Many real estate investors are looking to expand into new markets as backyard deals become scarcer and thinner based on demand for product, reduced HUD foreclosures and property values recovering from the mortgage meltdown. While new investors struggle to find local deals, seasoned and savvy investors are moving into new states to help quench their thirst for higher returns by leveraging their investment dollar.

Those investors exploring new markets are also looking to get out of “brick and mortar” and into the paper game. The ability to find deals six to 12 months ahead of REO investors (depending on the foreclosure time frames of states)—along with better pricing of deals—is driving note investors into new markets. While fast foreclosure states like Texas, Arizona and Georgia will always draw premium pricing, they may not be the best markets for an investor’s bottom line. When you add in the multiple exit strategies associated with nonperforming notes and the extra money available in specific states due to the Hardest Hit Funds, nontraditional markets are popping up as popular pastures in which to invest.

These 10 markets offer note investors the biggest bang for their buck based on several factors:

• Amount of available distressed assets to source.

• Availability of Hardest Hit Funds provided to the state from the Department of the Treasury for the Home Affordable Modification Program (HAMP).

• The state’s average rent vs. market value ratio (annual median rent average vs. average home value) or ARM Ratio as a basis for potential loan modification rates as associated with comparable three-bedroom home market rents.

#10 New Jersey

The Garden State has long been avoided by note investors due to the lengthy foreclosure timetable. While it still leads the nation in foreclosures at one out of every 559 homes, the expedited foreclosure time frame for noncontested foreclosures has led to a surge of fix-and-flip investors targeting vacant or zombie foreclosures for REO flips. Jersey ranks seventh in HHF allocation at $415 million, but lowest out of these 10 states on an ARM ratio at 5.8 percent ($1,363 average monthly rent/$281,000 average home value). With these types of numbers, focus on vacant primary or secondary homes where the borrowers won’t contest the foreclosure. The one market to avoid currently would be Atlantic City, as unemployment is rising and property values are falling due to trouble with the major employers (casinos) in the area.

#9 Nevada

Nevada has long been a target of California investors and homeowners looking for more affordable homes and rental properties. One out of 859 homes is still facing foreclosure even with the Silver State being a faster, nonjudicial foreclosure state and having over $202 million in HHF. While values have increased to an average of $257,000, rents have not rebounded as fast, resulting in just a 6.2 percent ARM ratio ($1,336 average monthly rent). This is why you see note investors choosing to foreclose as the primary exit strategy for nonperforming notes in Nevada.

#8 Florida 

The Sunshine State (or “God’s Waiting Room”) was once considered one of the worst markets to invest in as the 12-month-plus foreclosure time frame scared off many investors looking for faster results. The housing market has rebounded strongly with average values returning close to where they were in 2007, at over $203,000. Florida still ranks high on the current foreclosure list with one out of 738 homes facing foreclosure. The recent changes to how Florida distributes HHFs has investors looking to tap into the $1.1 billion in funds made available to modify homes. The reduced value over the past few years has led both domestic and international investors to put their money in Florida with the Miami and Tampa markets leading the way. While the ARM ratio has dropped to 6.3 percent as values increased faster than rents ($1,063), short-term, student and vacation rentals are attracting investors to find magical returns in the home state of the Magic Kingdom through appreciation, modifications and the expedited foreclosure time frames for noncontested foreclosures.

#7 North Carolina 

One of the more popular nonjudicial foreclosure states over the past years, North Carolina currently ranks sixth in funds allocated through the HHF program with over $700 million (and $223 million in the final round) given to the state to incentivize modifications. When you combine the faster foreclosure time frame with increasing values (average of $187,700), along with a rental rate of $1,063, you can understand why note investors are capitalizing on the 6.8 percent ARM ratio for modifications and fast foreclosures for REO flips.

#6 South Carolina 

North Carolina’s neighbor to the south has not been as popular a market for investors based on the 12-month judicial foreclosure time line. Nonperforming-note investors continue to see the Palmetto State as a popular destination in which to invest, as home values continue to improve (up to an average of $173,000) along with average rents ($1,047) and markets like Columbia, Clemson University and coastal regions gaining more traction. Investors who buy in Florida are also adding South Carolina to their wish list. With an ARM ratio of 7.25 percent, $317 million in HHF and one out of every 938 homes still facing foreclosure, “Carolina” is attracting more investors from across the country who are looking for deals.

#5 Indiana

One of the biggest states to rebound and attract investors from outside its borders over the past few years is Indiana. Many investors are targeting markets besides Indianapolis as a way to leverage their dollar by tapping into South Bend, Fort Wayne and other cities where values and job growth have both increased. With an average value of $170,000 and rent rates at $1,007, the ARM ratio of 7.12 percent gets an extra bump with the large amount of “zombie foreclosures” (10 percent of all homes). Nonperforming-note investors are converting these distressed assets into rentals, land contracts or providing owner financing to new home buyers who are recovering from the downturn. The Hoosier State continues to surprise investors with results throughout the state (and you don’t have to be from Hickory to have a winning investment).

#4 Tennessee

Memphis has long been an attractive market for landlords looking to improve their rental portfolios (85 percent rental market). But as the Tennessee markets have recovered (average home values of $162,000) and rents have increased to an average of $1,039, the Volunteer State is attracting more than just hopeful musicians. With over $302 million in HHF, an ARM ratio of 7.7 percent and a fast nonjudicial foreclosure time frame, Tennessee has note investors singing to a tune of high returns and avoiding the real estate blues.

#3 Illinois 

Illinois has had its fair share of problems for note investors, but the market has changed for the better. While problems with Cook County continue to plague note investors in the Windy City, the state’s expedited foreclosure time frame for noncontested foreclosures is helping note investors capitalize on the recently awarded $269 million in HHF and the appreciating home values in the $127,000 range. While one out of 878 homes is still in foreclosure, many note investors are buying outside of Chicago and using the average rent rate of $1,188 to increase their returns above the ARM ratio of 11.2 percent. Now if only the Cubs could win the World Series, all would be well in the Prairie State.

#2 Michigan 

The state once known as the ground zero of the foreclosure meltdown, this nonjudicial foreclosure state has risen from the ashes. With the help of state legislatures attracting new business, General Motors rebounding and an average appreciation in the Motor City of 24 percent over the past couple of years, it’s no wonder why many foreign investors are capitalizing on cheap real estate (average value of $124,000) and tapping into the above average rent rates of $1,146 to keep distressed owners in their homes and working to walk borrowers through the process of the HHF ($761 million given to Michigan including $262 Million just recently awarded) to score winning results. With an ARM ratio of 11.06 percent, you don’t have to be a Lions fan to score a touchdown—okay, so maybe just a Wolverine’s fan! Just avoid drinking the water in Flint!

#1 Ohio

The Buckeye State has definitely had an upswing in the past few years. Columbus, Akron, Dayton and Cincinnati are all showing appreciation and improvements in the housing markets. Add Cleveland into the mix (who knows what will be the effect of LeBron James bringing a title home) and many note investors are picking up multiple assets (average home values of $115,500). With one out of every 977 homeowners across the state still in trouble, there is plenty of opportunity for investors to leverage an ARM ratio of 11.1 percent to keep borrowers in their homes. The judicial foreclosure time frame can drag things out, but with the recent addition of $192 million in HHF, many investors are turning their attention to Ohio to drive up their returns. Cheap real estate, higher rental rates, government funds and appreciating values have created a perfect storm for note investors looking to invest outside their home state.


  • Scott Carson

    Scott Carson is founder and CEO of Inverse Investments, a Texas-based real estate investment company that focuses on buying pools of distressed assets on residential and commercial properties directly from banks and hedge funds. Carson also is a featured speaker and educator at dozens of investment clubs and real estate workshops across the country. 512-238-3018

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