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» VISIT US ONLINE @ DSNEWS.COM COVER STORY MARKET PULSE that today's values are based on simple economics: supply and demand. Let's examine some of the statistics around distressed properties. Currently, 1.3 million properties in the United States are in some stage of foreclosure (default, scheduled for auction, or bank-owned), according to RealtyTrac. The number of U.S. properties that received a foreclosure filing in May was 2 percent higher than in April but 28 percent lower than in the same month last year. At the same time, the number of homes listed for sale totals 933,318. Data from RealtyTrac also shows that about 3.5 percent of all homes purchased in the first quarter of this year were bought by institutional investors, with institutional purchases up 34 percent from a year ago. These investors entered the market wanting to take advantage of lower property prices. The idea was not to sell the properties immediately but to bank on a hold strategy that 1) allows for greater price recovery within the marketplace to maximize returns and 2) satisfies growing demand for rental space in large part due to the millions of people who've lost their homes to foreclosure over the past several years and as a result, are locked out of the credit chain for anywhere from three to seven years. While some institutional banks may not have their sights set on being landlords, many investors have found this to be the niche that best meets current consumer demands while providing positive cash flow. POINT— COUNTERPOINT Today, many investors are rethinking how to best maximize their investments and achieve the greatest possible return. Determining whether to invest in distressed properties is a question that can be answered by looking at the investor's strategic goals. Institutional buyers have become a dominant force in many markets, purchasing thousands of nonperforming assets each month with hopes of turning them into cash-flowing investments. Many of these buyers are waiting until the market rebounds further before selling the properties to turn a profit. In the meantime, they're renting out their properties to keep from holding onto an asset with negative cash flow. Through several methods—including buying bulk deals, purchasing properties at auctions, scouring local multiple listing services, and acquiring companies with desirable portfolios— these investors have amassed billions of dollars' worth of distressed homes. While some industry experts are concerned that property values are artificial and undergirded by increased demand from these institutional investors, the reality is MARKET PULSE T he rapidly changing marketplace is propelling mortgage companies to reconsider the true value of distressed properties and whether they are solid, long-term investments.Several industry reports indicate increasing home prices around the country; others concurrently point to a decrease in the number of distressed properties for sale. According to the June 25 release of the Standards & Poor's Case-Shiller (S&P) indices, home prices showed increases of 11.6 percent and 12.1 percent for the 10-city and 20-city composites, respectively, during the 12 months ending in April. Cities including Atlanta, Dallas, Detroit, and Minneapolis posted their highest annual home price gains since S&P started tracking the information. The agency has recorded positive year-overyear returns for at least four consecutive months, with average home prices across the country returning to their early 2004 levels. INDUSTRY INSIGHT Tenacious investors who look beyond listing prices to determine the true value of nonperforming assets can reap a wealth of long-term rewards. A Viable and Valuable Venture There is still a stigma around foreclosure. Many consumers do not want their neighbors to know they can no longer afford their home. This makes them prime candidates for several other possible workouts. If a modification or refinance is not an option, there are a number of alternatives that servicers did not, or could not, offer 10 years ago. Consumers can opt for a short sale, deed-inlieu, or deed-to-lease, just to name a few. These opportunities give them the chance to stay in a community where they have roots, while allowing the lender to receive income from the asset. When homeowners can remain in their preferred areas—attend the same church, avoid sending their children to a new school, and stay close to friends and neighbors, for example—it creates a win-win situation for all parties involved. Distress in the marketplace and the lengthy foreclosure process actually contributed to the availability of these foreclosure alternatives. Investors often found the wait time to sell foreclosed properties was much longer than they originally anticipated, making it difficult to push homes through as REO. In some states, it can take a year to a year-and-a-half to complete a foreclosure. In the meantime, new programs and creative alternatives have benefited everyone. 61