Guide to investing in distressed properties for profit

distressed properties

The term distressed property refers to a residential property on the brink of foreclosure or a property already owned by the bank. Investors often seek such properties out to buy them at a discounted rate.

There are three primary reasons for a distressed property sale. Let us take a quick look at these.

  • Foreclosures: Distressed properties are often the result of foreclosures or pre-foreclosures. This happens when the homeowner fails to meet the monthly mortgage payments. So, in such a scenario, the bank grabs hold of the property or forecloses on the home. That said, in case of foreclosure, lenders try to sell the property off quickly.
  • REO properties: Homes that don’t sell at an auction are referred to as real estate owned properties. These are considered distressed properties. Lenders of REO properties do not like the idea of making repairs or maintaining the property, so they are often willing to sell it off at a discount.
  • Short sales: Homeowners facing foreclosure may at times be willing to opt for a short sale. This typically happens when they owe more on the mortgage than the current worth of the property. In such a scenario, short sales present a tremendous opportunity. A short sale happens when a buyer buys the property for less than what the existing owner owes on the mortgage. This allows the latter to avoid foreclosure.

Buying a distressed property: Should you go for it?

Distressed properties are attractive as they allow buyers/ investors to make the purchase often below the prevailing market rate. Such a move can be quite lucrative in areas where property prices are generally high. So, these allow investors to lay hands on different properties at a reduced rate and sell it back at a higher rate. In fact, at times, banks may lower the mortgage and interest payments on the distressed listings – happy to have someone take the property off their hands.

Buying a distressed home comes with its own share of challenges, but then it also has its own perks. The fact that they are available at a great deal and they present investors with the option to make necessary repairs and flip the house or rent it out, is what makes these so lucrative an option.

How to find distressed properties?

Here are a few different options on how to access distressed property sales.

  • Auctions: Banks and lenders often opt for distressed property sale through auctions, thereby selling off probate properties at low prices. 
  • Tax records: As the name implies, public information can serve as a guide to look up homeowners who are delinquent on property taxes or facing pre-foreclosure in general.
  • Multiple listing service: When it comes to gathering info on the status of properties, MLS works on a state-to-state basis and offers a comprehensive data on the same. So, any property listed for more than 90 days means the seller is highly motivated to sell it off.
  • Probate court: In the event of a death, divorce, or bankruptcy, all matters of probate sale such as liquidating property assets, are handled by the probate court.
  • REO properties and bank listings: This is one of the best options for purchasing distressed properties as bank and REO properties sell for a much lower rate, allow general inspections, and won’t put you on the hook for evicting occupants.

Things to consider while opting for a probate sale

A home may be available at an attractive price point and even involve minimal repairing, but if it’s in an area surrounded by similar distressed properties, don’t expect to sell it at a high premium.

Most investors don’t prefer playing the long game on probate properties and you shouldn’t either. Hire someone for a home inspection and don’t rely on what the seller inspector says. Most often, the seller party only talks about cosmetic changes and doesn’t mention any structural damage.

Understanding the foreclosure process makes a huge difference in whether or not you’d be able to turn a profit on a distressed home. This presents a unique opportunity for investors, but average home buyers should probably avoid these. People who do not have experience in dealing with probate properties, end up biting off more than they can chew. Thus, in such a case, they’d be better off taking the traditional route while purchasing a home.

Key takeaway for home investors

Most real estate investors either love investing in distressed homes or stay away from it, and this decision of theirs is largely due to their good or bad experience while experimenting with it, or based on what they’ve heard from peers. However, investing in probate sale isn’t so black and white. You must keep your eye open and make an informed decision so that you can sell it at a higher price.

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