Distressed properties make for great fix-and-flip material, and if flipping's not your thing, they're often just a source of great deals, too.
But finding (and buying) a distressed property is a nuanced process. Not only should you go about your search slightly different than you would a traditional home purchase, but you also need to be more diligent in evaluating the home.
Are you considering a distressed property for your next real estate investment? Here's what investors need to know first.
What exactly is a distressed property?
A distressed property is a piece of real estate that's usually either under foreclosure, owned by a mortgage lender or bank, or owned by a government agency due to repossession or a tax lien. It can also just be a property that's in poor condition.
Distressed properties generally fall into at least one of the following categories:
- In some stage of the foreclosure process.
- Bank-owned properties.
- Short sales.
- In need of repairs/renovations.
A distressed property can also be a home that was halted during construction due to the owner's lack of financing, though these are less common than the property types listed above.
What are the pros and cons of buying distressed properties?
As with anything, there are both advantages and disadvantages to buying a distressed property -- particularly as a real estate investor. On the upside, you'll usually get a seriously good deal. If you're buying a bank-owned property, you might get a good rate on your loan, too, as lenders are generally very eager to offload those homes. Ultimately, that means lower mortgage payments and less interest paid while you renovate the property.
The catch? It will probably take a lot of hard work -- and maybe cash -- to get the property in marketable condition. There also may be lots of competition if the price is especially low.
• Low prices
• .Can often make good fix-and-flip material.
• May allow you to buy in a neighborhood you couldn't otherwise afford.
• Potentially high profits -- with the right property.
• Easier financing if you buy a bank-owned property.
• The home's condition may be worse than you think.
• You might need serious cash to bring the home up to speed.
• There's no guarantee the home will sell -- or that you'll see a return on your investment.
• Lots of competition from other investors.
9 resources for finding distressed properties
There are likely more distressed properties than you think. Foreclosure activity was up 13% in January 2020, and bank repossessions increased 70% over one year ago.
While the most foreclosures are happening in the Northeast, in states like New Jersey, Delaware, and Maryland, there are likely still a number of potential properties for sale in your area, too. To search for distressed homes in your area, try these nine resources:
- The MLS.
- Property auctions.
- Distressed property sites.
- Individual bank and lender websites.
- Government agencies.
- Old-fashioned drive-bys.
- Foreclosure, probate, and family attorneys.
- Real estate wholesalers.
- Your tax assessor or local sheriff's department.
Let's explore each of these avenues in more depth.
Just as you can with a traditional home search, you can also find distressed properties for sale on your local multiple listing service, or MLS. Check sites like Zillow (NASDAQ: Z) (NASDAQ: ZG) and Homes.com, or consider talking to a real estate agent who can do a back-end MLS search on your behalf. You may even find commercial real estate options on these sites.
Foreclosed and distressed real estate is often sold at auction, so you'll want to keep an eye on the local auction scene if you're on the hunt for a good deal. You can often find listings for property auctions in your local paper as well as online, on real estate sites like RealtyTrac.com, Auction.com, RealtyBid.com, and Tranzon.com are all great places to start.
Distressed property sites
There are also websites that focus almost solely on distressed property listings. These include sites like Hubzu, RealtyTrac, HomeSteps, Auction.com, Foreclosure.com, and HomePath. Some cover just foreclosures, while others list foreclosures, REOs, and even government-owned properties. LoopNet is another good option if you're looking for distressed commercial property.
Individual bank and lender websites
Most banks and lenders have their own hubs for the properties currently in their possession. We rounded up a large swath of the larger ones here, but it's far from an exhaustive list. It's likely a good idea to check the individual sites for banks and financial institutions in your area, too.
Tons of government agencies (HUD, IRS, etc.) have foreclosed and repossessed real estate to their names, often due to unpaid taxes or mortgage loans. Some, like the U.S. Marshals, for example, even have properties due to FBI-, DEA-, and ATF-related seizures. To see these and other government-owned properties, check out the resources we gathered here.
Driving around town is also a solid way to find a distressed property -- though it's probably not the most efficient way by any means. If you go this route, just make sure you focus on up-and-coming neighborhoods where home values are strong and buyer demand is present. Steer clear of any neighborhoods you'll have trouble selling in.
Foreclosure, probate, and family attorneys
If you can sync up with some local law firms -- particularly those in the foreclosure, probate, or family law arenas, they can be a great resource, too. These attorneys often have eyes on up-and-coming probate properties, homes that might be available due to divorce or separation, or real estate that will soon be in foreclosure. You can also check sites like SuccessorsData.com and USProbateLeads.com for additional leads on probate sales.
Real estate wholesalers
For real estate investors, wholesalers can be a great resource to have on hand. Most spend their days frequenting auctions, scanning sheriff's sales, and even canvassing current homeowners and motivated sellers to find real estate that can potentially spin a profit. Sometimes, they may even have properties you can't find anywhere else on the market yet. Don't know of any local wholesalers? Just look for one of those "We buy houses for cash" signs.
Your county tax assessor or local sheriff's department
Local foreclosure listings are often available on your county tax assessor's website or through your local sheriff's department (sheriff's sales function as another type of auction). If you aren't seeing these listings on your local departments' websites, try Googling "XX County delinquent mortgages," "XX County delinquent taxes," or "XX County foreclosure sales," and that should get you there.
Other tips for finding and buying distressed real estate
If you're considering buying a distressed property, make sure to bring a trusted contractor along when you tour potential homes. They can give you a good idea of what repairs you can expect, as well as what those might cost. You'll still need a full inspection of the property, but this can give you a good foundation to work with before making an offer.
You should also come with 1) a cash offer or 2) a good-size down payment. Most distressed properties will bring in dozens of cash offers from investors, so you'll need to be competitive. If you can't make an all-cash offer yourself, make sure you've got a preapproval letter to show your financing is a solid bet.
Finally, if you really want to strike a good deal, you might consider working with a real estate agent experienced in investment properties. They can help you negotiate, represent your best interests throughout the transaction, and even see you through to the end of the sale. Some agents may even know of a homeowner or two facing foreclosure, so having a strong network of local real estate agents at your disposal can help you find more properties, too!
Planning a fix-and-flip?
If you're eyeing distressed real estate for a potential fix-and-flip, be sure to check out our other real estate investing resources. Just getting started in the business? Our beginner house-flipping tips can help.
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