Distressed Property: What It Is And How To Find One
Andrew Dehan5-Minute Read
January 20, 2021
If you’re house hunting, you may be on the lookout for a good buy. Depending on where you live, COVID-19 may have caused an increased in foreclosed homes. States where foreclosure moratoriums have expired or were never passed have seen an increase in foreclosure due to the national disaster.
You may be in the position to buy one of these homes. Whether you’re looking on a deal for a primary residence or an investment property, a distressed property could be a great buy. It could also turn into a poor investment. The ideal buyer for a distressed property is prepared for uncertainty, with the skills to handle repairs or the money to pay a contractor.
This article will lay out what a distressed property is, the pros and cons of buying one and how to find them.
What Is A Distressed Property?
A distressed property is real estate that is in the foreclosure process because the homeowner cannot financially or physically maintain the property. Distressed properties are often priced to sell, whether by a lender or by the owner due to significant life events.
Buying a foreclosed home or a home in process of foreclosure can be a much different experience than a traditional real estate purchase. To avoid foreclosure, a homeowner may list the home as a short sale. The sales often occur due something such as death or divorce. Lenders may also list a foreclosed property as a short sale to try to get it off the books.
If the distressed property forecloses and the bank takes ownership, it’s referred to as an REO property. REO stands for Real Estate Owned. This is the last stop in the road in the foreclosure process for properties. At this point, it’s possible a short sale has been tried and the property may have been to auction. These properties have been vacated and are sold “as-is.”
Pros And Cons Of Buying A Distressed Home
There are pros and cons of buying a distressed home. It’s important to weigh these before considering buying one of these properties. Each of these could be true to varying degrees depending on the property and where it is in the foreclosure process. For instance, a property just put up for short sale may have less neglect than a vacated, bank-owned property.
Benefits Of Buying A Distressed House
The benefits of buying a distressed property are evident. The big draw here is that properties in distress often sell for lower prices than what they’re appraised at. Everyone likes a deal and distressed properties offer a lot of potential. For a new home at a great price, a distressed property could be right for you.
If you’re looking for real estate investment with a higher chance of ROI, a distressed property could be the ticket. Some of these properties may only require a small amount of maintenance or repair and could be flipped for a profit. Short sales and buying at foreclosure auctions are the bread and butter for many house flippers.
Many lenders are looking to get REO properties off their books. They may be willing to finance the property themselves. REO properties also qualify for many different types of loans and funding. You can take out loans to fund the purchase of the property and any repairs you need to make.
Drawbacks To Buying A Distressed House
There are several potential problems with buying a distressed house. You need to be prepared for these drawbacks before going into the sale.
Purchasing “as-is” properties is always risky. They may be in worse condition than what they were appraised for. Getting an inspection can prepare you for some of the damage, but there are problems the inspector could miss. You may be in on the hook for major repairs.
Buying home that’s in the process of foreclosure can also be an emotionally difficult experience. If they haven’t already left, the people living in the home may not want to leave. You’re most likely benefitting from someone’s bad situation.
You should also be prepared for the chance that purchasing a distressed home may be competitive. These homes often operate in a seller’s market, with many parties bidding on them.
Also, know that if you’re bidding on a distressed property at auction, you need to have financing lined up beforehand. If you have the winning bid, you’re paying for it no matter if you secure a mortgage. Another drawback is that you may not be able to get a mortgage if the property is too damaged.
How To Find Distressed Properties
If you think you’re ready to hunt for a distressed property, there are some key resources you should bookmark. The most obvious way to find a distressed property is to work for a real estate agent. They may know of properties not listed online.
Another strategy can be to drive around the neighborhoods you’re interested in. Search for houses that look like they’re abandoned or in disrepair. Take note of their address to look up the owner. While they may not be ready to sell, you could stumble into a great deal.
For a more reliable resource, check out the Department of Housing and Urban Development (HUD). HUD has a list of publicly available listings, as well as their HUDHomeStore.com site. Both of these are great places online to start looking for distressed properties.
Another resource is real estate auctions. While there are online auctions, many are live and held in the county courthouse. Research specific auctions. Learn the rules and requirements. Before you bid, you’ll need to register. Do your due diligence to find out everything you can about the property. You may want to hire a real estate attorney to investigate if the property has any liens on the title before you bid.
Probate sales are another place to look. These occur when someone dies and doesn’t give the home to an heir. At this point the home becomes the responsibility of an estate attorney or representative to sell. While there’s potentially a good deal here, it’s important to know that the sale process can be lengthier than normal. A court must approve any sale.
Distressed properties can come with a long history, not all of it good. It’s important to know these sales are caveat emptor, or “buyer beware.” This means they’re often sold as-is, and if problems arise after the sale, you’re on the hook for them.
Inspect the home before buying, even if it’s just pacing the outside. Pay an attorney to perform a title inspection to check for liens. Be on the lookout for any red flags. Learn how long the property was vacant, if at all. What can seem like a great investment can quickly turn sour if something unexpected turns up.
The Bottom Line
Buying a distressed property has its good and its bad. On one hand, the price could be significantly lower than what the property would normally sell for. On the other hand, the home could come with unforeseen repairs.
The ideal buyer for a distressed property is someone with construction experience and/or has more cash on hand for unexpected repairs. Working with an experienced agent can really speed up the process. If it’s your first time buying a distressed property, they will be able to field your questions and walk you through the sale.
Interested in reading more content on homebuying? Check out the Rocket Homes® blog.
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