During the economic slump in the late 2000s, the US housing market was flooded with distressed properties for sale. This made the strategy of buying distressed property super popular among investors at the time. Though there are far less distressed homes in the market today, buying distressed real estate still remains a potentially profitable venture for real estate investors.
So, What Is Distressed Property?
A property becomes ‘distressed’ when the owner is unable to keep up with tax bills or mortgage payments. Distressed property is usually sold below market value, thus offering investors an opportunity to get a great real estate deal.
Distressed property falls into three categories:
- Foreclosure – This happens when a property owner is not able to make mortgage payments and the bank seizes the home. Such a property usually ends up being auctioned to the highest bidder.
- Real estate owned (REO) property – An REO property is one that the lender owns after a failed foreclosure auction. As the property owner, the bank pays off tax liens and takes care of any necessary eviction.
- Short sale – This happens when a property owner sells their home for less than the amount owed on the mortgage. The lender or bank agrees to a short sale in the hope of recouping what is owed to them.
While buying distressed property can be a very rewarding venture, it is also very risky. However, anyone can learn how to buy distressed property while minimizing risks. A good place to start is with these 10 tips.
10 Tips That Will Make Buying Distressed Property Much Easier
1. Drive around to look for investment properties
One of the best strategies for finding and buying distressed property is to simply drive around neighborhoods where you would like to invest in real estate. Look out for properties with obvious signs of neglect such as newspapers piling on the porch, exteriors in need of paint, legal notices on windows or doors, no lights after dark, and overgrown yards. Once you have identified such properties, visit your local municipality office to get details of the distressed property owners or use Mashboard.
2. Check the multiple listing service (MLS)
Besides driving around neighborhoods, you can find distressed property listings from the MLS. Since a real estate license is required to access the multiple listing service, you will need to work with a licensed real estate agent. Look for rental properties that have been listed for more than 90 days. The longer a property has been on the market, the more motivated the seller will become.
3. Analyze the investment property
After identifying some potential investment properties for sale, you need to conduct an investment property analysis to check their viability before buying distressed property. You can use Mashvisor to analyze property based on metrics such as occupancy rate, cap rate, cash on cash return, and rental income. This will let you know if the property makes for a good rental property investment or not. You can also conduct a comparative market analysis (CMA) to get an idea of the value the property holds in the local housing market.
4. Get pre-approved for a mortgage
When it comes to distressed property, lenders and banks only want to deal with serious buyers. This is why you need to get preapproved for a mortgage before making an offer. Being preapproved will give you an edge over other real estate investors who are competing for the same deals. However, when seeking preapproval for distressed property loans, there are some pitfalls you need to be aware of. For example, if the home is too damaged and in need of extensive repairs, the lender could decline to finance the purchase.
5. Have some cash on hand
Besides getting preapproved for a mortgage, having a good amount of cash on hand will enhance your chances of buying distressed property. If you can make a down payment of 20-25%, the lender will take your offer more seriously. Having cash on hand will also allow you to pay for inspection and any major repairs you might need to make.
6. Don’t buy in a distressed neighborhood
A distressed neighborhood is one of the problems to watch when buying distressed property. If every condo in the neighborhood is vacant, or every house is going into foreclosure, it is a sign that the housing market is in a bad state. You might find yourself stuck with an investment property that only gets cheaper over time.
7. Find a realtor experienced in distressed property sales
Distressed home sales come with many unique pitfalls and problems. This is why it is important to work with a real estate agent that has experience handling such problems when buying distressed property. Ask for references to find out if the agent has closed on distressed home sales before. In addition, the realtor should have relevant certification from a recognized body such as the National Association of Realtors.
8. Conduct a home inspection
Foreclosures and short sales are usually sold ‘as is’, meaning that the seller will not take responsibility for any renovations or repairs at the time of transaction. Since you will be expected to handle any repairs as the buyer, a thorough home inspection is a must to determine the after repair value. The inspection will show you how much repairs would cost you to get the home move-in ready. Professional inspectors will look at details such as heating systems, roofing, pests, septic systems, and mold.
9. Get familiar with your state’s foreclosure laws
Every state has laws concerning buying distressed property. In some places, lenders have to go through a complex judicial process before foreclosing. In real estate circles, states that require long proceedings are called ‘judicial states’. Do some research on your state’s foreclosure laws before making an offer.
10. Be patient
Frustrations and delays are common when buying distressed property. Unlike a conventional transaction where you are just dealing with the property owner, distressed sales involve a lender that must approve the final sales agreement. This can be a lengthy process since you are dealing with the red tape of a large institution. You might have to wait for weeks or months before the lender responds to your offer.
While purchasing distressed real estate has many potential benefits, there are also some dangers of buying distressed properties. Applying the tips listed above will help you avoid the common pitfalls and enhance your chances of landing a great deal.