One segment of my business is investors. Over the years I have dealt with a lot of investors and still do. Investors are looking for inexpensive housing that usually needs repairs and updates. They usually plan to flip (fix up and resale at a profit) or rent for a profit. The types of houses they are interested in I call distressed sales. My definition of distressed is bank owned, HUD owned, VA owned, foreclosed, short sales or bankruptcy homes. When I started in 2002 there were very few of these types of homes. Most of these type of homes needed lots of repairs that could cost anywhere from a few thousand dollars to over $20,000. It took a certain type of buyer that could pay cash for the home and fix it up. In many cases banks would not give loans on houses that were not immediately livable. At that time you could expect a 20 percent discount off market value for a distressed house listing.
As you can see from the above chart, distressed sales climbed from about 5 percent in 2003 to about 35 percent in 2009. During this time there was a whole lot of new construction in Pike Township. You could get a new home with no money down and very low closing costs. The problem with new construction is that there are no property taxes the first year. Property taxes are usually included in the mortgage payment. By the second year property taxes get escrowed and make the mortgage payment s go up, sometimes as much as $200 a month. The homeowner can’t afford it and the home gets foreclosed on.
At the same time during that period, banks would do mortgages with no money down and if the buyer was breathing, they could get a mortgage. This brought out tons of buyers. In many cases the finances of these buyers was questionable and they probably should not have bought homes. The peak of the Pike market was in 2005. By 2007 the economy took a turn for the worst and distressed housing skyrocketed.
The market was flooded with distressed listings. Investors came out in droves. Prices dropped to sometimes 50 percent of what market value was in 2005. There was an extreme amount of flipping. At the same time non-distressed homeowners were losing all their homes equity because home values were dropping. In many cases they could not sell their homes and break even. Total sales in Pike went from 1642 in 2005 to 884 in 2010.
By 2010 there was a huge demand for rentals. Homeowners that had lost their homes during downturn could not buy new homes. They had to now rent until they could repair their credit which might take years. Real Estate Investment Trusts started coming into Indianapolis and buying 1000’s of homes. They were turning around and renting them. Even with strict guidelines about what they would buy based on return on investment, they bought many of the distressed homes on the market. They were not adverse to doing repairs and making the houses marketable to rent. In effect this took a lot of distressed homes off the market. At the same time it made a lot of homeowner associations pretty mad. They did not want rentals in their neighborhoods. This caused a lot of them to change their covenants to restrict rentals.
From 2011 with a high of distressed homes at 35 percent of sales to 2014 we dropped to 16.6 percent of sales. We are now currently sitting at about the same rate as at the peak of the market in 2005. The big difference is that in 2005 a total of 1642 homes were sold. In 2014 a total of 1083 homes were sold. I believe it will be a slow climb back to the sales level of 2005.
Bottom line…it is harder and harder for me to find good homes for my investors. Yes, there are still distressed homes out there BUT the return on investment is getting squeezed. In the past when it was easy to get a reasonable profit on a house flip, now the numbers are getting harder and harder to work. With less distressed housing on the market the prices are getting higher and firming up. More and more when one of my investors makes an offer on a distressed house, there are multiple offers at the same time. If I don’t get my investors to the house the first day it is listed and make an offer, it will be sold quickly to another investor. That is why I review all new listings in Pike Township first thing every morning.