchasing five or fewer properties, while 95% of online REO auction sales have gone to that same category of small-volume buyers.

An increasing share of buyers purchasing via online REO auction are owner-occupants, according to the Auction.com data. So far in 2021, more than 13% of buyers who purchased an REO property via online auction on Auction.com said they were owner-occupant buyers, up from 11% in 2020 and up from a low of 8% in 2017.

By comparison, less than 1% of online REO auction buyers so far in 2021 (0.6%) said they were multi-property purchasers, down from 1.4% in 2021 and down from a peak of 1.8% in 2018.

MOST CASH SALES TO INDIVIDUAL BUYERS

The trend is similar when looking at the larger real estate marketplace. All-cash home purchases reached nearly 950,000 in the first half of 2021, the highest total in the first half of any year going back as far as data is available (2000). But the vast majority of cash buyers in the first six months of 2021 were individual buyers purchasing one property or small-volume investors purchasing fewer than five properties.

In the first half of 2021, 92% of all-cash home purchases were by entities purchasing five or fewer properties during that six-month period. That’s down just one percentage point from the 93% going to small-volume buyers in the first half of 2011.

Cash buyers purchasing just one property during the first half of 2021 accounted for 82% of all cash purchases during the period, up one percentage point from 81% in the first six months of 2011.

Meanwhile, entities purchasing 100 or more homes in the first six months of 2021 accounted for 4.3% of cash home sales during that period, according to the analysis of the public record data. That was twice the 1.9% share going to large-volume investors in the first six months of 2011, the peak year for all-cash sales share over the last two decades. But it was still dwarfed by the volume of cash sales to individual buyers and small-volume investors.

BRIGHT, SHINY OBJECTS

Individual buyers and small-volume investors who want to avoid competing with the large-volume institutional investors are focusing on older, distressed properties. Unlike in 2011, the bright, shiny objects for most institutional homebuyers in the 2021 market are non-distressed homes in need of little or no rehab and with low ongoing maintenance costs.

The public record data show that just 1,400 of the more than 40,000 properties large-volume cash buyers purchased in the first half of 2021 (3%) were in some stage of foreclosure when purchased. In the first half of 2011, the distressed property share of cash sales was more than three times that, representing 10% of cash sales.

AGE BEFORE BEAUTY

Large-volume cash buyers in the first half of 2021 purchased homes that were an average of 31 years old, built in 1990 on average, according to the public record data. By comparison, homes small-volume cash buyers purchased were nearly 10 years older, built in 1981 on average.

The average property age was older for cash buyers purchasing two to five properties (46 years on average) than it was for single- property cash buyers (40 years on average), indicating that many single-property cash buyers may be owner-occupants who are less inclined to deal with heavy-duty rehab and deferred maintenance issues.

Further, the average property age was 49 years for cash buyers purchasing between 10 and 50 properties so far in 2021. This category likely represents professional investors who are willing and able to take on properties requiring more extensive rehab.

BROADER ACCESS TO CAPITAL

These are investors like Nick Aalerud, owner of AA Real Estate Home Buyers, a local real estate investing company that has been buying distressed and deferred maintenance properties in the Boston area for 15 years.

“We’re not a massive fund, but we can compete with their strategy,” said Aalerud, noting the financing options now available to small and medium-sized investors allow them to close deals quickly as cash buyers. “We’re going in as ‘cash’ to our sellers, as they want to ensure there’s no financing contingency, and for speed of closing, however, it doesn’t mean we’re not getting financing.”

Local banks and local private money lenders have long been sources of financing for investors like Aalerud. The emergence of what he calls local money lenders that only take collateral into account provides a third alternative that is often faster than local banks and with lower rates that private money lenders.

“I can pick up the phone and get 100% financing for any investment we do, if it’s within 75% of after-repair value, because of our experience and track record,” Aalerud said, adding that less experienced investors also now have better financing options than they did historically. “Access to capital is everywhere, but sound deals are harder to find in this market.”

The new category of “soft money” lending is poised to expand to more smaller-volume borrowers as traditional banks continue to shy away from the type of loan products needed to renovate the nation’s increasingly aged housing inventory, according to Ray Sturm, CEO of AlphaFlow. He co-founded the company in 2015 to connect local private lenders and the local real estate developers they lend to with capital markets.

“We’re seeing huge inventory that’s extremely old. You have a huge housing need in the country,” Sturm said, noting it’s important that standardization comes hand in hand with growth. “We have to maintain discipline on good credit standards, so we don’t blow up the industry like in 2008.”

He noted: “If we can help all these small-business owners grow their business, and not only them but their borrowers, by helping them access securitization-level capital, I love it.”

LEVELING THE FIELD FOR LOCAL BUYERS

Although distressed inventory in 2021 is down dramatically from pre-pandemic levels, due primarily to the national mortgage forbearance program andforeclosure moratorium for government-backed loans in place for most of the pandemic, technology is helping small-volume buyers expand their distressed property acquisition radius.

Most foreclosure auction and online REO auction purchases so far in 2021—at least 75% in both cases—are still within 100 miles from the buyer’s home ZIP code, but the average distance between buyer and property purchased is gradually expanding. For foreclosure auctions, the average distance is 257 miles so far in 2021, up from 252 miles in 2020. For online REO auctions, the average distance is 238 miles so far 2021, up from 182 miles in 2020.

Chattanooga, Tennessee-based investor Steve Johnson recently purchased two foreclosure auction properties using the Remote Bid feature on the Auction.com mobile app. The feature allows buyers to bid remotely at live foreclosure auctions that historically required in-person attendance to bid.

Technology like Remote Bid is helping local buyers like Johnson compete against better-capitalized, out-of-state investors.

“Chattanooga has just been flooded with investors from California and other places,” said Johnson, who started investing after he retired from his fulltime

job in the insurance business three years ago. “There’s not many properties that you can buy and afford here. With Remote Bid, I can buy anywhere.”

Johnson still sticks to buying properties within driving distance of his Chattanooga home, but Remote Bid has increased the amount of inventory available to him by allowing him to bid on multiple foreclosure auctions occurring in different counties on the same day.

“Remote Bid allows me to bid on many properties in many different locations at the same time,” he said.