Where Not to Buy a Foreclosure in 2013

7

Above: RealtyTrac’s Worst Places to Buy a Foreclosure

Las Vegas? Phoenix?  Stockton?

Are you kidding me?

Those are hallowed names in the history of America’s foreclosure nightmare, cities where subprime defaults set off the firestorms of foreclosures that brought the national housing economy to its knees.

They were the markets where modern-day residential investing was born.  The perfect storm of a plentiful supply, affordability and rents driven up by families who had lost their homes created the first wave of REO-to-rental millionaires.

Today they are still centers in the residential investing movement, and the site of newly formed large scale investment operations like AZ Equity Partners and Waypoint are active.  However, the geography of foreclosures has changed radically over the past year and now they are no longer at the top of the list to buy and rent out a foreclosure, they are at the bottom.

The Study

Last week RealtyTrac named those three markets to its top twenty list of Worst Places to Buy a Foreclosure in 2013.  They join other former hot spots like Boise City, San Jose, Fresno, Bakersfield, Oxnard and Modesto who all share a common history.  They were hot during the boom, prime territory for alternative loans and owners quickly went underwater.  Last year California markets regained value with the help of extraordinarily low inventories and today, foreclosure activity is down and prices are up.  Inventory, foreclosure prices, foreclosure activity and foreclosure discounts were the four measures RT used to rank best and worst markets.

The Worst Places list includes a group markets whose profile is virtually the opposite of the foreclosure hotbeds. These are McAllen TX, Ogden UT, Little Rock AR, Salt Lake City, Buffalo, Provo UT, Honolulu Austin and Knoxville.  Most of these places never saw the boom driven by easy financing that drove housing prices through the roof and as a result, they didn’t experience the bust.  Subprime financing was rare and foreclosures, except those driven by unemployment in cities like Buffalo, never amounted to much.  These markets made RealtyTrac’s list of Worst Places to Buy a Foreclosure in part because there aren’t many of them.  When there are fewer foreclosures to start with, it doesn’t take many to register a double digit decline or a shrinking of the foreclosure market share.

Only Part of the Story

Unfortunately, the RT ranking tells only part of the story, perhaps the least important part for the REO-to-rental investor.  The ranking looks only at the acquisition side, not the income side, of the equation.  Rents and cap rates are increasingly important to investors, especially as the supply of foreclosure victims declines and competition stiffens from a new wave of multifamily housing coming on line.  Sacramento, Austin and San Jose are three of the hottest rental markets in the nation.  Their rents are soaring because their economies are hot, which means they will continue to be hot.  Do they really deserve to be on this list?

Would Phoenix, Vegas and Stockton be on this list if rents were included? Probably not.  From all reports, rental demand is strong in those markets and investor/landlords are not only enjoying good cash flow but they are also experiencing appreciation in the value of their properties.

RealtyTrac can’t measure rents because it doesn’t have rental data.  In fact, few people have good SFR rental data, which is a different category than multifamily.  SFR rental data is as different from multifamily as single family homes are from condos.  Because the business is dominated, or at least has been to date, by many small investor/landlords and small regional property managers, collecting good SFR data has not been easy.  Zillow uses its AVM to provide rental values for individual properties, which is a reasonable substitute.
Photo: http://www.realtytrac.com/

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About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.

7 Comments

  1. This article talks about the REO market in Vegas yet does not mention one word about AB284, its affect on the REO market here since Oct 2011, nor does it discuss the law being reconsidered this month, nor does it discuss the possible affects of amending or getting rid of AB284.

    I don’t see how people can make educated decisions without this info.

    Best Regards,
    Robert Adams

    • Hi Robert;

      Thank you for your comment,.

      You see, the fine folks at Bigger Pockets like me to keep my posts to a reasonable length and since a few months ago I devoted most of a post to the Nevada law (Legislating Disaster in Nevada and Maryland: Good Intentions Gone Wrong), It got heavy readership and I didnt see the need to repeat what was already on the BP blog. As far as this story goes, I didnt have the space to go deeply into what’s going on in each market. Folks like you know more about your local dynamics than I do anyway. My goal was to help the growing number of investors who have a national perspect on distress sales with the latest data available.

      Sorry you were disappointed, but Robert this is not the New York Times. We’re just a bunch of volunteers who freely share our knowledge to help others. Perhaps you could take a minute to bring us up tio date on Nevada. How are processing timelines? Do you have a sense that the law is stimulating short sales? I’ ve seen data that shows the foreclosure discount has disappeared; is that the case?

      Join the party, Robert. Everyone is welcome.

      Steve

  2. This is by no means an accurate article and the headline of this article is very misleading. I have a friend who just purchased a foreclosure house in Santa Clara. He rehabbed it and made a killing on his very first real estate experience. Simple as that.
    My thinking is if you are planning to invest in any of the markets listed above, don’t be discouraged by these negative lists.
    Research your market, do your homework and keep in mind that at the “right price” with the “right strategy” any deal can be a winner. And quite opposite to what this article says, there are many right deals that can be made in these cities.

  3. I would like to point out that the author did not create the list. He also stated the local factors such as rental rates would affect outcomes.

    • Hi Mike,

      As you can see, RealtyTrac put Fresno on its list of worst places to buy a foreclosure, but i think this is a good example of why their list is stupid. Fresnos has calmed down a great deal in recent years, but there a lot worse markets to buy a foreclosures. A ten months’ inventory is not bad in today’s foreclosure marekts and an average foreclosure discount of 22% puts it in the middle among markets even though RT had Fresnow at a 44% discount as recently as August.

      However,, as I noted in the article, whether it is a good market for you all dependents on your business plan. If you are going to buy and hold, rents, vacancy rates and cap rates are more important.

      Steve

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