Buying Strategies in a Tough Market: Distressed Properties
One issue buyers are encountering in the current real estate market is limited inventory - which can make finding an investment property a little tricky. Buyers are always asking, ‘how can I find properties when no one is selling?’ I advise them to get creative! One approach is to start looking at distressed properties, a potentially lucrative buying strategy in a sparse market.
what is a distressed property?
Distressed properties, such as foreclosures, short sales, and bank-owned properties, can be a great opportunity for real estate investors to make a profit. These properties can typically be purchased for significantly less than their market value. However, buying distressed properties can be a complex process, and requires careful research and due diligence.
Before you begin your search for distressed properties, it's important to understand the different types of properties that fall under this category.
Foreclosures: Properties that are in the process of being repossessed because the owner failed to make their mortgage payments. These are sold at auction. If the auction is unsuccessful, the bank/lender takes ownership of the property.
A foreclosure occurs when a homeowner fails to make their mortgage payments and the lender repossesses the property. Foreclosure properties are typically sold at auction, with the highest bidder winning the property. In some cases, a foreclosure property may be sold directly by the lender after the auction.
It's important to note that foreclosure properties are sold "as-is," meaning the buyer is responsible for any repairs or renovations needed on the property. Additionally, foreclosure properties may have liens or other encumbrances that need to be resolved before the property can be sold.
Short sales: Properties that are being sold for less than the amount owed on the mortgage, with the lender agreeing to accept less than the full amount owed.
A short sale occurs when a homeowner owes more on their mortgage than the property is worth, and the lender agrees to accept less than the full amount owed on the mortgage. Short sales are typically negotiated between the homeowner, the lender, and the buyer.
Short sales can be a good opportunity for buyers to purchase a property at a lower price, but they can also be a more complex process than buying a traditional home. It's important to work with a real estate agent who has experience with short sales and can help navigate the process.
Bank-owned properties: Properties that have already gone through the foreclosure process.
Bank-owned properties, also known as real estate-owned (REO) properties, are properties that have gone through the foreclosure process and are now owned by the lender. Bank-owned properties are typically sold through a real estate agent or at auction.
Similar to foreclosure properties, bank-owned properties are sold "as-is," meaning the buyer is responsible for any repairs or renovations needed on the property. Additionally, bank-owned properties may have liens or other encumbrances that need to be resolved before the property can be sold.
how to buy distressed properties
Find distressed properties
Online listings: Websites like Zillow and Trulia offer a variety of real estate listings, including distressed properties.
Real estate agents: Work with a local real estate agent who specializes in distressed properties. They can provide you with access to listings that may not be available to the general public.
Public records: Many local governments maintain public records of foreclosures, tax liens, and other distressed properties.
Auctions: Distressed properties are often sold at auctions, which can be a great way to get a good deal.
Tax Sales or Sheriff Sales: These auctions are for properties that are being sold to settle the tax debt.
Do your due diligence
Once you have identified a potential distressed property, it's important to do your due diligence before making an offer. This includes:
Researching the property: Look into the property's history, including its ownership, any liens or encumbrances, and any known issues with the property.
Getting an inspection: Hire a professional home inspector to thoroughly examine the property and identify any potential problems or issues. In some cases you may not be permitted to access the property at all. This is common in properties being sold at auction. If this is the case, you will want to talk to an advisor about the risks you are assuming before buying a property sight-unseen.
Occupancy: Will the property be occupied at settlement time? You cannot assume that the property at auction is vacant. In many cases, it may not be. You may need to evict the occupant to have possession of the property.
Understanding the costs: Be sure to factor in any repairs, renovations, or other costs associated with the property when calculating your potential profit.
Know your exit strategy: Before you make an offer on a distressed property, it's important to have a clear plan for how you will make a profit. This may involve fixing up the property and reselling it for a profit, renting it out for a steady income stream, or holding onto the property for long-term appreciation.
Consider working with a team of professionals: This may include a real estate agent, attorney, home inspector, contractor, and accountant. Each of these professionals can provide valuable insights and expertise that can help you make the most of your investment.
Buying distressed properties can be a great way to make a profit in real estate investing. However, it's important to do your research, understand the different types of distressed properties, and work with a team of professionals to ensure a successful outcome. With the right approach and a bit of perseverance, you can turn a distressed property into a profitable investment opportunity. If you need help sourcing distressed properties, reach out to the Steel City Realty team!