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4 Things Real Estate Investors Need to Know About Foreclosures

Stocks in this article: BAC JPM WFC FNMA FMCC

RealtyTrac's analysis of foreclosures in the first quarter reveals a few interesting trends for real estate investors.

One, among properties actively in the foreclosure process (excluding bank-owned properties), 35 percent were properties identified as vacant or where the homeowner had moved. The percentage of owner-vacated foreclosure inventory was 50 percent or higher in several states, including Indiana, Oregon, Washington and Nevada

Homes that are vacant for too long start to deteriorate as the owner fails to maintain them. This lowers their market value and also brings down home prices in the neighborhood.

But the data also suggests that there are plenty of vacant single-family homes, which is good news for investors in the business of fixing up these homes and then renting them out or selling them. Institutional investors are betting big money on converting foreclosures into rentals with Blackstone (BX) leading the way.

Two, there was a 12% increase in "shadow inventory" - homes that have started the foreclosure process but have not yet been listed in the market. "Many of these properties will be listed for sale as short sales in the next six to 12 months, or go through the foreclosure process and eventually be listed for sale as bank owned in the next 12 to 18 months," according to the report.

That is good news for buyers in markets that are suffering from a shortage of inventory. Some of the biggest increases in unlisted foreclosure inventory were in New York, Florida, New Jersey, Washington and Illinois, according to the report.

Three, some of the foreclosure inventory is really old. About a third of the foreclosure inventory as of the first quarter was built before 1960 and this is up 11% from a year ago. Investors are unlikely to find these appealing because the costs to repair and maintain them are considerable.

That means more bidding wars for the more desirable properties -- the ones built after 1990, which account for another third of the inventory. These pose the least risk for significant maintenance and repairs, according to RealtyTrac.

The homes built between 1960 and 1990 which account for the remaining third need more work, but may be appealing to owner-occupants and investors as well.

Four, foreclosure inventory is increasing the most at the very low end and at the very high end. While 60% of distressed properties are homes valued below $200,000, the properties priced above $5 million saw a 126% jump from a year ago, while foreclosure inventory of homes with loan amounts less than $50,000 increased 62%.

-- Written by Shanthi Bharatwaj New York.

>Contact by Email.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.
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