When operating in the world of real estate investing, you can diversify your portfolio in various ways. One way is distressed properties. Distressed properties are popular amongst savvy investors because they offer the potential for high returns, as long as the investor knows how to navigate their intricate nuances. Knowing how to find distressed properties gives investors access to homes that are often priced well below their actual market value, making them a rewarding investment route for those with an interest in restoration and renovation.
Whether you’re new to the industry or have been investing for years, buying distressed properties gives you the opportunity to build a career in renovations and flipping, a great way to generate massive profits. However, these hidden gems aren’t a dime a dozen, and working with them requires an acute understanding of their characteristics, where they can be found, and how to capitalize on the opportunities they offer.
We’ve put together this blog to expand on distressed properties, along with outlining a variety of proven strategies for finding them.
Distressed properties can broadly be defined as homes or commercial properties that are on the market, despite their unfaavorable conditions or characteristics. These homes are often on the market due to the owner’s own financial instability, whether as a result of a failed investment or simply due to defaulting on mortgage payments. But what is a distressed property in detail?
The most common form of distressed properties comes in the form of foreclosures. Foreclosures often take place when property owners fail to make their mortgage payments, leading to the lender initiating the process in an effort to recoup their losses. After the foreclosure process comes to a close, these homes often end up being reverted to the bank or becoming Real Estate Owned (REO).
You can go about finding bank-owned or foreclosure properties in a variety of ways, with many of them listed on online platforms such as bank websites and the specific platform Foreclosure.com. It’s worth noting that not all foreclosures are distressed properties, but there’s a lot of crossover between the two definitions. It’s also notable that you can purchase such properties before the foreclosure process is completed, giving you an edge over the competition.
Short sales occur when the owner of a property owes more on their mortgage than the property’s current market value. This means the lender can agree to a sale for less than the loan is actually worth as a means of starting anew. Short sales are often complicated, drawn-out transactions, so it can be worth enlisting the guidance of an experienced agent to help carry you through the process.
Short sales often take place to avoid the foreclosure process from occurring, as this can complicate things even further. These sales generally only take place for owners in poor financial situations.
Abandoned properties are another form of distressed property, being homes left vacant for a number of potential reasons. Things like deaths in the family, financial hardship, or relocation before sales have been made can all result in properties being abandoned. Finding distressed properties that have been abandoned can be completed by studying listings in your local municipality or on websites like Auction.com. Abandoned properties, while still technically owned by the former owner, are anyone’s game, so being quick on the draw is important. Properties become distressed for a number of different reasons, with some of the most common being financial difficulties, job loss, divorce, legal issues, and general neglect. However a home ends up becoming a distressed property doesn’t matter—the result is a property that you could invest in for less than market price. Investing in distressed properties isn’t a sure thing. Doing so often means taking on the responsibility of significant repairs and renovations as a means of returning it to a liveable, attractive state. It’s important to inspect every distressed property with a professional inspector. Otherwise, you could be surprised with unexpected, frustrating costs. Along with all of these risks, you could also have to participate in complicated legal proceedings, especially if working with foreclosures and short sales. Make sure to do your due diligence with title searches and consultations with real estate attorneys whenever possible. Finally, it’s important to remember that when you buy distressed properties, you may well have to negotiate with banks, which means navigating a lot of red tape and bureaucracy. It’s important to use your CRM software to your advantage, gathering as much information about distressed properties for sale as possible. However, even with all of this information to digest and a few challenges to navigate, distressed property sales and purchases can be highly profitable. But before you even get this far, you need to know how to find distressed properties.
Now that you know more about what constitutes a distressed property, it’s important to have strategies on hand for finding them. By using and tailoring these strategies for your local market, you’ll have the best possible chance of bringing distressed properties into your portfolio.
Having strong relationships with local real estate agents in your area can be incredibly beneficial for a number of reasons, let alone the potential for tips on distressed properties. Agents with experience in this field can offer valuable leads and insights, along with helping to guide you through transactions.
Much like typical listing sites, plenty of online platforms focus on distressed properties specifically. Websites like Foreclosure and Auction are some of the most popular when it comes to finding distressed properties—and regular browsing can give you a well-rounded view of what’s available near you.
One way to learn if anyone in your area is struggling financially is by studying mortgage reports. After doing so, you can contact these people directly, offering them the opportunity to sell to you—something they might be eager to do as a means of avoiding the implications of foreclosure.
Using public records is the best way to begin a direct mail campaign, with local courthouses and tax assessor’s offices often keeping records of properties in default, foreclosure, or with tax liens. By checking these public records, you can find reliable leads for distressed homes.
Real estate wholesalers work with the express intention of selling properties quickly, which means they often have connections with distressed homeowners. Building relationships with wholesalers can help you to create a stream of distressed property leads.
You can literally drive around targeted neighborhoods on the hunt for distressed properties. Search for properties with overgrown yards, boarded windows, and notices on their doors, along with other signs of damage and distress. Using a driving-for-dollars app like DealMachine or the built-in system from REsimpli, you can keep track of the properties that you come across, recording their characteristics and important data about them.
Foreclosure properties often end up in real estate auctions, which are a great place to purchase homes at lower prices. Still, it’s important to remember that properties bought at auction generally require full cash payments and can’t be mortgaged in the long term.
After a home has been foreclosed, it often becomes owned by the bank. This means that you can purchase the property directly from the financial institution, with many banks listing REO properties on their websites, however, there’s usually a lot of competition for properties of this nature.
Make sure to show face at local real estate investing clubs and networking events. Not only will this grow your reputation in the community as a serious investor, but it will also put you face-to-face with people who can provide leads on distressed properties.
Property management companies are often aware of properties that have been neglected or abandoned by landlords that have had enough of dealing with them. These companies are often willing to share leads with investors, especially if said investor is open to keeping them on as managers.
Remember, none of these strategies are overnight solutions, and most of them won’t work in an isolated sense. It’s crucial to use any and all of them in a strategic, balanced way, maintaining due diligence on every specific property throughout the process. If you stay on top of your market research and use these methods wisely, finding and investing in distressed properties can be a great way to grow your business.
Throughout this article, we’ve expanded on what a distressed property really is while also illustrating how to find distressed properties in your marketplace. All that’s left for you to do is put this information into practice.
However, it’s vital to remember that dealing with distressed properties is a different game when compared with typical real estate transactions. You’re not just agreeing to buy a property that you can easily sell off—you’re embarking on a journey of restoration and renovation. Consider the costs of this process and the potential return on investment carefully before you go hunting for auctions.
With the right amount of research, careful thought, and collaboration with other professionals, distressed properties can offer huge rewards. You just need to be careful in your decision-making.
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