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Should You Buy a Distressed Property?
The world of investment is so diverse that it offers a limitless choice for investors. Many people still prefer to put their money on the safest bets. Indeed, real estate is still one of the safest options and provides a long-term profit.
Talking about real estate, we have to say that some people choose to invest in the so-called distressed properties. Despite the fact the process of obtaining a distressed property is no easy feat, most experts claim it’s worth the efforts. The main reason – the price is cheap.
Let’s take a look at this type of investment, the benefits, the risks. After that, you will find a few practical steps showing you how to actually buy one.
What Is a Distressed Property?
A distressed property is a home that is facing the risk of foreclosure. Foreclosure is a procedure during which the lender takes your home and sells it so that they can recover their money. Many things can lead a bank to this radical measure.
Usually, this happens when the borrower stops making payments on their mortgage. Additionally, other debts and unpaid taxes can also lead to foreclosure.
Why Are They So Attractive?
The main thing is their price. When property is in foreclosure, the lender actually cannot do anything with it. That’s why they sell it and want their cash back so that they can continue lending money to other people. To achieve that, distressed properties are usually pretty cheap compared to their market value or initial price.
However, lenders don’t use the money to repair the property in order to sell it in a better condition. They try to get rid of it as soon as possible even at a loss.
How to find them?
Check with your lender and ask them for a list where distressed properties are listed.
The Different Aspects of Distressed Property Investment
The first thing a buyer should do is to find the best deals on the market. Only by comparing different offers will you be able to choose the best. Having all the information about the property is the best you can do. Nevertheless, this might be an expensive journey which will also take a lot of time.
Why don’t you contact an experienced real estate agent? Certainly, they will have all the information concerning the home you’ve chosen. They will tell you if the foreclosure has ended or is still in progress. Perhaps, the costs are too high for the ex-owners and they cannot keep up with them. Realtors would try to make sure both sides are happy and it’s a win-win situation since they represent both parties.
Secondly, a buyer should never forget that the lender has not invested a single penny in these homes. This means that the condition most probably won’t be perfect and you have to put some money aside for repairs. Be ready to calculate the necessary expenses and see if it’s worth the purchase. If the condition is really bad, maybe the cheap price won’t justify the financial resources you are willing to invest.
Useful Tips for Buying Distressed Properties
Fasten Your “Seatbelt”
Don’t expect the process to be easy and pleasant. There are many a setback on the way, so let’s see the biggest challenges down the road:
- If you want to purchase a distressed property, most probably you need a mortgage of your own. However, that’s not certain. Usually, banks have requirements for the property and the one you want might not be able to qualify.
- Be ready for serious delays. Often, the buyer cannot use his property because of delays. This situation occurs due to several reasons:
- The home is still occupied by the previous owners.
- The communication with the bank that owns the property is very slow. Sometimes lenders might delay potential buyers for months while preparing their reply.
- The house has other encumbrances such as other loans, unpaid taxes, liens and more. This will also cause a significant delay.
- Not the best area – When shopping around, a buyer can come across the best possible house. However, the neighborhood is not the one he wants. Don’t give up, try to find the balance between the perfect home and perfect area.
- Speed up the process – Some properties may qualify for the Home Affordable Foreclosure Alternatives program (HAFA), which can speed up the procedure. Under the program, the lender is obliged to answer within 30 days of submitting your offer.
The next section will be dedicated to various tips on how to make the process easier, more enjoyable and most importantly successful.
Work With an Experienced Realtor
In one of the previous chapter, I suggested using the help and assistance of a real estate agent. However, that’s not enough. Make sure you find one that has solid experience with distressed properties. He or she will definitely know the ropes and will help you find the best offer.
Certainly, you can look for not only experienced but also qualified and certified agents. The National Association of Realtors has launched a program (Short Sale and Foreclosure Certification Program) through which it certifies brokers. In order to pass successfully and obtain a certificate, real estate professionals should receive legal training on laws related to foreclosures and short sales.
The Distressed Property Institute also provides professionals with the opportunity to get an official certificate.
In my opinion, the crucial factor is definitely the experience of the agent. You can check that and if they have done this before at least 5-6 times, maybe this is your agent.
One of the ways in which you can achieve that is to find as many offers as possible online. Keep in mind that usually, homeowners do not define their homes as distressed. Therefore, it will be difficult for you to actually identify them. There are, however, specialized websites that list distressed properties but they will charge you for using their services. For instance, realtor.com offers a free page where you can find some info on distressed properties.
Another option is simply to drive around and look for houses that have signs indicating this home is distressed. If there is an indication that the property is not occupied and is not in good condition, then this might be your deal. Once you have chosen a house, you can go and check with a tax assessor who has all the information. Sometimes, homeowners won’t agree to sell the property so it’s advisable to find an agent who can contact them on your behalf.
Negotiate The Price
You can actively participate in the process of negotiating the price. You have to give it a try, don’t you? Especially if the chosen property is in bad condition and needs lots of future investment. This is where you can start from, homes in poor condition don’t fare pretty well.
If this fails, you can ask the lender for an appraisal of the distressed property. An appraisal is when the lender fully evaluates the value of the property thus determining how much money they can lend you as a borrower.
Don’t Invest In a Distressed Area
The area in which the property is located is extremely important. If you purchase a distressed home that is in a normal neighborhood, it will prove a great choice in the long run. Why?
As we know, the price of the property will be pretty low and if you manage to find a good neighborhood, you can win. For instance, you can even buy a house, renovate it and if the location is decent, sell it at a higher price and make some profit.
On the contrary, a poor area will not help your investment since the equity of the house will not grow in the future.
Be Prepared To Make Repairs
The condition of foreclosed properties is more often than not quite bad. In many cases, the previous owners had to leave their home against their will. Occasionally, they damage the property when leaving the house out of sheer anger and feeling of injustice. What’s more, these houses will stay unattended for quite a long time before they have a new owner. This means that they can be burgled or damaged by vandals.
It’s essential to have a contractor with you before buying the house. He will calculate approximately the costs of any future repairs and renovation.
This should not discourage you, however. Keep in mind that whatever you buy, you need to invest an amount of money to make it your home – new furniture, repairs, renovation, etc.
All in all, buying a distressed property sit’s a double-edged sword. There are many challenges to face and many battles to win. Furthermore, it requires a serious amount of effort and dedication on the buyer’s part. Nevertheless, it might be the cheapest way to getting the dream home in the dream neighborhood.