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How To Buy Distressed Property

By Sharad Mehta
5th Oct, 2022

11 Ways to Find Distressed Properties to Buy

If you’re a real estate investor, you likely understand the importance of finding distressed properties.

These houses allow you to negotiate steep discounts and present the opportunity to force rapid appreciation through renovations. Find enough distressed properties for sale, and you will generate all the income you will ever need.

Pretty simple, right?

Not quite. If you’ve been investing in real estate for much time at all, then you understand that locating distressed properties can be one of the most challenging parts of the business. Many investors spend years without an understanding of how to find distressed property.

We’re willing to bet that if real estate investors could wave a magic wand and solve one problem in their business, most of them would choose to improve their flow of distressed properties.

The good news is that you don’t need a magic wand to solve your problems. You just need the right strategies to find distressed property and the discipline to implement them consistently.

This article presents the best methods for finding distressed properties that you can begin using today. We also discuss the most common types of distress, so you know what to look for.

What is a Distressed Property?

Before we get into strategies to find them, it is helpful to define what a distressed property is. A property becomes distressed when the owner does not have the resources, time, ability, or wherewithal to maintain it, make the mortgage payments, or both.

When you think about a typical distressed property, you likely imagine a dilapidated house that needs significant repairs. While this is often the case, it isn’t always. Often homes in excellent condition become distressed because of circumstances in the owner’s life.

Three categories cover the most common types of distress in real estate: property, financial, and life distress.

Property Distress

This is the most obvious type of distressed property and occurs when something is wrong with the house itself.

Significant Repairs Needed

A house that needs a complete overhaul is one of the easiest ways to find a great deal. Sometimes when the owner is in financial distress, they are still able to sell it for top dollar. But that isn’t possible when the house is run down.

Tenant Issues

Many people decide to rent out their homes and quickly realize they are not fit to deal with the headaches of owning rental property. Not only can maintenance be overwhelming, but a bad tenant can make it a complete nightmare. A house with a burned-out landlord can be one of the best types of distressed properties to structure a profitable deal.

Financial Distress

Even when the house itself isn’t in bad shape, the owners themselves can get in a financial bind that leads to a distressed situation.

Pre-Foreclosure

When a homeowner stops paying their mortgage payments, the lender files a notice of default, and the house enters the foreclosure process. If enough time elapses without resolving the issue, the lender will foreclose on the property and sell it at auction to get their money back.

The good news is that you can buy a house before it goes to the foreclosure auction. These are some of the best situations to work out a creative financing solution with the homeowner, such as buying it subject to the existing financing.

Behind on Taxes

If a homeowner falls behind on their property or income taxes, the chances are high that they are facing other financial difficulties and their property will soon become distressed. Beyond that, the county or IRS will likely place a lien on the property for the taxes they owe, making it even more challenging to sell the property.

High Debt

A high level of debt is a leading indicator that a house will become distressed soon. If someone is racking up large amounts of credit card debt, they are likely having difficulty keeping up with their financial obligations.

Underwater on Loan

One of the most distressed situations in real estate is when a homeowner owes more on their house than what it is currently worth. This frequently happens when people purchase homes or refinance right before a correction in home prices. Because they haven’t had time to pay down the principal amount of their loan, the fall in home prices eats up all of their equity and causes it to go upside down.

Life Distress

Sometimes life events happen that lead to a distressed property. Here are some of the most common causes.

Health Issues

Illness is a prevalent cause of distressed properties. Not only does it change a homeowner’s financial situation, but it often prevents them from maintaining the house as they once did.

Job Loss/Transfer

A change in job status can lead to a very stressful situation. Unfortunately, many people live paycheck to paycheck, and a sudden job loss will cause them to fall behind on payments. Even a job transfer can be stressful because they must worry about selling their house quickly on top of finding a new place to live in their new destination.

Divorce

A large percentage of distressed properties are the result of divorce. Maintaining a house is often the last thing on people’s minds in these situations. Also, what happens with the property is often a point of contention, which frequently causes it to fall into disrepair.

Best Ways to Find Distressed Properties

Now that you know the types of properties you should be looking for, the next step is to determine how you will find them. This part of the process can often feel like looking for a needle in a haystack, but it is worth it! Finding distressed properties to buy and structuring deals that provide significant profit will keep your real estate investing business going.

Here are some of the best ways to locate distressed properties. Some of them work best for certain types of distress, but they all have great potential to bring you stellar deals!

Driving for Dollars

This strategy is one of the best ways to find distressed properties that need repairs. It involves driving through neighborhoods on the lookout for houses that appear neglected.

What’s great about this strategy is that it allows you to spot distressed houses well before anyone relying on virtual methods can. People looking for distressed properties online are at the mercy of the data of the service they are using, which takes time to update. However, if someone lets their house go, the yard can become overgrown in a couple of weeks.

The key to this strategy is driving methodically through areas you want to buy houses in and looking for obvious signs of distress or vacancy. Here are some signs to look for:

  • Overgrown grass
  • No personal items
  • No cars parked in the driveway
  • No lights on in the evening
  • Open windows revealing an empty house
  • Damaged siding and windows

Working with Wholesalers

Wholesalers specialize in locating distressed properties, negotiating with owners for hefty discounts, and passing them on to other investors for a fee. Wholesaling is where most rookie investors get started because it requires little money, so you will need to find the ones with some experience.

The most successful wholesalers have their marketing systems honed in to consistently locate discounted homes. Before you try to implement those strategies yourself, consider networking with wholesalers and letting them know you are a serious buyer.

The best places to find wholesalers in your area are local REIA (Real Estate Investor Association) meetups and local real estate Facebook groups.

Working with Agents

Depending on your market, finding decent deals on the MLS (Multiple Listing Service) might be challenging. That’s because the MLS is where most buyers are looking, so the competition on distressed properties is usually very high.

However, this doesn’t mean you should rule out the MLS altogether. There could be hidden gems that pop up, and you don’t want to miss them. To make sure you see them, you should work with a real estate agent and let them know exactly what you are looking for so they can notify you if anything comes up.

Beyond using a real estate agent to scour the MLS for you, many agents come across owners of distressed properties that don’t want to list their homes. If they know you are actively looking for these types of deals, they will gladly pass them on to you so you can buy them.

Networking with Real Estate Professionals

Many professionals within the real estate industry come across distressed properties all the time and would happily let you know about them if they knew you were looking for them. The key is to let everyone know what you do while considering what you can do for them in return. Your success rate will be much higher if you let them know you plan to reward them somehow. For example, a real estate attorney might keep you in mind more if you consistently use them for your closings.

Here are some real estate professionals that you should constantly be networking with:

  • Home inspectors
  • Property managers
  • Contractors
  • Real Estate Attorneys
  • Appraisers

Once again, make sure to express genuine interest in their business when talking with them and ask questions about how you can work together.

Real Estate Data Aggregators

Many of the distressed property types listed above can be found using a service such as Propstream. This service allows you to scan an entire area, such as a county or zip code, and filter the properties based on specific metrics.

Some distress types that can easily be obtained using this service are pre-foreclosures, liens, underwater, and divorces. There are hundreds of filters you can use to pinpoint the exact properties you want to invest in.

Once you find a list of houses that fit your criteria, your next step is to contact the owners to see if they are interested in selling. You can use direct mail or skip trace the owners and plug them into a CRM to call and text them.

One bonus tip to increase your success rate is to use list stacking to increase the likelihood of a property being distressed.

Online Marketing

Most of the strategies listed here for finding distressed properties involve reaching out to specific homeowners and asking them if they’re interested in selling. However, there are ways to have these homeowners come to you when they’re ready to sell.

Online marketing is one of the best ways to generate a line of motivated sellers coming to you. This marketing strategy revolves around your website. Many real estate investors have a website, but very few do the work required to get their site to show up in front of motivated sellers.

There are two main methods to get motivated seller traffic to your website: SEO and PPC

SEO

SEO (Search Engine Optimization) involves optimizing your website so that it shows up on the first page of Google when people search for terms related to selling their house. This subject is pretty complicated, and we could devote several articles to it and still just be scratching the surface.

However, SEO really boils down to two things: content and links. You must write high-quality content that engages your traffic and have other sites link to yours to show Google that you are a credible source.

PPC

Pay-Per-Click advertising (PPC) is essentially the paid shortcut version of SEO. Whenever you search for something on Google, the first few results say “Ad” next to them. Instead of performing SEO to rank at the top, these sites paid a fee to be placed there.

You can do the same thing for your real estate investing business. By running PPC campaigns, you can direct motivated sellers to your website and have them contact you about making an offer on their house.

Facebook Ads

Instead of waiting for distressed property owners to search for you online, what if you could get in front of them while they’re scrolling on social media? That’s the point of Facebook ads. After all, people spend more time on their phones now than ever.

Running social media campaigns can be a great way to find distressed properties. Just like online marketing, the sellers come to you instead of you having to chase them down.

Facebook Groups

While Facebook ads are a fantastic way to get in front of motivated sellers, they do cost money to run. You must allocate a sizeable ad budget to work with the algorithm and get in front of enough people to start generating leads.

One lesser-known way to find distressed properties is posting in local Facebook groups. Many online yard sale and buy/sale/trade groups have thousands of members in them. By posting in them and letting people know you are looking for a fixer-upper, you will likely spark many conversations that lead to you buying a distressed property.

Auctions

Once a homeowner has gone too long with delinquent mortgage payments, their lender will foreclose and sell the property at an auction to recoup their money. These auctions are an excellent place to find distressed properties for sale.

In many counties, one law firm is responsible for managing the auction of most foreclosed properties. To see the upcoming foreclosure auctions, you can often visit their websites and find a schedule. Surprisingly, many foreclosure auctions are held on the county courthouse steps.

One thing to avoid is bidding on a house site unseen. Although you are looking for distressed properties, some of these can be severely distressed. It is helpful to at least put eyes on a house that you plan to bid on, even if you can’t get inside.

Pre-Foreclosure Data

One problem with buying a distressed property at auction is that it can be highly competitive. It doesn’t take any special marketing to find these deals. You just have to show up on the courthouse steps at the right time. This ease of access results in numerous interested investors and the prices being bid up.

Instead of waiting until homes go to auction, you can buy them while they are in pre-foreclosure. Technically you can buy a house up until it goes to auction, but it works much smoother if you budget for at least a couple of weeks to get payoff and title information.

To find properties in pre-foreclosure, you can use a filter within Propstream or create an account with foreclosure.com. Once you have a list of prospects, you can use the marketing strategy of your choice to contact them.

Code Violations

There are specific standards that houses must meet in order to be considered safe, and these standards are usually set at the municipality level. When a home does not meet these regulations, they are cited a code violation.

While some code violations are petty and don’t mean much, distressed properties can be given severe violations due to the danger they pose. When it gets bad enough, some cities will decide to demolish the property to prevent it from continuing to be a public nuisance.

Check on your city’s website to find properties that have been given code violations. They often publish these violations. You may have to do a little more digging than that, but the harder a list is to find, the better it usually is.

Pros and Cons of Buying Distressed Property

Although buying distressed properties offers several advantages, it is not for everyone. While they often offer steep discounts, they often come with many problems.

Benefits of Distressed Properties

Distressed properties are what keep real estate investors in business. Most investors’ business models simply cannot run by paying full price for houses. Here are some of the main reasons why you should be trying to find distressed properties:

  • Can negotiate steep discounts
  • Allow for forced appreciation through renovations
  • Make more cash flow when renting
  • Structure creative finance deals

Drawbacks of Distressed Properties

Just because distressed properties are what most investors are looking for doesn’t mean that they don’t pose any issues. Even though they offer the highest rewards, they almost always present major headaches. This doesn’t mean you shouldn’t pursue them. You should just be aware as you set out to buy distressed property.

  • Often require major renovations
  • Unforeseen house problems
  • Complicated seller issues
  • Fast timeline with pre-foreclosures
  • High competition from other investors

How to Prepare to Buy Distressed Property

Before you set out to find distressed properties, there are some things you should get in order first so that you can easily convert the deals you come across. Here are some ways to be proactive so that your investing journey goes more smoothly.

Get Finances in Order

The last thing you want to do is find a distressed property and negotiate a killer deal with the seller but not be able to close because you can’t get the money. How embarrassing!

Before you start heavily marketing for deals, you should take some time to figure out how you will finance your deals. This could be personal cash, bank financing, or private money lenders.

If you plan to work with local banks, you should meet with them to see what loan programs they offer and what their requirements are for investment properties.

Learn Creative Financing Strategies

Many distressed properties are great candidates for creative financing. In some cases, creative financing is the only way to make a deal work because there simply isn’t enough margin for a traditional flip.

Learning about subject to’s, seller financing, wraparound mortgages, and lease options will help you convert more leads and construct even more profitable deals!

Find Reliable Contractors

When you buy distressed properties, you will inevitably have to renovate them. Unless you want to be swinging hammers at night after looking for deals all day, you will need to build a team of contractors.

Having contractors that you can count on will allow you to make offers on houses with much more confidence. Instead of wondering how you will be able to fix them up, you can be sure that your team has your back.

Find a Good Title Company

Not all title companies are created equally. Some specialize only in cookie-cutter transactions from the MLS, while others understand how real estate investors operate and can help you close creative deals.

A good title company will make your life much easier, so it is crucial that you find one or two that you plan to work with early on.

Work with a Helpful Agent

A knowledgeable real estate agent can be an invaluable part of your team. Beyond having someone to list your properties to sell, they can advise you on deals and market data. You should look for an agent you can bounce ideas off of and who will give you objective advice when you are considering making an offer on a distressed property.

Develop Your Marketing Strategy

Although we’ve presented many ways to find distressed properties in this article, you will still need to figure out the best way to market to them. Whether you plan to send direct mail, cold call, or text your prospects, you must build out your marketing plan if you want to be successful in purchasing distressed properties.

Now You Know How to Find Distressed Property

The ability to find distressed properties to buy is one of the most important skills you can have as a real estate investor. Struggle to find them, and your business will suffer. But your business will have no limits if you can consistently find houses in distress.

Buying distressed properties is not easy, but it is definitely possible with hard work. If you implement the tips presented here, you will be well on your way to finding consistent, profitable deals.

We wish you the best on your investing journey!