Whether you live in Washington, Los Angeles, Las Vegas, San Diego, Chicago or Seattle, you have probably come across houses with a warning sign on the front yard that the real estate property has been condemned. This guide will shed some light on what condemned properties are and whether or not you should invest in one.
What Does It Mean When a Property Is Condemned?
Property is condemned when government authorities decide that it is unfit to reside in. If there is anyone living in the home when it is condemned, they will have to move out.
A single family home, condo, multi family home or apartment could be condemned due to a number of reasons:
- The utilities in the property (power, gas, and water) have been discontinued.
- The property has been vacant for a lengthy period (usually 60 days or more).
- A home inspection reveals specific hazards (such as mold) that make the property unsafe to reside in.
- The property is located in a place set aside for public amenities such as a water reservoir, park or freeway. In such a case, the federal, state or local government has the right to seize the property (according to the principles of eminent domain). They can then modify or demolish it to pave the way for projects that will be beneficial to the public.
When a property is seized for public use, the property owner must be justly and fairly compensated for their loss. In the case of disrepair, the property can be removed from condemned status if property owners make the necessary improvements.
So, should you invest in condemned properties? Buying condemned properties is a rental property investment strategy worth considering. You can find cheap houses for sale, buy them below market value, renovate them, and then convert them into a rental property. You could also implement the fix and flip real estate investment strategy using these investment properties.
5 Tips for Investing in Condemned Properties for Sale
Condemned properties are not without risks. If you do wish to invest in one, follow these 5 tips:
Learn how to find condemned properties
There are many strategies for finding condemned houses. You could choose to drive around neighborhoods looking for dilapidated buildings or houses with a ‘condemned’ sign. However, it might be difficult to establish if a building is condemned by just driving by. This is why you should network with neighbors, contractors, real estate agents, and other people that could give you leads on a potential real estate deal.
Alternatively, you could look at your local government’s list of condemned properties, either by visiting their offices or checking their website. However, since this information is also available to other real estate investors, you are likely to face stiff competition from other bidders in your attempt to invest in condemned properties.
Related: 6 Insider Tips for Finding Investment Properties
Consider non-conventional loans for financing condemned property
Most traditional lenders such as banks only lend based on the current condition of the investment property. The costs of fixing up the property are usually not included in the loan. To finance a condemned property, it would be advisable to work with a private money lender. Many non-traditional lenders offer loans based on the value of the house after building or rehab. These loans are often set up for the short term, thus making them ideal for fix and flip real estate.
Identify encumbrances, liens, and other problems
Before you rush into signing a deal for condemned property, ask yourself the following questions:
- What specific violations resulted in the property being condemned?
- Are there any encumbrances or liens on the investment property?
- Will the government approve a settlement?
Make sure the title is clear before signing on the dotted line. Don’t forget to check if the investment property is zoned for residential use.
Related: Due Diligence in Real Estate: 9 Crucial Steps
Prioritize repairs
Deciding what repairs to focus on is very important when investing in condemned properties. Home inspectors, contractors, and real estate agents can come in very handy in helping you decide the most economical way to repair a condemned house. The idea is to spend as little as possible to boost your chances of making a good return on investment from the flip or cash flow if you rent it out. Necessities such as code enforcement, structural and safety issues should be placed at the top of your priority list.
Sell or rent out
The end result of fixing a condemned house doesn’t have to be perfect. It should just be good enough for selling or renting out. Once you have renovated the investment property to make it livable, you can then start marketing it.
Here are some tips for listing your investment property for sale on sites such as the MLS (Multiple Listing Services) and the Mashvisor Property Marketplace:
- Describe the investment property accurately – Be sure to include details such as the number of bathrooms, bedrooms, balconies, porches, and square footage.
- Describe the area – Potential buyers will be interested in knowing more about the area the property is located in. Mention neighborhood amenities that would grab their attention such as train stations, swimming pools, parks, malls, hospitals, and local schools.
- Omit red flag words – Words such as ‘fixer’, ‘TLC’ or ‘cosmetic’ could pass on a negative message about your investment property.
- Use proper spelling and grammar – This will make your description easy to read.
- Use great photos – A great written description should be accompanied by clear photos of your investment property. Be sure to include photos showcasing all the spaces of your property. Use angles that make your property appear open and spacious.
Related: Listing Your Home for Sale: A How-to Guide
If you do wish to rent out the investment property, you should perform an analysis before buying it to ensure it can generate positive cash flow. Mashvisor provides real estate investors with rental property analysis tools, among them a rental property calculator, which you can use to assess the investment property’s rental income, expenses, cash flow, cash on cash return, and occupancy rate. Give it a try now by signing up for Mashvisor and entering the address of a condemned property to analyze it.
A Few Final Words
If you buy condemned properties the right way, you can have a good real estate investment which will generate positive cash flow.
However, the greatest risk of buying condemned property for sale is that the cost of making repairs could end up being much higher than the property’s value. If the home was condemned due to severe structural problems, you are likely to lose a lot of money rehabbing the property.
In addition, buying a condemned property could result in additional liability if the problems of the home are affecting neighbors. For instance, if a problem of rodent infestation ends up affecting neighboring homes, then the owner of the condemned property will be held liable.
Before buying a condemned house, carefully weigh the pros and cons to establish if the investment is truly worthwhile.