The anticipation is building as foreclosure moratoriums across the country draw to a close. Real estate experts predict a wave of distressed properties hitting the market, presenting an opportunity for savvy investors. Knowing how to find these overlooked gems can be a game-changer, especially considering the staggering increase in foreclosure filings - a 27% rise month-over-month in August 2021 and a staggering 60% increase year-over-year.
But what exactly are distressed properties, and why should you consider them? Distressed properties are real estate assets that are in a state of disrepair, be it due to financial hardship, foreclosure, or unpaid taxes. Contrary to popular belief, distressed properties are not a liability; instead, they offer incredible potential for value-add and cash-out opportunities. Investors can implement the BRRR (buy, rehab, rent, refinance, repeat) strategy, acquiring undervalued properties, renovating them, and profiting from long-term rentals.
The future is unpredictable, but proactive investors who prepare for the coming years may reap significant benefits from distressed property opportunities. With this in mind, let's dive deeper into finding these hidden treasures.
What Defines a Distressed Property?
A distressed property is a real estate asset that falls into one of four categories:
- Pre-foreclosure or short sale
- Property in the foreclosure process
- Bank-owned property (REO)
- Tax lien sale due to unpaid property or income taxes
These properties, often referred to as "underwater properties," can be found across all real estate asset classes, including single-family homes, small multifamily buildings, office spaces, retail properties, apartments, mixed-use projects, industrial facilities, special-use properties, and even raw land.
Are Distressed Properties Worth It?
Investing in distressed properties comes with potential risks, but the rewards can be astonishing. To make an informed decision, let's consider the pros and cons.
Pros of Buying a Distressed Property
- Cheap real estate in otherwise expensive areas
- Instant equity when purchasing below-market value
- Sellers lack funds for necessary repairs, which can be an advantage for buyers
- Highly motivated sellers trying to avoid foreclosure
- Attractive financing options from banks looking to offload REO properties
Cons of Buying a Distressed Property
- Delays in negotiating short sales with banks
- Possibility of being outbid in auctions
- Need for quick cash payments and financing after repairs
- Properties are sold "as is," often with needed repairs and no warranties
- Encumbrances such as tax liens or unpaid mortgages may need to be settled before owning the property
By weighing these factors, you can determine if investing in distressed properties aligns with your goals and risk tolerance.
Unearthing Distressed Properties
To uncover these hidden gems, you need to know where to look. Here are some valuable resources and strategies:
Distressed Property Websites
Utilize online platforms specializing in distressed property listings such as Auction.com, Foreclosure.com, HomePath by Fannie Mae, HomeSteps by Freddie Mac Homes, HUDForeclosed.com, and RealtyTrac.
Bank REO Sites
Head straight to the source by exploring bank REO sites like Bank of America and Wells Fargo. Alternatively, contact local credit unions or community banks for potential distressed property leads.
Government-Owned Property
You may be surprised to discover that government agencies seize properties regularly. Keep an eye out for distressed properties for sale by agencies like the VA, USDA, U.S. Army Corps of Engineers, and the U.S. Marshals Service.
Local Tax Assessor Office
Delinquent property taxes can indicate distress. Many tax assessor's websites maintain lists of properties with delinquent taxes that you can review. Search online for the tax assessor in your county or use a public records online directory like NetOnline.com to find relevant offices.
Real Estate Wholesalers
Real estate wholesalers are experts in finding distressed properties, estimating repairs, and assigning purchase contracts. Working with wholesalers can provide opportunities for instant equity. However, thorough due diligence is essential before committing to any deal.
Real Estate Agents
Real estate agents experienced in working with distressed properties can help you find short sales, pre-foreclosures, and even foreclosed properties listed on the local multiple listing service (MLS). Check sites like Zillow, Realtor.com, and Homes.com or reach out to trusted agents in your area.
Probate and Attorneys
Those going through bankruptcy or divorce may be forced to sell properties for financial reasons. Keep an eye on legal notices of pending divorces and bankruptcies or reach out to attorneys specializing in these areas. Probate court can also yield distressed property opportunities, but the process can be time-consuming and complex.
Driving for Dollars
Get in your car and drive around different neighborhoods in search of neglected properties. Look for signs of distress, such as dilapidated homes, multiple notices on doors, or unlit properties at night. You can even hire a real estate agent to assist you in this search, paying them a finders fee.
Remember, persistence and due diligence are key when hunting for distressed properties. Explore multiple avenues and resources to maximize your chances of finding lucrative opportunities.
Successfully Closing on a Distressed Property
The closing process for distressed properties varies based on the property's stage in the foreclosure process. Here's what you can expect:
Pre-Foreclosure
- Similar to a short sale, the seller provides property disclosures and cooperates with inspections.
- Traditional financing options through direct lenders or mortgage brokers are available.
- The lender must approve the purchase price if it doesn't cover the outstanding mortgage balance.
Bank REO
- Bank-owned properties typically lack seller disclosures.
- Buyers can conduct inspections and due diligence.
- Financing options may be available through the bank selling the property.
- Key deal points, including price, down payment, closing costs, and date, can be negotiated.
Auction
- Properties are sold "as is," without disclosures or inspections.
- Buyers must conduct a title search before bidding to identify encumbrances or liens.
- Auctions require cash payment on the day of sale.
- Lenders may withdraw properties from auctions if the winning bid is too low.
Each stage presents its challenges and opportunities, so it's crucial to understand the specifics before closing.
Embracing the Opportunities
As we navigate the current housing market cycle, with historically high prices and increased competition, distressed properties offer a chance to acquire undervalued assets. While the path may come with risks, armed with a well-planned strategy and a reliable team, you can reap the rewards.
Stay vigilant, explore different avenues, and be prepared to act swiftly when a promising distressed property opportunity arises. With dedication and a keen eye, you can uncover hidden gems and potentially achieve an attractive return on investment.
Discover the hidden potential in distressed properties - your journey to financial success starts here.