What Is a Distressed Property?
A property is distressed when the owner can no longer keep up with the responsibilities of homeownership, most notably their financial obligations. In most cases, a distressed property is either at risk of foreclosure or the owner has already defaulted on payments. They may also owe back taxes or have outstanding liens on the title, and the property’s condition may be deteriorating as well. There are several different types of distressed properties, each offering unique investment opportunities. Here is a look at a few common examples.
Types of Distressed Properties
- REO Properties
- Short Sales
The foreclosure process begins when the owner has failed to make payments for several months, and the lender is taking the necessary steps to repossess the house. Investors also commonly purchase homes in pre-foreclosure, which means that the owner has missed a few payments but not enough to begin the formal foreclosure process (which is usually 3 – 6 months after the first missed payment). When a home is facing or currently in foreclosure, owners are typically willing to make a deal to avoid ruining their credit.
2. REO Properties
Real estate owned or REO properties are those that have already gone into foreclosure and been repossessed by the bank. The bank will first attempt to auction it off, but if no one bids on it, it will remain on their balance sheets until they find a buyer. As a result, REO properties are usually sold at a steep discount. But good deals tend to go quickly, so there may be a reason the property didn’t sell at auction. However, if you’re planning to do a gut renovation anyway and just need a cheap home in a particular location, REO properties are a smart bet.
3. Short Sales
A short sale is when the owner sells their home for less than the remaining principal. Short sales usually happen when the house is going into foreclosure, but the homeowner wants to avoid destroying their credit. They will work out a deal with the bank that allows them to walk away from home without having a foreclosure on their record. In this case, the lender must agree to the deal because the price is less than what they currently owe. But many banks will agree to short sell the property to recoup some of their loss and avoid wasting time with a formal foreclosure process.
How To Find Distressed Properties
1. Check Public Records
A good place to find distressed properties is by checking the public records. You can check court records to find out who’s late on their mortgage and who is going into foreclosure or declaring bankruptcy. You can also check the county assessor to determine who is behind on their taxes. If the owner has missed mortgage payments or has unpaid taxes, the property will likely soon be distressed.
2. Go Driving For Dollars
Driving for dollars is a strategy where you drive around different neighborhoods looking for properties showing signs of physical distress. If the home looks run down or abandoned, the owner is likely behind on the mortgage or can’t pay the taxes. You can start in your own neighborhood or drive around any markets where you may want to buy a property. It may take some time to find a decent prospect, but if you’re patient, you can often find a diamond in the rough that other investors have missed.
3. Look For REO Property Listings
Banks publicly advertise their REO listings, so you can quickly check their websites to find distressed properties they own. You can usually find the listings on the bank’s website or check the MLS for any REO listings. You may also want to check the databases of Fannie Mae, Freddie Mac, and HUD because they also foreclose on homes and offer REO properties for sale.
4. Work With a Wholesaler
Another option is to work with a wholesaler and have them scout distressed properties for you. Wholesalers earn a fee by finding properties, getting them under contract, and then selling them to investors. While you will have to purchase the property at a slight markup, good wholesalers will find discounted properties that allow everyone to make money. So, this is a viable option if you don’t have the time and energy to search for deals on your own.
5. Search the MLS
Another valuable source of information on any home, including distressed properties, is the MLS. You will need a real estate license to access the MLS, meaning you will likely have to work with a realtor to gain access to these listings. But if you’re willing to pay the commission, the MLS can be an excellent resource for finding unique investment opportunities.
6. Use a Distressed Property Website
There are also real estate websites where you can buy distressed properties online. These websites are an excellent resource because you can find great deals with all kinds of information about the listing, such as the number of bedrooms and bathrooms, the square footage, and any other relevant data points. But be sure to do your research and try to request a tour in person because you can’t always believe what you see online.
7. Attend a Real Estate Auction
REO property auctions are another great place to snag a distressed property. Once the bank has foreclosed on the home, they will attempt to sell it to the highest bidder at a property auction to get it off their books. If you know what you’re doing, you can often get a great deal on a distressed property by buying it at auction. But be aware that they move quickly, and you likely won’t be able to view the property until after you’ve purchased it. Plus, there’s lots of competition, and you’ll be expected to come up with the funds shortly after the auction. So be prepared and don’t get carried away bidding on a dud.
8. Check Probate Courts
The probate courts distribute a person’s assets after they’ve passed away. They are the ones who are responsible for executing the deceased’s will, which includes transferring any real estate to their heirs. If the property happens to be distressed, the heirs will likely want to sell it as quickly as possible. You can find probate leads by checking the public records at the local county courthouse. But make sure to have a gentle approach when contacting leads because they may still be grieving.
Distressed Real Estate Investing Tips
Understand What You’re Getting Yourself Into
When buying distressed properties, it’s essential to be aware that they will likely need significant renovation. Chances are that if the previous owner fell behind on the mortgage, they haven’t kept up with the maintenance or may have even done more damage to the property on the way out. Also, there may be an issue with the title, such as unpaid liens, that you’ll have to clear up. So be aware that when you buy a distressed home, you’ll likely need to make a significant investment to get it to market standards before you can sell.
Be Patient With Sellers
Going through a foreclosure is never easy on anyone, especially when it’s coupled with financial problems and other life stressors. So be patient with sellers, and don’t be overly aggressive. Although you want to get the best deal possible, you’ll likely make things easier on yourself by offering to be a solution to their problems rather than taking advantage of them.
Have a Solid Exit Strategy
It’s essential to have a solid exit strategy laid out before you make a purchase. Unless you’re planning on living in the home yourself or renting it out, you’ll want to sell it at some point. So, make sure you have a clear plan to rehab it and market it to homebuyers before you make a purchase. The longer you hold onto it, the more problems can potentially arise. So, map out your investment strategy beforehand to know what price point and location work for your bottom line.
Use Multiple Different Methods
If you want to build a consistent pipeline of leads, use as many different methods as possible. You may try all of them and then narrow it down to two or three that are the most consistent. But it always helps to have many techniques in your arsenal, so if one method slows down, you can still find deals.
Should You Buy Distressed Properties?
Distressed properties offer the best deals for investors, so if your goal is to flip houses or invest in real estate using the BRRRR method, this is the way to go. If you’re just an average homebuyer looking for a primary residence, you’ll want to stick to the typical properties being offered at market value. But if you’re looking to make money investing in real estate, buying distressed properties is one of the best ways to do it.
You need to buy properties at a significant discount from what they would sell for in market condition to make money rehabbing houses. But, unless the seller is completely clueless, they aren’t going to give their home up at a significant discount if they are in a position to sell it for what it’s truly worth.
Distressed properties provide the best circumstances to get a great deal and flip it for a profit. But remember that they will almost always require extensive renovation, and depending on how you find the sale, you may not get to view the property before you buy. That means the property can have significant issues such as termites, bedbugs, title problems, cracked foundations, leaky roofs, etc. So hope for the best but prepare for the worst if you’re using this strategy.
Finding Distressed Properties Bottom Line
Finding distressed properties is likely easier than you think, but you’ll have to be patient and learn to identify good deals if you want to be successful. Just because a property is being offered at a discount doesn’t mean it’s a good deal, and if you aren’t careful, you can easily buy a house that costs more to purchase and rehab than it will make when sold. So, be sure to crunch the numbers carefully and do your homework before making a purchase. Buying distressed properties isn’t as simple as purchasing regular homes. Make sure you understand the associated risks.