Almost weekly we see some list of the best and the “worst” markets.

The big question is: BEST FOR WHAT?

As real estate investors, we obviously look at markets as buyers, with an eye towards getting great deals in solid places. It is obvious that in 2012, the strategy for the savvy real estate investor is to buy in a market that has gone down a lot, yet has good future demographic indicators. Buying low and holding for some years may then turn into a very solid investment strategy, especially since rentals are so strong (as they usually are during a downturn).

Thus the cities touted as “best” are actually some of the worst ones to actually invest in right now.

There is always a sense implied in these reports that everything has to pay off immediately, or very soon. Real estate works a bit differently - you can hold an investment for a few years and think nothing of it.

What is the better market to buy in, then? One that didn’t go down much with this recession and is already trending up and “selling high” or one that took a beating, yet for the future has excellent indicators? I believe the answer is obvious.

However I see some of the best markets for investments, such as Orlando, Phoenix, Jacksonville and Las Vegas, appear in the “worst” category, while cities that are not particularly interesting to invest in such as McAllen TX , Akron Ohio or San Jose, CA, appear in the “best” list.

As long as the knwoledgeable reader understands what is going on, it becomes evident tha tthe so-called “worst” list is quite likely the list of the very best places to invest circa 2012.

Hi Adiel,

Here’s some of the latest data from Vegas that contradicts what the media is spreading:

Here’s a graph that shows that the number of homes in escrow has now risen, and the number of listings has dropped, to the point where the two are equal. Also, the percentage of REO listings in now down to 19%!

If that’s not enough to show how active the market is, here’s another graph that shows that the number of monthly closings is now at the same point that it was back in the heyday of the market in 2004/2005. Those that don’t believe us when we tell them about all the competition are willfully ignoring the facts:

Regarding prices, here’s the graph of closing price per sq.ft. for the last 10 years. You can see how flat prices have been here for the last 2 ½ years. Plus, we’re currently nearly 40% below the pre run-up prices!! Hardly looks like we’re ripe for another huge drop in prices:

One more item for those who keep saying that there’s another huge wave of foreclosures on the way. This graph shows the number of homes on the market that say they are in some stage of foreclosure (have received a notice of default). The number has dropped dramatically since the beginning of the year. We should be seeing the number of REO’s increase, not decrease if this prediction were true. It looks like these properties have already hit the system long ago. This may be the most interesting of all the graphs.

This is the end of Glenn’s report. It makes perfect sense to me. there are large areas in North las vegas, for example, where we are not buying. It is exactly in these areas that a huge number of foreclosed homes exist. The broad media data obviously includes these areas, as they do many other areas which are quite irrleveant to us and our investors. Glenn’s data is woth its weight in gold to me, the eager and interested buyer.

It is titled “Land of Opportunity” and a subtitle “There Are Jobs To Be Had In The Right Places And Spaces”

The caption is followed by a map of the United States with the bottom and top states for job creation per capita.

Here are the top states (the article does not give an order, just a map): Florida, Arizona, Nevada, Texas, Alaska, New Mexico, Nebraska and Colorado.

It comes as no surprise that the main states we are interested in are the best for job creation. Arizona, Florida and Nevada present not only good job-creation behavior, but of course they also present terrific values for foreclosed homes. Combine this with the super-low interest rates we have today and there is a recipe for long-term success.

It’s amazing to me that some reporting does not break important issues such as jobs based on geography. This one does and hence its usefulness.

it also makes sense since buying Single Family Homes is buying a commodity that people cannot give up on easily: their very home. Add to that the fact that housing serves as a good inflation hedge, and no wonder the “Big Money” is chasing what we have been buying all along. I am enclosing the entire article for your reading pleasure. No doubt this is the time to buy these homes either via funds or individually.

Big Money Gets Into Landlord Game

By ROBBIE WHELAN  (This is from the Wall Street Journal, Thursday August 4^th, 2011)

VALLEJO, Calif.—Agustin Gutierrez, a construction worker from this town in the hills northeast of San Francisco Bay, lost his job in 2009, then, 10 months later, he lost ownership of his home.

Now, the husband and father of four rents the same five-bedroom ranch from McKinley Capital Partners, an investment company that’s at the forefront of a new breed of big-money landlords.

Hedge funds, private-equity firms, pension funds and university endowments are dipping into the foreclosure market.

McKinley, which has acquired more than 300 foreclosed single-family homes in the Bay Area over the past two years, recently teamed up with Och-Ziff Capital Management Group LLC, a New York hedge fund, with plans to buy at least 500 more foreclosed homes in the next year. Those homes, too, will be rented to people like the Gutierrez family.

Buying foreclosed homes as investment properties has long been dominated by mom-and-pop investors. But now hedge funds, private-equity firms, pension funds and university endowments are dipping into that market. The attraction is double-digit returns at a time when most bonds and other income investments yield very little.

The most popular strategy is for a big investor to team up with a local company that scouts out houses and finds the renters. The hope is to flip the homes in the future when prices recover.

“It’s kind of the Wall Street meets Main Street phenomenon,” says John Burns, an Irvine, Calif.-based real-estate consultant who has discussed investing in single-family rentals with hedge funds. “The Main Street guys need the capital, and Wall Street needs the expertise.”

At the end of May, 3.5 million loans were at least 90 days delinquent or in foreclosure, according to investment bank Barclays Capital. At the same time, the country’s home ownership rate has fallen, to 65.9% in the second quarter of 2011 from its peak of 69.2% in 2004, according to figures released by the U.S. Census Bureau last month. That drop has produced millions of new renters and helped push the vacancy rate for rental housing down by about two percentage points, to 9.2%.

“The single-family rental market is actually quite large,” said Dennis McGill, director of research at Zelman & Associates, a research firm that follows the housing market. “The average American says, ‘If I’ve got two kids and a dog, I can’t live in a one-bedroom apartment.’”

Zelman recently issued a report saying that in Arizona, Florida and Nevada, states hard-hit by the foreclosure crisis, the number of families renting a single-family home increased 48% from 2005 to 2010.

Large institutional investors could eventually help stabilize the market by soaking up the huge overhang of foreclosures, which could allow housing to begin healing. However, the number of single-family homes being bought by institutional investors is still small compared to the millions of distressed properties. The biggest players in the market are deploying hundreds of millions of dollars, not the billions necessary to make a major dent.

The federal government has a large role as well. The Obama administration is currently considering ways of selling foreclosed homes to investors who agree to rent them out. Fannie Mae and Freddie Mac and the Federal Housing Administration own more than half of all unsold foreclosed homes.

Being a landlord can be a costly hassle for large investors. Unlike apartment complexes, which concentrate hundreds of rental units in one place, investors must buy hundreds of single-family houses that are miles apart, each with separate maintenance problems. Tenants can be troublesome.

“You could have a bad tenant who doesn’t want to pay their rent, or maintain the pool,” says Guy Johnson, an investor who buys foreclosed properties in Nevada, Arizona and California and rents some of them out. “A hedge fund manager doesn’t want to have to be their own plumber or electrician.”

Buying foreclosed properties isn’t easy either. Investors sometimes have to pay thousands of dollars in “cash for keys” payments to the previous homeowners in order to entice them to leave the property, and foreclosed homeowners often damage their homes before they are evicted.

Private-equity giant Carlyle Group LLC tried its luck with the single-family home market two years ago but abandoned the strategy late last year after concluding that the returns weren’t large enough. Carlyle’s strategy was different. The company formed partnerships with local asset managers in California that bought and flipped homes, rather than renting them.

For now, more investors are plunging into the single-family rental market. McKinley, the Oakland, Calif., company that owns Mr. Gutierrez’s house, has already begun to use Och-Ziff money to purchase houses. Its model is to buy homes at an average price of about $100,000 apiece, put between $10,000 and $25,000 in renovations into them, and set the rental rate of the house so that it produces a return of 8% to 12% annually. This often works out to a rent of roughly $1,200 per month.

McKinley and Och-Ziff could see additional returns from selling the houses at a higher price after a few years, once the market has improved. “Two years ago no one thought you could scale this business or that it could be institutionalized,” said Gregor Watson, a principal with McKinley. “Now, you can get very good yields. It’s a very good long-term strategy.” He declined to comment on the Och-Ziff investment. Och-Ziff also declined to comment.

Other large investors have formed rental-housing partnerships.

G8 Capital, a private-equity fund based in Ladera Ranch, Calif., has bought 3,000 homes across the country since 2008, mostly to flip them. It decided last year to begin pursuing a hold-and-rent strategy. It has since bought 250 foreclosed homes as rentals. Carrington Property Services LLC, a Santa Ana, Calif.-based property investment company that manages about 4,500 homes nationally, is in talks with investors to raise funds for a real-estate investment trust, to be called Residential National Trust, which would acquire foreclosed homes for rental. The company plans to buy as many as 5,000 more rental homes in markets including Chicago, Miami, Phoenix and Las Vegas.

Waypoint Real Estate Group, an Oakland, Calif.-based company, has bought 700 homes in the past two years as rental properties. Doug Brien, a former place kicker for the New York Jets who is now managing director of Waypoint, says that his company has approached pension funds, university endowments and large private investment groups about investing in his fund. In July, he says he closed on a financing deal from an Ivy League university endowment, but declined to name the university.

“At some point, there will be a shortage of housing,” Mr. Brien said. “Everyone is realizing that single-family buy-and-hold is the way to go.”

In November, hedge fund manager William Ackman’s Pershing Square Capital Management LP released a report arguing that single-family rental properties are an “under-owned asset class” that would make “an intelligent investment for institutional investors.” Pershing Square predicted that investing in single-family homes and holding them as rentals for 10 years could produce double-digit investment returns, even if U.S. home prices only improved marginally.

All the activity is fueling a renewed debate over whether investors are good or bad for the housing market. In the early days of the housing bust, some community groups discouraged banks from selling foreclosed homes to investors for fear they wouldn’t take proper care of the properties. Some communities riddled with foreclosed homes became slums.

Alan Mallach, a senior fellow with the Brookings Institution in Washington, argues that instead of running from investors, local governments should provide subsidies to investors who buy, rent out and are good landlords for foreclosed properties. “If a neighborhood has a high rate of home ownership, that’s obviously better,” he said. “But in some markets, there was so much inventory coming on the market that the sheer number of properties was destabilizing those markets.”

Mr. Gutierrez, the Vallejo construction worker, now pays $1,800 a month in rent, compared to the $2,500 per month he was paying to cover the cost of his mortgage when he owned the house. He says it bothers him that he no longer owns his home, but is happy to pay less and says his new landlords are good property managers.

He bought the house in 2003 for $340,000 using a $322,700 loan. He refinanced the home five times, driving up the total amount of debt on the house to $400,000. He lost the house to foreclosure in 2009. McKinley paid about $155,000 for the house that year.

“It’s confusing, because sometimes I think it’s my house, but I have to remind myself that it’s not,” said Mr. Gutierrez, who says he doesn’t plan to try to repurchase the house. “It’s sad, but it’s what happened to a lot of people.”

—Nick Timiraos contributed
to this article.

 In many cases, the Short Sale is an alternative to foreclosure. In other words, if the short sale doesn’t go through, there will be a foreclosure as a natural continuation of the process.

 If we think about it logically for a second, a short sale implies that the owner does all the “heavy lifting” for the bank. The owner finds a realtor to list the property, adjusts the listing price to match what the bank is willing to accept, then goes, along with the realtor, through all the vetting of the buyers, through the entire closing process, until the property is sold and the bank gets paid.

 The alternative, from the lender’s standpoint, is that the lender takes the house in foreclosure, then the lender has to be the seller. In many cases there are tremendous inefficiencies when the bank is the seller, as the bank may be handling many thousands of properties. Delays can be caused, the chance of vandalism is much higher (since the banks will not engage in leasing the property while they are selling it so it stands vacant), there will be less attention put on the sale of the property since the bank’s Asset Manager has many such properties to attend to. By contrast, the owner doing a short sale is a dedicated and devoted seller, putting a lot of effort into the process and focusing on the property almost exclusively, which is very likely to maximize the sales price for the bank.

 It would stand to reason that the banks would be very eager to let owners go through with short sales rather than take the house in foreclosure. Especially if the owner is already well behind on their payments (which makes foreclosure much more likely).

 However, as anyone who has tried knows, the first hurdle the bank poses to the owner interested in a short sale is, as always, the mountain of paperwork it requires from the owner before the short sale can begin. The bank will usually ask for full financials, tax returns and in some cases many other documents. It may sound like a prudent action to take, but many owners on the verge of losing their property are in a terrible financial turmoil. In many cases the financial records don’t reflect the down-spiral of their situation. Obviously 2009 tax returns have little bearing on the owner’s financial situation in 2011.

 The logical question is also asked: WHY do the banks want all this financial information and paperwork? After all if the short sale doesn’t happen, the bank will likely get the property in foreclosure and have no paperwork whatsoever. How does the paperwork help in making the short sale go forward?

 Now I am aware that there are many moving parts to the ownership and servicing of the loan: There is the original lender, there may be a lender of a second lien, there are the current servicers of those liens (usually quite different), then there are the investors who had purchased the liens (or parts thereof) as security instruments. They all have to come together and agree. Still this does not explain why the process of short sale approval is fraught with so much paperwork and demand for financial data. How does that , in any way, make the short sale, which is clearly beneficial to the lender, proceed?

 It may be that the mountain of paperwork is needed to satisfy some arcane .lawmakers in the aftermath of the financial crisis. It may be that it makes the lender “feel” that they are responsible and that they “vetted” the owner prior to the sale, but to what end? If the owner is already well behind on their payments, the likelihood of foreclosure is close  to a certainty. 

 There may be some “behind the scene” activities in which the lenders may be compensated differently by the government in the event of a foreclosure vs. a short sale. Such a scenario might make the lender less eager to agree to the short sale. However until tangible evidence is presented to this effect, it is illogical for the banks not to streamline the short sale process and facilitate it as much as possible.

 In fact, why is any paperwork needed at all? Besides some vague “responsible” air it somehow lends to the bank, it serves no purpose whatsoever, logically speaking.

 Why not evaluate the situation as it stands, see how far behind the owner is (the further behind the closer they are to foreclosure), and then simply approve the short sale at a price acceptable to the bank and based on a good BPO (Broker’s Price Opinion). Everything will move along much faster, inventories will reduce much faster, happy buyers will get properties at good prices, and the banks will get paid and move on.

 In addition, there will be a great benefit in that realtors will not look at short sales as low-probability-to-close events. After all there are so many buyers that simply give up after months of delays on the part of the banks. These delays have only to do with the useless paperwork. If that hurdle would be eliminated, sales will close in a reasonable time, buyers will remain in the transaction and actually get to close, and realtors will take short sales seriously and dedicate as much effort to them as to any other sale. This would go a long way towards reducing inventory and moving things along. It will surely hasten the beginning of the real estate recovery.

 It’s nice to dream, isn’t it?

The article goes on to describe the many problems MERS is encountering, related to inaccurate ownership transfers, inaccurate records, and other issues, casting doubt as to the actual mortgage ownership and certainly on MERS’ ability to foreclose.

The “Robo-Signing” issue is related to many MERS owned mortgages as well.

The challenges to MERS as far as ownership and the right to foreclose may become worse in the coming months.

What do these troubles mean to us, real estate investors?

In my opinion, MERS’s issues will mean that there will be more hesitation in foreclosing on certain properties. This will, of course, have the effect of increasing “potential foreclosure inventory”.

While there is a steady supply of foreclosed properties coming to the market, the backlog will likely increase the “window of opportunity” we have to obtain properties from the banks.

Some may argue that one of the undesired effects will be to delay the beginning of appreciation in certain markets. This is quite plausible. Other words to describe it could be as harsh as “delaying the housing recovery”. This may also be the case. The real estate investor, however, while wanting the economy to recover and the country to prosper, may also feel that prolonging the window of opportunity enables him or her to purchase more or create situations that allow more purchases such as borrowing funds or liquidating other assets in order to be able to buy properties on the cheap.

Since the essence of smart real estate investing at this juncture is to buy properties from the banks at very good prices (in some cases a fraction of the bare construction costs), and then rent them and wait for some recovery to occur, it may not matter much if the holding period gets prolonged by an extra year or even two. The global strategy remains the same and since the on-going cash flows are good, holding a bit more is hardly difficult.

However the ability to buy within this recessionary window is something that will disappear, perhaps for many decades, once recovery is in full force. As an investor I actually prefer a bit of a wider window in which to get these amazing bargains, at the expense of perhaps needing to hold them longer.
A link to the New York Times article is: http://www.nytimes.com/2011/03/06/business/06mers.html