Does the equity math still work with foreclosure starts up 20 percent, or is the discount getting bid away?

Question

I'm taking my time on this first purchase and trying to think a year out rather than about one house. The reported first-quarter numbers have foreclosure starts up 20 percent year over year to roughly 82,600 properties, concentrated in Texas, Florida and California. The chapter here reads that as more supply of motivated owners.

My worry is the other side. Every one of those notices hits the same daily-updated platforms that everyone else subscribes to, so the lead count rises and the number of investors chasing each lead rises with it. If ten investors call the same owner in week one, the owner learns their house is worth more than the first offer. At what point does the pre-foreclosure discount compress to where it isn't worth the acquisition cost?

Rena Expert · Accepted Answer

The discount in this strategy doesn't come primarily from the owner's ignorance of value. It comes from the owner's inability to transact any other way inside the time left. That's why competition compresses it less than you'd expect. Ten investors calling teaches the owner their house is worth 320. It doesn't produce a buyer who can close in three weeks with a lender payoff, junior liens cleared, and no financing contingency. The number of parties who can actually perform on a 5-week clock is small in any county, and it doesn't scale with the number of parties who bought the list.

Where compression does show up is in the easy files, meaning clean title, one lien, cosmetic rehab, decent neighborhood. Those get worked to a thin spread fast. What survives is the messy end, which is where rigging's HELOC example lives. So the effect of rising starts isn't a uniformly better market, it's a wider spread between the two halves of the list, and your acquisition cost per deal on the clean half goes up.

The number I'd watch instead of starts is the completion rate, meaning how many notices actually reach auction versus get cured, refinanced, or sold conventionally. Starts up 20 percent with a high cure rate is a much smaller pool of real sellers than the headline suggests, and cure rates move with home equity levels and with servicer behavior.

The risk you haven't raised is on the exit. Rising starts in a concentrated metro eventually means more distressed inventory listed in the same submarket you're reselling into, at the same time your carrying costs are running. Underwrite the resale at a price that survives that, and don't assume today's ARV holds through a 6-month rehab.

marcus_hale41 · Answer

The cure rate point is the one I'd build the model around. I've seen figures suggesting a large share of notices never reach the auction, and if that's directionally right then your real lead count is a fraction of 82,631, spread across every county in the country.

quill, I'd also separate the three states out. Texas runs a fast non-judicial timeline and Florida goes through the courts, so the same headline number gives you a 60-day window in one place and well over a year in another. Those aren't the same business.

monica_tran3 · Answer

Competition, after five years of running a service business, shows up as speed to answer. Price matters less than most people think. The owner picks whoever called back.

Does the equity math still work with foreclosure starts up 20 percent, or is the discount getting bid away?

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