What Is A Distressed Property?

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Striking a deal when buying a home is every homebuyer’s dream. Sometimes, though, the super low prices come at a cost – it may be a distressed property.

It’s not a bad thing to buy a property that’s distressed, but knowing what you’re getting into is crucial. Buying distressed properties without realizing the work or consequences involved could be detrimental.

Here’s what you need to know. 

Understanding Distressed Properties

A distressed property is one that’s about to go into foreclosure or is in foreclosure. One way or the other, it’s under lender pressure because of unpaid mortgage or tax payments.

Distressed properties may be in the foreclosure process, a short sale, or already foreclosed on and sold by the bank.

No matter how the property is sold, distressed properties are usually priced well below the market value. This can be great for buyers, but use caution, especially if buying a property at auction or ‘as is’ as most foreclosed or distressed properties aren’t well maintained.

The Pros And Cons Of Investing In A Distressed Property

Pros:

  • Most distressed properties sell at a low price. This helps investors especially since you can more easily invest in more properties or better afford your first investment property.
  • You can fix the home up how you want. Experts in the real estate industry know just what buyers want. When you buy a home for a lower price, you’re better able to afford renovations, making the home more enticing for renters.
  • You may earn larger profits flipping the property when you buy it at below market value. If you do some of the work yourself or have contractors with reasonable prices, you may turn a larger profit.

Cons:

  • You may not know what you’re getting into. If the home is sold ‘as is’ you can’t ask for renovations or repairs. You also can’t ask for credits at the closing. All renovations and repairs fall on your shoulders, which can get costly.
  • It’s harder to find financing. Traditional loans, including conventional and FHA loans, have strict property guideline requirements. Distressed properties usually don’t meet those requirements, which leaves you without financing, unless you turn to a hard money loan.
  • The process may take longer, especially if it’s a short sale. Both bank-owned sales and short sales involve the bank, which means delays. It’s common for distressed properties to take 3 – 4 weeks longer than regular properties to close on.

How Do You Find Distressed Properties?

If buying a distressed property resonates with you, know where to look:

  • Hire a real estate agent – Working with a reputable real estate agent in the area is your best bet to find distressed properties fast. Real estate agents have an ear to the ground, hearing about properties going up for short sale or about to enter foreclosure before most others. If you work with an agent that works exclusively with distressed properties, you’ll be in good hands.
  • Check the papers – If you’d rather do it yourself, read the newspapers daily for the latest foreclosure listings. Since foreclosures are a part of public records, you can get the information you need quickly. You can also watch for auctions, assuming you want the stress of buying a property at auction.
  • Network – Getting out there and networking is the best way to let others know what you want. Word-of-mouth is often the best way to get the business you want. You never know when a friend of a friend wants to sell their home before foreclosure proceedings begin.

Financing Distressed Properties

It’s important to realize that financing distressed properties may be a bit more of a challenge. Regular lenders don’t like foreclosed properties because they usually have issues that won’t pass the traditional appraisal.

They also don’t like how long the process takes. They may require you to have a much larger down payment or charge higher fees. Your best bet is money from a private money lender or hard money lender – a facility that offers fast funding doesn’t care about great credit scores and knows how to look at the transaction from the investor’s point of view.