Sure, there are going to be local families that will pay $100/sq ft to be in an older area, but this is the exception and not what any investor would pay. If you can't cash flow $300-$500/month off your investment property you have paid too much. Offer less.
Many areas of Merced are rife with drug users/sellers/meth labs and people on assistance. The pool of potential tenants is bottom of the barrel.
I am a retired California Certified General Appraiser and licensed California General Contractor and have been investing in real estate since 1965. Have also been silent owner in 2 real estate companies. I know real estate values. I have property in Merced, so I do know the area and investment conditions.
If you are an out of area investor it is stupid to invest in Merced. The realtors/property managers can rob you blind. It's nothing for an out of area owner to be forced to spent thousands repairing a house each time it's re-rented. The property managers love this and make tons of money off non-locals.
Merced is not the place to invest. Their market values may take 20 years to recover. Way too many out of area owners have walked from their investments and still are in 2011.