REO Market Could Reap Significant Benefits

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A new study out from CoreLogic finds big benefits in the REO market for investors looking to rent.

The emerging market for converting REO properties into rentals could net as much as $100 billion in 2012 for investors, according to new data from CoreLogic.

With assistance from the government’s REO conversion plan, the research firm is reporting that the Midwest and Florida are in particularly strong positions to benefit from the “strong and vibrant” rental market, which features “stable rents, low months’ supply and a healthy pace of closings” that all contribute to a potential return far beyond today’s real estate climate.

The Midwest and Florida, CoreLogic reported, are in a strong position because of their high cap rates and large supply of REO properties. And, as HousingWire pointed out in a recent summary of CoreLogic’s findings, the capitalization rates, which are the most cited metric for measuring a property’s profitability, are incredibly high in the many local markets comprising those two sectors, particularly in West Palm Beach, Fla. (12.4 percent), Cleveland (12.3 percent), Chicago (11.6 percent) and Las Vegas (11.4 percent). The lowest-rated cap rates were in Honolulu (5.4 percent), Raleigh, N.C., (7.3 percent) and Austin, Texas (7.7 percent).

CoreLogic said in its study that the steep discount rates in those high-cap markets are the big reason for their potential profitability.

“If bulk sales do come to market, investors are likely to gain some concessions that are deeper than 30%,” CoreLogic said. “If the price discount rises to 40 percent to 50 percent, cap rates would increase to between 10 percent and 12 percent.”

As the Federal Reserve has noted, the pattern of foreclosures in today’s real estate market has had an ironic effect on the success of the rental market. As homes have entered REO status and contributed to the robust supply of cheap rental properties for investors, the former homeowners who were foreclosed on have entered the rental market. In the last five years, the Fed estimates that three million people have followed this trend, which is greater than the net increase in renters from the ’90s through the housing boom.

And as CoreLogic points out, government initiatives will keep the opportunities coming to satisfy that new rental demand.

“Given the government’s emphasis is shifting to the viability of converting REO housing stock into rental properties, there will be plenty of opportunities for large investors to participate and scale in a manner that previously was difficult,” CoreLogic said.

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