The Cheese Has Moved!

If you haven’t read Who Moved My Cheese? by Spencer Johnson, it’s time to – especially if you’re a real estate investor – because folks, when it comes to buying property at the foreclosure auction, the cheese has definitely M-O-V-E-D!

From December through March, Kim and I took some time down and didn’t work foreclosures.  We got back at it last month and went to April’s foreclosure auction loaded for bear.  There were six properties on our target list.  With this many targets, we were confident of being the high bidder on at least two of them.  Imagine our disappointment when we left the auction without buying anything!

At the auction, Kim and I quickly noticed that things had definitely changed – and changed in a BIG way.  From 2007 through 2012, buying at the foreclosure auction was like shooting fish in a barrel – it was a target-rich environment.  Each month, there were 170 or more properties advertised for foreclosure, but only a couple of able investors on the steps to bid.

This is no longer the case.  This month, there were only 80 properties advertised for foreclosure.  And on the steps, the number of investors bidding on properties has dramatically increased.  In little ol’ Bartow County, we even have hedge-fund buyers and online bidders.  Crazy stuff!

So here’s the question: With a lot fewer properties advertised for sale and many more folks bidding, what do you think is happening to the sale prices of foreclosure properties – they’re climbing, right?  And what do you think is happening to investors’ profit margins – shrinking, aren’t they?

One investor told me that they’d rather make a couple thousand dollars on a deal than zero thousands of dollars on a deal.  But here’s the thing: Because you’re dealing with big money when buying foreclosures – it’s an all-cash-on-the-barrelhead purchase – you’re also dealing with a lot of risk.  Doesn’t it make sense that when you’re making an investment, the higher the risk, the higher the return needs to be?

At April’s auction, Kim and I had a real ah-ha moment.  We realized that the cheese has moved.  The days of buying foreclosures and turning a quick $30,000 profit (as we did from 2007 to 2012) are gone…for now, anyway.  So what do we do next?

As the saying goes, what goes around comes around.  From 2003 to 2006, Kim and I were rarely high bidders at the foreclosure auction.  Back then – as it is today – lots of investors were willing to work on tighter margins than we were.  Yet we still did a LOT of deals during those years – it’s just that we didn’t buy a lot of properties at the steps.

The only constant in real estate is change!  Every day, babies are born and folks die; people are promoted while others get fired; some folks get new jobs and others lose old ones; kids move out and parents move in; young families need bigger homes and retirees need smaller ones.  Changing circumstances like these often require homeowners to make adjustments in their living arrangements.

As real estate investors, it’s our job to help people solve their real estate problems.   But before we can accomplish this goal, we must first fully understand their problems.  The best way to do this is to meet face-to-face with sellers at their kitchen table and ask a lot of questions.

So where did the cheese move?  We think for the next few years, it will be found by knocking on sellers’ doors – just like we did from 2003 to 2006.  Yes, we’ll still work foreclosures, but they are no longer our main focus.