Large real estate markets, especially those hit hardest by the housing crisis, are the most attractive options for REO-to-rental investors. But how can servicers and investors identify which markets will achieve the greatest ROI?
The current REO activity and size of the local housing market are key metrics in determining how profitable a potential investment destination will be. However, there are two additional best practices servicers should leverage when dealing with REO properties.
Proximity
Focus on evaluating areas as locally as possible by leveraging property databases to score and rank every ZIP code in the local housing market. Neighborhoods, ZIP codes and counties all experienced different levels of distress during the market downturn, which makes county- or metropolitan statistical area-level evaluations irrelevant in most cases.
In order to determine the risks associated with REO-suitable properties, year-over-year property valuation appreciation and depreciation must be taken into consideration for each ZIP code in a market. Servicers must be able to identify which REO properties will deliver what the investor wants. Breaking down the information neighborhood by neighborhood will allow servicers to survey homes with REO potential and provide investors with the best options for each neighborhood in the identified ZIP code.
Encompassing
Each home in a given marketplace has experienced changes since 2008. Once servicers have identified REO-suitable homes, a comprehensive evaluation of various market, county, ZIP code and neighborhood statistics and trends must be completed to accurately analyze the whether a property (and neighborhood) can deliver to the investor’s ROI standards.
Market supply, market demand and distressed discount trends are crucial metrics that must be explored even further to identify the best REO homes in the neighborhoods with the best profit potential. Servicers should take into consideration the number and year-over-year changes in foreclosure filings, six-month changes in listings, REO inventory and year-over-year change. All of these metrics can also be integrated into a scoring model to rank and prioritize the local markets with the greatest REO-to-rental return potential.
Capitalize and Achieve
To capitalize on the best REO-to-rental opportunities, it’s critical to consider the large number of metrics that drive property values and market trends. Integrating general property intelligence and distressed metrics allows you to narrow in on the most compelling markets, make informed decisions and achieve the desired returns. It is important to expect the unexpected, keep it local and deploy a comprehensive approach when analyzing REO investment opportunities; no ZIP code or county should ever be treated the same.
Randy Wussler is vice president of product management and marketing for San Diego-based DataQuick, a provider of advanced real estate information solutions powered by data, analytics and decisioning. Wussler can be reached at
