APR 18, 2013 9:39am ET

Best Markets to Buy Distressed Assets This Year

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As the upcoming spring and summer seasons approach where home buying is known to ramp up, Realtors are curious whether they will have success selling distressed properties this year.

Because inventory available on the multiple listing services is still at low levels throughout the nation, the present day continues to be a seller’s market.

According to CoreLogic, REO inventories fell by 30% during 2012. This decline not only triggered a steep rebound in home prices, but renewed optimism about the broader housing market and recovery.

However, the decline in REO inventories across markets has been uneven. Midwestern and Northeastern markets continue to struggle with REO inventory levels, while some markets in the South and Southwest have experienced massive declines. CoreLogic said the largest decline in REOs last year occurred in Atlanta.

The Santa Ana, Calif.-based analytic firm also counted fewer foreclosed properties and a declining shadow inventory, as well as a reduction in the supply of homes and improving demand which resulted in gains in home prices.

Other encouraging developments for the longer term include the improving employment picture, more clarity on important regulatory matters, for example the Consumer Financial Protection Bureau’s recent definition of a qualified mortgage, more positive consumer sentiment and spending and finally, the wealth effect from record-high equity markets.

“Importantly, this home price appreciation reduced the number of borrowers who are underwater, providing them with more options,” stated Anand Nallathambi, president and CEO of CoreLogic. “These are optimistic signals that the housing market is finally rounding a very long corner and gaining traction.”

February 2013 national housing data from Realtor.com, operated by Move Inc., indicates that listing inventories increased 1.15% month-over-month, with approximately 1.5 million single-family homes, condominiums, townhomes and co-ops listed for sale.

Furthermore, the median age of inventory was at 98 days, a 9.26% decrease on a monthly basis. Lastly, median list prices were slightly higher in February compared to January at $189,000.

“As we enter the busiest time of the year for home buyers and sellers, our latest housing trend data shows just how competitive the market is with a significant national housing recovery well underway,” said Steve Berkowitz, chief executive officer of Move Inc. “Looking ahead, we can expect the amount of inventory to increase this spring along with higher list prices as sellers become more comfortable with the market conditions.”

To help Realtors know if their market is a prime location to dispose distressed assets, RealtyTrac recently created an analysis of the best places to buy bank-owned homes, short sales and foreclosures. The data is based from the Irvine, Calif.-based analytic firm’s fourth quarter of 2012 foreclosure and short sales report covering more than 900 metropolitan areas across the country.

Only markets with at least 200 short sales in the fourth quarter of 2012 were included in RealtyTrac’s list. Average sales prices on short sales in the top 15 markets ranged from $91,145 in the Grand Rapids, Mich., metropolitan area to $283,825 in Santa Barbara, Calif.

Short sales—both of properties in the foreclosure process as well as those not in the foreclosure process—surged in the fourth quarter compared to the prior year for the top 15 markets for buying short sales. RealtyTrac data said short sale prices increased by as much as 37% in Detroit to a 107% annual uptick in Santa Barbara.

The average amount short—difference between the sales price and the loan amount owed to the bank—ranged from $53,158 in Grand Rapids to $178,201 in Santa Barbara. The average amount short was more than $100,000 in seven of the top 15 markets, indicating banks are willing to realize a significant loss with a short sale in exchange for avoiding the complex and costly foreclosure process.

“Short sales are on the rise as a better alternative to foreclosure in many areas—good news for buyers and investors in markets where short sales are closing more quickly at solid discounts,” said Daren Blomquist, vice president at RealtyTrac. “But buying from the bank may still be a better option in other markets because of increasing REO inventory, deeper discounts and shorter times to close.”

For purchasing bank-owned homes, the top 15 markets all experienced sharp increases in REO sales in the fourth quarter. For example, Cleveland saw 141% more REO transactions, the highest of the metropolitan areas on this list, while Sarasota, Fla. only had a 19% increase in REO sales.

Similar to the short sales data, the top 15 list for REO homes was limited to markets with at least 200 bank-owned sales in the fourth quarter which accounted for at least 10% of all residential sales. In addition, the average sales price of a bank-owned home was at least 30% below the average sales price of a nondistressed property in all 15 metro areas selected.

In all 15 markets, the average number of days from bank repossession to sale was below the national average of 178 days in the fourth quarter. To select the best places to buy foreclosures in 2013, RealtyTrac scored all metro areas with a population of 500,000 or more by summing up four numbers: months’ supply of foreclosure inventory, percentage of foreclosure sales, foreclosure discount, and percentage increase in foreclosure activity in 2012.

Using this data, topping the list of the best city to acquire a foreclosed property this year was the Palm Bay-Melbourne-Titusville region in Florida. This area had a 34-month supply of inventory, foreclosure sales representing 24% of all sales, an average foreclosure discount of 28%, and a 308% increase in foreclosure activity in 2012 compared to the prior year.

Additionally, five other Florida cities ranked among the top 20 best places to buy foreclosures, including Lakeland, Tampa, Jacksonville, Orlando and Miami.

New York also had five cities that made the top 20 list: Rochester, Albany, New York, Poughkeepsie and Syracuse. The big backlogs of foreclosure inventory and major increases in foreclosure activity that occurred during 2012 were reasons for these cities making the list.

Meanwhile, the metropolitan with the lowest score was McAllen, Texas, which had a 12-month supply of foreclosure inventory, foreclosure sales accounting for 7% of all residential sales, an average foreclosure discount of 21%, and a 66% annual decrease in 2012 to 2011 in foreclosure activity.

The West dominated as the worst places to purchase foreclosed properties, with Las Vegas, Salt Lake City, Phoenix, Portland, Ore., San Jose and Honolulu some of the notable cities on this list.

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