Are you new to real estate investing or a professional interested in trying a new investing strategy? Chances are you are looking to find a distressed property for sale. Distressed properties offer undervalued deals that are very attractive to investors, increasing your profit margin. In this article, we will discuss creative ways to find distressed properties, including buying distressed properties, and some important tips to keep in mind.
What Is A Distressed Property?
A distressed property is either physically or financially (or both) unmaintained by the current owner. For the sake of real estate investing, distressed properties (otherwise known as pre-foreclosures) are homes in which the owner has been unable to keep up with mortgage obligations and is therefore at risk of falling into foreclosure. However, it is worth noting that a pre-foreclosure is exactly what it sounds like: the owner is merely at risk of foreclosure and not currently in the process of it. Some properties are found to be in poor condition due to neglect or because they are at risk of being foreclosed upon.
Who Invests In Distressed Properties?
Both homebuyers and real estate professionals frequently choose to invest in distressed properties. Homebuyers hoping for a fixer-upper and lower purchase price may find these homes to be an excellent opportunity. Distressed properties can also give homebuyers a chance to break into fast-moving markets, as there may be fewer offers to compete with. Real estate investors are typically interested in distressed properties for the same reasons. Distressed homes often have a lower purchase price and feature highly motivated sellers in many cases. These characteristics can help investors secure more profitable deals.
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How To Find Distressed Properties: 9 Creative Hacks
Distressed properties represent particularly attractive investment opportunities. Not only can they offer wider profit margins than traditional deals, but they can also represent less competition. This is because investors are often unsure how to find and invest in distressed properties. There are several ways to find these opportunities, but the following hacks are among the best:
- Look For Neglected Properties
- Check Tax Records
- Find Properties With Delinquent Mortgage Payments
- Consider Probate Options
- Peruse REO & Bank Owned Property Listings
- Drive For Dollars
- Talk To Out-Of-State Owners
- Check The MLS
- Search Online
1. Look For Neglected Properties
When it comes to the physical appearance of a distressed home, there’s one telltale sign to keep in mind: neglect. To find distressed properties for sale, start by selecting a target neighborhood, then be on the lookout for signs of homes that may be neglected. A distressed property may have:
- Multiple notices placed on doors or windows
- Peeling or faded paint
- Indoor and outdoor lights not turned on at night
- A yard with overgrown weeds or neglected lawns
- Broken windows or any other needed exterior repairs
- Uncollected mail or newspapers
More often than not, a neglected home and yard mean the owner has given up trying to maintain the property. That could mean two things: either the owner doesn’t want to maintain the home or can’t afford to. If you come across the latter, you may find a motivated seller willing to part ways with the home at a discount.
2. Check Tax Records
Delinquent taxes are public record and could suggest a homeowner is in financial trouble. If for nothing else, those who can’t pay their taxes may also not be able to pay their mortgage. Delinquent taxes are often a motivation to sell.
3. Find Properties With Delinquent Mortgage Payments
Not surprisingly, homes with delinquent mortgage payments represent the epitome of distressed properties. Those who can’t pay their mortgage are at risk of foreclosure and may be willing to sell at a discount if it means avoiding foreclosure and all of the financial woes that accompany it. Fortunately, you can find public records of delinquent mortgages at local courthouses.
4. Consider Probate Opportunities
The probate court is yet another creative space to find distressed properties. A great opportunity for investors is probate property. As a result of a significant life event such as divorce or a death in the family, these properties have been left behind. In many cases, those inheriting the home may not want it. This represents the chance to take it off their hands for a good price. It should be noted that making an offer on a probate sale requires a special process, as the property is being sold through an attorney or an executor.
5. Peruse REO & Bank Owned Property Listings
Real estate-owned homes, or REOs, are those properties that lenders have already repossessed. That said, lenders aren’t in the business of holding real estate inventory and would rather get rid of non-performing assets. As a result, savvy investors may convince said lenders that selling them the home at a discount is their best move.
6. Drive For Dollars
A traditional method to find distressed properties is hopping in the car and driving around. "There might be something about seeing the property in person that could be missing from professional images of the property, such as the neighborhood’s atmosphere and sounds and smells that could deter homebuyers or renters from the property," says Ben Reynolds, CEO and Founder of Sure Dividend. Look for signs such as an overgrown yard, broken windows and shutters, exterior paint that is faded or peeling, notices that are posted on any doors, and junk mail and newspapers left uncollected. If you find a property that meets any or all of these descriptions, be sure to write down the address to start investigating.
7. Talk To Out-Of-State Owners
Various circumstances can cause homeowners or investors to move out of state, resulting in a potentially challenging dynamic. These property owners may struggle to manage and maintain homes in areas they cannot visit often. As you might imagine, this can lead to distressed properties and highly motivated sellers. The best way to identify out-of-state owners is typically through direct mail or networking. Look for mailing lists that may have address information and strategize an effective direct mail campaign. Simultaneously, ask around your network for anyone with extra information. You never know; you may find other investors who are more than willing to let you take an out-of-state property off their hands.
8. Check The MLS
Although the functionality of the Multiple Listing Service (MLS) differs from state to state, investors should never forget this important resource. Those who learn how to find distressed properties on the MLS can often find unique investing opportunities. Access to the MLS will require a real estate license. However, investors still have the opportunity to work with others who have one. A property’s listing status can signal a distressed property. This includes short sale or real-estate owned property listing codes. Look for properties listed for longer than 90 days. The 90-day mark is a key indicator that will signal the seller’s motivation level. The longer a property stays on the market, the more motivated or desperate the seller will become. This can often lead to great deals and savings for investors if they can obtain MLS access.
9. Search Online
There are ways to utilize the above methods online for those still wondering how to find distressed properties. Many forms of distressed properties are not labeled as “distressed” outright. Look for ‘properties for sale by owner’ that are delinquent in taxes and mortgage payments, properties that must be sold legally due to bankruptcy or divorce, probate deals, and properties that are owned by the banks or the government.
Starting with the first example, finding properties with tax delinquencies online is luckily a straightforward process. The hardest part will be finding your local tax assessor’s web page that lists these properties. After finding the site, search the listings until you have found a property you’re interested in. Another type of property that might be in distress is one in which the owners have fallen behind on their mortgage payments, also known as “underwater.” These properties are usually in pre-foreclosure and can be found in a few different places such as your local county website or paid sites such as Foreclosure.com.
Look online for properties that must be sold legally, such as through bankruptcy or divorce. When looking through your county foreclosure listings, you may have already noticed distressed properties being auctioned due to bankruptcy or divorce. Although not every county is required to list such properties, some listings can be easily found online.
Finally, investors should search through REO (real estate-owned) and government-owned properties online that have already been foreclosed upon. Many local and national banks have their own property listing sites, as do government entities such as Freddie Mac and Fannie Mae.
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7 Tips For Buying Distressed Real Estate
Learning where to find distressed properties is a great jumping-off point, but you should know more to ensure your search is successful. After all, while distressed properties may seem like simple rehabs, closing these deals can be quite different. You should have several things in place to make sure you are ready to close when you find the right property. Read through the following tips as you start your search for distressed real estate:
- Choose a target neighborhood
- Don't just look for the "distressed property" label
- Get pre-approved for a mortgage
- Work with an experienced agent
- Get an inspection
- Familiarize yourself with the local jurisdiction
- Make a cash offer
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Pros & Cons Of Distressed Properties
It’s common for home buyers or house flippers to look for distressed properties as they feature noticeably discounted prices. However, note that with each bargain deal on a house, this is the case for a reason. Owners of homes with drastically reduced prices usually hope to avoid foreclosure or have the property already in foreclosure. The price will always be attractive, so be sure you know what you are buying. Discover every aspect of the house and why it qualifies as a distressed property.
Advantages Of Distressed Properties
The extremely low price of distressed properties is the main interest of home buyers and house-flippers. Sellers are desperate to sell distressed homes. Usually, these sellers want to avoid spending the money to repair a property to bring it to a higher price. As a result, the prices will always be below market value. Distressed homes are an excellent option for those who are investing in real estate for the first time. Be sure to consult a Realtor with experience in distressed properties. They can help guide you through the purchase and repair process to eventually increase the home's value.
Take a look at some of the attractive aspects of distressed properties:
- Lower than market value cost
- Fix and flip opportunities
- High profit potential
- Easier financing options through bank-owned homes
- Opportunity to buy in a nicer neighborhood than you could normally afford
Disadvantages Of Distressed Properties
While prices may be the lowest, buying a distressed home does come with the risk of having the poorest conditions. If you purchase a distressed home with inhospitable conditions, it is vital to save funds for repairs or hire contractors. Usually, foreclosed homes will be up to less than mediocre standards compared to other homes in the area. You may have to purchase appliances or make drastic electrical and plumbing repairs. You may have the opportunity for a thorough home inspection. However, you will still have to finance any repairs to the distressed house.
On top of the actual condition and necessary repairs of the home, you may also run into issues when it comes to actually purchasing the distressed property. Buying a foreclosed home is different than buying a home that is current on its mortgage. First, you will need to buy the home at an auction. This can be an in-person auction or an online auction. A major drawback to the auction format is that you may be outbid at the auction, resulting in a higher price than you wanted to pay or someone else walking away with the purchase. The sale will then need to be finalized after the auction before you are actually allowed to buy the property. Another drawback to buying a foreclosed home is how long it actually takes. There are many reasons for purchasing delays, and these delays can make the closing process take between 6 and 12 months. For comparison, a traditional home sale usually takes between 6-8 weeks to close.
Here is a list of the most unattractive qualities of distressed properties:
- Unexpected repairs
- Increased competition
- Cost of renovations
- There is no guarantee the property will sell
Financing A Distressed Property
Financing a distressed property with a traditional lender can be somewhat challenging. This is because the appraisal value may be low and the costs of repair high. Lenders want to protect their bottom line, and that means avoiding potentially risky investments. That being said, not all lenders will turn down a distressed property.
Investors should employ certain tactics to ensure they can secure financing. First, run the numbers and assess your ideal purchase price. A low offer may be more likely to secure your financing, though remember, it still needs to be accepted. Second, timing is key when securing a distressed property. Lenders may be more likely to approve funding to help a property avoid foreclosure.
Finally, don’t forget to consider creative financing strategies. These include working with a hard money lender or even a silent business partner. Remember to approach each lender with a strong pitch and accurate numbers for the investment potential. Financing a distressed property will come down to preparation.
Summary
Finding a distressed property for sale is no easy feat. Luckily, combining several creative strategies for identifying and targeting these properties can lead to great rewards. By incorporating the creative hacks listed above, including the important tips to keep in mind, you will be on your way to finding these coveted investment opportunities.
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