Foreclosures are way down from their peak; prices are up from their trough. And institutional investors waving lots of cash have been horning in on the competition for the ever-slimming crop of pickings.
For individual investors who may not have joined the first waves of bargain hunters after the crash, opportunities to score good discounts on homes have narrowed as the housing market keeps rebounding.
But they are still available in many markets if you know where to look, say real estate experts who are well-versed in distressed properties.
"Investors need to sharpen their pencils and do a good job analyzing every deal because the margins are smaller," said Rick Sharga, executive vice president of online real estate marketplace Auction.com.
"When prices were at the bottom you could afford to make some mistakes because potential profit margins were high. Now that prices are higher and margins tighter, you really do need to be careful," he said.
With margins tighter now, it has become more important to consider expenses such as maintenance, leasing costs, taxes, local assessments and homeowner association fees.
The good news is that investors will likely be able to sell at a higher price should they want to exit in the near term, as prices are still rising. Or if they buy to hold, they could benefit from rents that are climbing as inventory falls.
Which markets offer the deepest discounts on foreclosure homes? In a list of the top 20 such cities compiled recently by real estate website RealtyTrac, the Southwest Florida market of Fort Myers led with foreclosed-home prices 65% below the price of nondistressed homes, on average. Atlanta and Fresno, Calif., also delivered deep discounts: 57% and 62%, respectively. Rust-belt cities such as Columbus, Akron and Toledo in Ohio also made the list.
"In markets where you can buy properties from $75,000 to $125,000, you're not counting as much on appreciation as rental returns," Sharga said. "You could be looking at 15% to 20% margins on rentals.
Los Angeles skidded onto the list at No. 20, with a foreclosure costing 44% less than other homes. If you can afford to pay more for an investment home in that higher-priced market, "you can get a great discount," said Daren Blomquist, RealtyTrac vice president.
It's tougher to find a foreclosure in California since new legislation added requirements for lenders. But foreclosures that stalled in 2013 are apt to get pushed into 2014, increasing inventory, Blomquist says.
"The Inland Empire and Central Valley are still markets for investors to keep their eyes on because of lower median prices there," Blomquist said, adding that prices in Fresno are still under $200,000.
Florida also offers opportunities in select markets. Fort Myers and Tampa are two such examples. As one of the states that requires court approval on foreclosures, the process has been slow going, holding up inventory in the pipeline.
While foreclosure starts in Florida were down in 2013 from 2012, the Sunshine State still had the highest foreclosure rate in the U.S. in 2013, with 3.01% of all housing units marked with a filing, RealtyTrac says. Nevada was second at 2.16%.
Meanwhile, the number of scheduled auctions in Florida is rising. In December, they were up 60% from a year earlier, Blomquist says.
"That is an opportunity for (cash) investors," he said.
Miami led the U.S. last year in foreclosure activity among metro areas with populations of 200,000 or more, RealtyTrac says. But it's a tough market for individual investors competing with affluent foreign buyers who've added to sharp price gains, especially by the coast.
Finds Beyond Florida
States with high foreclosure inventory in the pipeline as a percentage of all mortgaged homes also include New Jersey, New York, Maine and Connecticut, according to property data firm CoreLogic (CLGX). But those states aren't necessarily the best investment choices, with prices too high or the demographics wrong.
"If you're looking for demographic growth, it's in the South and Southwest," said Sam Khater, deputy chief economist with CoreLogic. "If you're looking for affordable stock, it's primarily in any interior large market in the South, such as Charlotte and Atlanta. I would include Texas. Houston is very affordable. So is Dallas.
But the competition for bargains in Texas may get tougher. Institutional investors have "rotated" into Texas, Khater says. Not only is housing there relatively affordable, demand for it is growing. "Their number one criteria is demographic growth," he said.
Seeing rental potential from buying and fixing up distressed houses, big investment firms — Blackstone Group (BX) and Colony Capital to name two — bought more than 366,200 single-family homes between January 2011 and November 2013, says a report by RealtyTrac and Pintar Investment Co.
They moved first into collapsed home markets in the West, such as Phoenix and Las Vegas.
When deals in the West dried up after prices ran up, they moved to Southeastern markets, including Jacksonville, Fla., Winston-Salem, N.C., Macon, Ga., Tampa, Fla., and Lakeland, Fla. Memphis, Tenn., Charlotte, N.C., and Atlanta were especially popular spots in 2012.
Jacksonville is now "a hot spot for institutional investors," said Blomquist, as is Atlanta still. Jacksonville had the second-highest number of foreclosure filings in 2013 after Miami. But where big money goes, prices typically go up.
As investment firms have recently tamped down buying and turned to getting their properties ready to rent to generate cash flow, price acceleration in those markets has slowed, Khater says. The pace started slowing noticeably in July and August, around the same time interest rates began rising.
Investment money didn't get all the deals. Even picked-over Phoenix still has big and small investment money looking over the remains, observers say. "We're still at four times the normal level of properties in distress," said Khater.