What Is a Distressed Property?

Many people want to invest in real estate but need help knowing where to start. For example, they may have heard the term “distressed property,” but they’re not sure what that means.

A distressed property is a real estate asset in poor physical or financial condition. Investing in distressed real estate can be profitable but requires careful research and due diligence.

If you’re interested in investing in distressed properties, this article is for you. You’ll learn about the different types of distressed properties and how people make money by investing in them.

What Is a Distressed Property?

A distressed property is one that has been subject to financial stress or has fallen into disrepair. It’s usually a result of homebuyers being unable to afford the repairs, upkeep, property taxes, or mortgage payments. These properties can be found in many different places and situations, such as foreclosures, abandoned homes, fire-damaged properties, repossessed vehicles, government auctions of seized assets, and bankruptcy sales. 

Distressed properties often offer buyers an opportunity to purchase a home for a lower price than its market value since it needs work done and may need considerable renovations before it can be livable again. However, potential buyers must thoroughly research any potentially distressed property before purchasing to ensure they are getting a good deal and know what kinds of repairs they may have to make.

Types of Distressed Properties

A distressed property is usually one of three categories: foreclosure or pre-foreclosure, real estate owned property, or a short sale. A distress sale usually happens because the seller must immediately sell an asset to fund emergencies such as paying other debts or medical costs.

Foreclosures

Foreclosures happen when the homeowner or borrower fails to make mortgage or loan payments. Lenders will quickly try to sell the home through foreclosure sales or at auctions when a property forecloses.

Potential buyers of distressed properties should be aware that foreclosure sales can be highly competitive, as many investors bid on the same property and are eager to purchase it at a discounted rate. It’s also important to remember that lender-owned foreclosed homes still require payment and come with certain risks, such as potential title issues or hidden damage. 

Short Sales

When a homeowner owes more on the mortgage than the home’s actual worth, they may consider doing a short sale. A short sale is when the owner sells the distressed property for less than what they owe on their mortgage. It can be a win-win situation as the homeowner avoids going into foreclosure, while the buyer can score a great deal on the home.

A short sale usually occurs when a homeowner is forced to move from the property and cannot wait for the home’s market value to recover. For example, if the homeowner needs to relocate asap for a job or is forced to liquidate their assets due to a divorce settlement, there may be no choice but for them to do a short sale. The lender must agree upon a short sale since the arrangement could remove the collateral securing the mortgage.

REO Properties

REO properties, otherwise known as real estate owned properties, are bank-owned properties that don’t sell at the initial auction. Buyers can usually get a deal with REOs since lenders don’t want the burden of fixing up and maintaining these properties, so frequently, properties are offered at a steep discount.

While foreclosed property can be an excellent opportunity for buyers to purchase a property at a discounted price, it’s essential to consider that these properties may also require extensive repairs and renovations to make them livable again. Therefore, the cost and extent of repairs should be considered when determining an offer and ensuring the final purchase price is fair. Additionally, potential buyers should conduct due diligence to ensure there are no hidden liens or title issues associated with the property that could interfere with their ownership. 

10 Ways To Identify a Distressed Property

You can typically identify distressed properties as they usually stand out from the other homes in the same neighborhood as long as they are maintained well. Here are some of the best ways to tell if a property is distressed:

1. Look for an unusually low listing price, which could indicate a distressed property.
2. Check foreclosure listings, either online or through the local court system, as these homes may be listed at a discounted rate.
3. Pay attention to properties that have been on the market for an extended period, as it could signal that the owner needs to offload quickly and may be willing to accept a lower offer.
4. Contact the lender directly to inquire about any offers they are currently entertaining for their distressed properties.
5. Look for signs of neglect, such as overgrown landscaping, broken windows, and peeling paint, as these can be indicators of a distressed home.
6. Check public records for notices of default or auction notices which can alert you to potential deals on distressed properties in your area.
7. Research recent sales prices in the area to get an idea of what similar properties are selling for so you know if you’re getting a good deal on a distressed property or not.
8. Request detailed information from sellers regarding any repairs that have been done or need to be completed to assess if there are any unexpected costs involved with purchasing a distressed property.
9. Ask your real estate agent about any new listings in your area that could be considered distress sales, such as short sales and foreclosures.
10. Reach out to investors who specialize in buying and selling distressed properties. They can provide insight into potential opportunities available in your area.

Benefits of Buying a Distressed Property

Purchasing a distressed property comes with several potential benefits for real estate investors:

• Lower purchase price: There is often more bargaining room for distressed properties, and investors can often negotiate to purchase the property at a significantly lower rate than they could with other types of real estate investments.
• Easier financing options: Investors may also benefit from easier financing options, as lenders generally prefer to extend loans on foreclosure properties rather than properties still in the original owner’s hands.
• Increased profits: After improvements are made on a distressed property, investors can usually turn around and sell them for a handsome profit or even rent them out for an additional income stream. In either case, investors who buy distressed properties may have greater potential for increasing their bottom line than those who stick with traditional real estate investing strategies.

Risks of Buying Distressed Property

Buying a distressed property also comes with a few risks, the main one being its condition. Some may require serious repairs with the plumbing or electricity, walls, foundation, and more. If you purchase a property requiring more repairs than anticipated, you could lose money and time while you’re fixing it.

Location plays a large part in getting a successful return on your investment, and many times distressed properties are in underserved neighborhoods. Property investors look for investment opportunities in locations where they can expect good occupancy rates, decent real estate appreciation, and high rental demand. No matter how nice a particular property looks, the property location and other demand factors must be considered.

If you’re looking for a short closing time, think again. Short sales can take up to a whole year to close, which hinders your ability to start working on the property to re-sell. While not necessarily a risk, another downside to distressed properties is that they can be hard to find. According to the National Association of Realtors, distressed sales made up less than 1% of sales as of February 2022.

How To Find Distressed Properties

Distressed properties can apply to both residential and commercial buildings. Searching online is one of the easiest ways to find a distressed property. Some websites you can look at for home sales and property listings include RealtyTrac, Auction.com, Foreclosure.com, LoopNet, Zillow, and even your local multiple listing service (MLS).

Brokers are another great resource you can tap into to find distressed properties for sale. They have experience in buying, selling, and leasing properties and should know of any distressed houses currently on the market. Similarly, you can look online at lender websites to see if any real estate owned properties (REOs) are available.

Having a strong network of brokers and lenders can help you stay informed of any investment opportunities. Search online, ask trusted friends and investors, and stay in touch with past brokers and lenders to build your connections. Direct mail is also useful because you can make direct low-price offers to the seller.

Tips for Buying Distressed Properties

To help avoid potential issues when buying a distressed property, consider the following tips:

• Thoroughly research and inspect the property before making an offer. Check public records and recent sales prices in the area, and ask for detailed information from the seller to get a full picture of what repairs may need to be done and any potential legal issues, such as probate and tax liens that may arise with the purchase.
• Work with knowledgeable professionals who can advise the investor on local laws, rules, regulations, and other factors that could impact the success of their investment.
• Get it Inspected before making a decision. Always hire your own inspector, and don’t rely on the seller’s. Remember, the seller’s inspector works for the seller, so they neglect serious issues and only tell you about minor problems.
• Understand the foreclosure process by knowing when to purchase a distressed property and when to walk away is a valuable skill to possess. Similarly, knowing which step the home is in during the foreclosure process can make or break your profit. For example, if you buy the property before the foreclosure is complete and vacant, you could be responsible for additional costs.
• Analyze all costs associated with purchasing a distressed property, including taxes, insurance, and repair costs, as these can add up quickly if not accounted for ahead of time.
• Use caution when negotiating with lenders and property owners, as they may be desperate to unload their properties quickly, which could lead to an unfair deal for you as an investor.
• Be prepared to move quickly when finding a potential deal, as distressed properties often attract multiple offers, so it’s important to act fast if you want to secure your desired property.

Closing Thoughts

While finding a distressed property is not always easy, it can be like winning the lottery when you do find one. Since distressed properties are mostly for flipping and not living in, it is important that you have experience in fixer-uppers so you know when a house has too many issues to deal with. Then, with knowledge and a great bargain, you could make a substantial amount of money if you know what to look for.

Finding the best real estate investment for you can be challenging if you try to figure everything out independently. While there is no shortage of opportunities, each comes with its own risks.

Investing through Arrived can minimize the unknowns and the hassle of finding and managing properties. Browse our available homes today and see how your initial investment could grow over the next few years