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MARKET OPPORTUNITY FOR INVESTORS Low Risk* Medium Risk* Speculative* Dangerous* ATlANTA, GA COlORAdO SPRINGS, CO AlbANY, NY PROVIdENCE, RI AUSTIN, TX TAMPA-ST. PETE, Fl ClEVElANd, OH ROCKFORd, Il lAS VEGAS, NV HONOlUlU, HI dUlUTH, MN ATlANTIC CITY, NJ MERCEd, CA lOS ANGElES, CA ST. lOUIS, MO MANSFIEld, OH MIAMI, Fl OMAHA, NE bUFFAlO-NIAGARA FAllS, NY dECATUR, Il Source: HomeVestors and Local Market Monitor *Assessments based on housing demand and projected price movement. People who have been homeowners tend to want the amenities that come with having a single-family home instead of living in an apartment complex. They do not want to share walls or common areas or give up having a backyard and private space. This underlying desire creates an opportunity for investors who have the ability to purchase properties in areas where there are a large number of potential renters. Investors purchasing homes in bulk are not without competition, however. With a large number of apartments for rent in today's market, they come with deals such as no security deposit, free rent for the first and last month, or utility discounts—and such offers are enticing consumers who might otherwise gravitate toward renting a single-family home. Some private equity firms are opting for a deed-to-lease alternative, in which they reclaim the deed and allow the borrower to lease the home for a period of time. Many deed-to-lease programs are developed to help borrowers improve their impaired credit scores by reporting regular, ontime rent payments. Investors see deed-to-lease as a means of receiving some sort of yield from the rental income. It is also a positive because the home remains occupied, which means one less vacant property that's likely to become a source of blight and invite crime into the surrounding neighborhood or community. It is a good strategy for companies with the willingness and ability to take on the role of landlord. Not for Every Company There are several factors of concern when considering the value of owning distressed properties. Companies know that owning a house without cash flow is expensive. If a company has 62 a large portfolio of nonperforming assets, the carrying costs of properties that are not rented oftentimes offsets any rental yields that are realized. The maintenance of a rental home can also prove to be expensive. As any homeowner can attest, it is not uncommon for a furnace, air conditioner, or roof to require repairs that translate to out-of-pocket payment. To help mitigate this scenario, companies should research where to buy rental assets and consider the rental rates in that area. Hot areas include Phoenix; Atlanta; and Charlotte, North Carolina, to name a few, because they were areas of the country hit especially hard by value depreciation. Other factors in determining markets ripe for strong returns on distressed property investments include those with robust economies, low unemployment, and the potential for home price appreciation. Added Value in Distressed Assets Investors should keep in mind that there are a number of modification and refinance programs available for borrowers who want to repay their mortgages. According to HOPE NOW, there were an estimated 70,000 permanent loan modifications in April. The industry's continued focus on homeownership preservation means investors could easily, or at least without great pains, start receiving cash flow from assets purchased as nonperforming. Motivated consumers now have more options available to them, whether through government or private programs, for restructuring their payments or working out an alternative resolution that's beneficial to both the investor and borrower. With home prices rising, investors must determine if the values are sustainable or inflated due to demand. Prices are rising because there are fewer affordable houses available, on the market. This has led investors to dig deeper into their pockets to obtain target properties. The shortage of inventory and influx of competitive buyers are driving up market values. One of the hardest-hit areas in the country, Arizona, experienced a steep increase in home values during the last 12 to 18 months. Prices rose 16.9 percent during the 12 months ended in May, according to CoreLogic's home price index. But even if prices there maintained the current double-digit growth, CoreLogic says it would take Arizona another 35 months to get back to its historical highs for home prices. Even with what CoreLogic describes as "jaw-dropping" price appreciation over the past 24 months, prices in Arizona are still 45.6 percent below the peak hit more than seven years ago. Trulia says asking prices in Phoenix in July were 23.8 percent above July 2012. While these numbers may be a bit inflated from investor activity, the values can't be completely discounted, and it's unlikely that they'll recede, even if buyer composition changes drastically. In fact, home prices throughout Arizona are likely to increase further because more individuals are now getting into the market and buying as well. All in all, there are plenty of indicators of home price appreciation. With the slight increase in interest rates, potential homeowners and investors alike who were waiting for the very bottom of the market are now jumping into the game to take advantage of still historically low rates. In addition, those who have been paying their mortgages on time are better able to refinance for better rates now that they are regaining lost equity and coming into more acceptable parameters for credit in this post-subprime world. There is a lot to consider when looking for the true value of a distressed property investment. While holding a number of these assets may not be for every investment-minded individual or institution, there can be benefits to doing so. Meeting the growing needs of financially challenged consumers has led investors to get creative while allowing servicers to effectively mitigate losses. Research and market awareness will allow investors who are willing to wait for increased home price appreciation to see the true value of these properties. Along with being a virtue, patience can lead to financial benefit. Brent Taggart is SVP of client relations for Green River Capital and has worked in the real estate and mortgage trading industries for more than 13 years.