Pin a map of the United States to the wall, take 10 steps back, aim and throw your dart. Almost anywhere you hit is going to have some level of foreclosure activity going on, even if it is negligible in relation to the area’s real estate market.
Despite the housing problems that have hit many areas nationwide, some areas of the country are better poised to stand the test of time than others. Those areas are still affected by the overall psychology of the down market, but represent an opportunity to buy low and realize a high rate of return when the market recovers.
“You’re basically taking advantage of someone else’s misfortune. That’s the unfortunate situation, but it presents an opportunity for many people as well,” said Andrew Couture of Neighborhood Scout, an online service with a national database that allows users to drill down to the neighborhood level for various types of information.
“If you can do it in an area where schools are good, employment is good, crime is low, there’s access to amenities and opportunities, there’s lots to do, that’s going to be a more desirable place to the population in general than a place with no amenities and where opportunities are limited,” Couture said.
When analyzing what areas represent the best opportunities for foreclosure investors, we looked at the following variables:
- Average Savings on Foreclosure Purchase
- Home Price Appreciation
- Recent Home Sales & Inventory
- Job Market & Unemployment Rate
- Vacancy rates
- School District
- Crime Rate
A Method to Our Madness: The List
All of those factors are well worth considering, but at the end of the day choosing a list of 10 locations that offer good investment opportunities is subjective.
“I think in this market there’s not really a top 10. In this market, almost every market in this country is an excellent opportunity for investors,” said investor and trainer Andy Heller. “Real estate is a long-term investment. I think the opportunity is simply different in some markets.”
Nevertheless, Foreclosure News Report has come up with the followinglist of 10 metropolitan statistical areas (MSAs) around the country that we believe offer good opportunities for foreclosure investors:
10 Best Places to Buy Foreclosures
Avg. Savings on Foreclosure Purchase
1-Year Price Appreciation
5-Year Price Appreciation
Year-over-Year Employment Growth
As you can clearly see from the list, average savings on homes sold range anywhere from more than 20 percent in markets like Beaumont-Port Arthur, Texas, to almost 50 percent in markets like Binghamton, N.Y. Likewise, the one-year change in price appreciation rates for the 10 MSAs range from a low of 5 percent in Kingsport-Bristol, Tenn.-Va, to a high of nearly 8 percent in Binghamton, N.Y.
We based the list on the two primary goals of a prudent investor: 1) purchase any property for the best discount possible and 2) purchase in an area where the return on your investment will be as stable over the long-term as possible.
Opportunities Abound No Matter What Market
William Bronchick, president of the Colorado Association of Real Estate Investors, recommends that investors look no further than their own backyard to find investment opportunities.
“My general opinion is you invest in your backyard. No matter what market you’re in, the deal has to make sense. Look to buy property for cash flow. It helps to be more familiar with the market,” Bronchick said.
Bronchick believes that the best markets to invest in are those that did not experience dramatic surges in property values during the boom years earlier this decade simply because prices in those markets are not crashing as hard now.
Bronchick said he has heard of investors looking to parts of Texas like San Antonio, Austin and Dallas to invest in, as well as Colorado Springs, Denver, St. Louis and parts of the Rust Belt.
Dr. Jay Q. Butler, Director of Realty Studies at the Morrison School of Management and Agribusiness at Arizona State University, suggested that jobs and family support are important considerations when determining where to invest because those two factors are key to potential tenants or buyers.
“Looking at Texas, all of their markets have been stable beyond belief. Oklahoma has historically been a stable market. Oklahoma City, even Tulsa, have been good,” said Butler. “To some degree so have the Alabama and Georgia markets. They have pretty good manufacturing, and the auto industry has moved into that area. The Carolinas are also historically a stable market.”
Markets like Michigan, California, Nevada and Arizona have employment issues with jobs that have been lost and are not going to be replaced. On top of that some of those same areas have other issues that could affect the housing market. California, Nevada and Florida have water issues confronting them. Michigan has employment issues caused by the struggling auto industry, while Ohio has suffered job losses in the steel industry.
Plus, Butler noted, many people who want to move to the warmer climates of California, Florida and Arizona won’t end up moving because they don’t want to give up the family support for things such as daycare and elderly care.
“A lot of families are relying on others to help them. Family and friends for daycare; same thing for the older people. There’s more of a need to create an ultra-family type of support system,” he said.
Although the markets on this list are not the only places with good foreclosure investing opportunities, many of the markets are within states that are generally considered to be more stable in today’s economy. In the end, however, it is still the investor’s choice as to where to put his or her money down.
Heller categorizes markets two ways: what he calls Category A markets are those that are much more volatile, having experienced double-digit appreciation and now have prices falling faster than the national average. These are markets like California, Florida, Las Vegas and Arizona.
“In these markets, for the most part, the foreclosure rates are higher than the national average, so the opportunity to acquire investment grade property, at substantial discounts, is higher,” Heller said. “The blessing is these markets offer greater potential returns, so it does represent more risk. You’re able to manage that risk by targeting a higher than normal investor discount.”
By contrast, what he calls Category B markets are those that had more stable year-over-year appreciation over the past seven to 10 years. Markets such as Atlanta, parts of New York, Minnesota and North Carolina fall into this category.
“In these markets you have record foreclosures, but closer to the national average, and investors can get a great deal, but probably not at quite the discounts as in the markets in the first category,” he said. “These markets represent less risk because of less volatility.”
Properties in Category A represent more risk because they are in more desirable areas of the country. So property values — which shot up much faster in these markets than in other parts of the country — are now experiencing more of a freefall in home prices, thus more people are losing their homes.
“The encouraging news is times have never been better for an investor anywhere. In all 50 states. The supply of properties going through foreclosure has never been greater. One thing an investor needs to understand is there will still be some falloff in these markets, so the investor should seek a higher investor discount. That discount needs to allow for future possible softening,” Heller said.
How much of a discount? Considering the deterioration still going on to a greater or less extent depending on the market, it can be as much as 40 to 50 percent in Category A markets and 20 to 30 percent in Category B markets.
Heller explained it’s all about risk and reward. No matter what market an investor chooses, when the economy does finally turn around the potential rewards from the rebound will be exciting.
Overall, Heller is less concerned about what particular parts of the country to invest in than he is about the strength and diversity of that market’s employment base. Areas where the local economy has been dependent on one particular industry for a long time are going to be difficult areas for investors to find tenants to fill their properties.
Still, the last year has made a significant difference in investors’ ability to work no matter what market they are interested in.
“Right now is an investor’s dream. In a period of 12 months the most challenging part of investing in real estate — finding deals — has gone from difficult to easy,” Heller said.