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Dealing with Distressed Properties

Are you into distressed properties investment? Well, we’ve got all that you will need. Investing in distressed assets is a smart move that promises great returns. And like any other great investment strategy, there are risks and rewards. However, investing in this sector is not as easy as buying and selling, but it requires knowledge, skill, and experience. That is what you will find in this guide. 

On the other hand, you may be facing financial difficulties and unable to meet your mortgage obligation. While trying to hold on to your property may be your first instinct, sometimes it’s not worth it. And there is more to learn about that in this guide. 

Buying Distressed Property

Since the collapse of the housing market in the US in the 2000s the investment in distressed property became popular. While the sector has fewer distressed properties nowadays, it’s still a lucrative investment. 

What’s a Distressed Property? 

It’s any property with a risk of foreclosure due to delinquent mortgage or repossession by the government due to tax lien.  Such properties are financially and physically (or either) not maintained by their owners. 

Categories of Distressed Property

There are three major categories that distressed property belongs to. They include: 

  • Foreclosureat this point, the mortgage lender or bank seizes the distressed owner and sets it for auction. Here, it’s the highest bidders who have it their way. 
  • Short salethis is where you find an owner selling their home for less than what they owe in the mortgage. 
  • REO (Real Estate Owned) if the auction of the property fails, the bank takes ownership of the property and settles the tax liens plus conducts eviction if necessary. 

 Clues for a Distressed Property 

  • Physical State 

Deterioration of the house plus the compound is an indication of neglect. Either due to finances or the owner leaves in another state. They will be overgrown weeds, from ground to water gutters, and including in the cracks on floor and wall. Also, the paint is old and peeling off. And the door and windows may be broken. 

  • Debt-linked clues

Defaulting severally on a mortgage payment is another clue that the house is about to become a distressed property. 

  • Transaction Clues

This involves a comparison of historical and current sales data plus the current estate value to determine whether the owner will have an itch to sell the property. And if the property owner spent more during the purchase, it’s a sign of a potential  home. 

  • Important Life Events 

Two major life events are clear clues to a distressed home. That is the divorce and death of a homeowner. In both cases, the beneficiary can agree in selling the property and share the money. 

Profiting Tips in buying distressed property 

  • Avoid distressed neighbors

This is the number one thing to watch out for before investing in a given distressed home. Examine the neighborhood if it’s still occupied. If most of the houses are empty, then avoid that location. It means almost all the houses will face foreclosure and you may get stuck with the property.  

  • Have the cash ready 

Cash on hand means you have a higher chance of securing a distressed property. If you can pay up to a 20% discount in advance, the seller and lender will see you as a serious investor. Also, with the money, you can begin settling the inspection and repair costs. 

  • Home Inspections

With foreclosures, the seller is not responsible for repairs or any renovations. Therefore, you need a professional inspector along with you. They will help you estimate the repair cost, which you can use to determine the after renovation value of the house. 

  • Patience 

There are lots of delays, setbacks, and frustrations in this line of investment. But with patients, you will earn a good profit. Here, you are dealing with a complicated process unlike the conventional way of dealing with the buyer only. Before any sale agreement is complete, the lender must approve it. And this is where it takes longer for a transaction to complete. 

Hire a reliable realtor you know to deal with owner-motivated distressed property. They will help you through the challenges and pitfalls of distressed property sales. 

  • Familiarize with foreclosure laws in your state

Some rules and regulations govern foreclosures in each state. To ensure you are not breaking any law, familiarize yourself with these laws for smooth transactions. 

  • Mortgage Pre-approval

Mortgage pre-approval will portray you as a serious investor when targeting banking repossessed or distressed properties. Remember, bigger companies and investment firms are targeting the same property you are. And banks will only pass bids that appear to be serious. 

Pros

  • Buying cost is below the market value 
  • Easier financing especially with bank repossessed properties. 
  • Gives you access to the potential market that was unaffordable
  • Great opportunity to earn a living through fix-and-lip
  • Low costs mean higher profit 

Cons 

  • Intense competition from fellow investors 
  • No guarantee when flipping the property
  • All transactions require cash
  • You will invest in the renovation of the property 
  • Unexpected repairs 

Finding Distressed Property

If you are working on investing in distressed properties, you are on the right track. And here are ways on how to find distressed properties: 

  • Local Auctions

There are local auctions for distressed or foreclosed properties. In these venues, the highest bidders have it their way. While lenders and banks are at the forefront of disposing of these properties, you may also find homeowners. But do not drop your guard as auctions are not as easy as pledging the highest money. 

All the transactions are in cash and property finance by investors is not applicable. To find a local auction venue, go through the local paper. Also, you may try online auctions on popular sites like Tranzon, RealtyTrac, or RealtyBid. 

It’s a traditional technique but a potent one in finding distressed properties. Driving for dollars will require  a car to use in driving around various residential areas searching for signs of neglect.  It should be easy to spot one, as most homes under distress stand out among the rest. So, during your hunt, check for the following signs:

  • Pile up of newspapers and mails at the entrance
  • Damages on the windows, door, rain gutters, fence, garage, and roof
  • Unkempt lawn and yard with overgrown weed
  • Notices from the mailbox, to door to windows and wall
  • Exterior paint fading and peeling off
  • Cracks on the wall, walkway with weeds growing through them

If you notice a property with the above signs of neglect, it’s a potentially distressed property you can look into. 

MLS

Also known as Multiple Listing Service is a great spot for locating distressed properties with amazing deals. And any investor in this sector will tell you so. It’s a resourceful place with the latest offers you can invest in. What’s more, they offer great investment opportunities you may not want to miss out on. But to access the records on this site, you need real estate certification. 

To avoid such barriers, you can work with an agent with access to this site. On the list of properties, you will find various kinds of distressed properties. But for the best investment, target those that have been on for several months. You will have better bargaining power and be able to get a lucrative offer. 

  • Court Records 

Surprisingly, court records are the best place to locate distressed properties. First, you can search for homeowners with a delinquent mortgage. They are potential investments for property in distress. Since most of them fear foreclosure, they can easily sell the property and be free from the mortgage obligation. 

Also, in court records, you can look for probate opportunities. It’s a lucrative place with investment opportunities. Due to an important life event like death or divorce in a given family, there are properties left to divide. In most cases, the beneficiaries may choose to dispose of the property and divide the money. 

Since it’s done urgently, the rate of selling such properties is often at a discounted rate. However, it’s not an easy transaction, there are specific processes to follow since an executor or attorneys are included. 

  • Government Agency

There are multiple government agencies with a list of repossessed properties. Like the IRS, they repossess properties of owners who have failed to clear their taxes. Also, you may look into HUD and what they have in their list of foreclosed properties. Other agencies include USDA, VA, FDIC, US Marshals, and Army Corps, etc. 

  • Tax Records 

On tax records, specifically in your county, you can find homeowners with delinquent taxes. And this represents a primary stage for a property about to be in distress. And with hardship in settling their taxes, that means the owner could be having difficulties with their mortgage too. Therefore, try your luck and you may find a homeowner ready to sell their home at a discount to end their financial strain. 

  • Online Searching 

When searching for properties physically to invest in seems impossible, try online. With online searching, you can relax at home while contacting various sellers and making deals. Just search for websites offering distressed property investments. But before you celebrate your findings, check the date of the post. Also, find out how many other investors are targeting that property.  

FAQs

What are distressed properties?

They are properties on the edge of foreclosure since the current owner is financially strained and unable to maintain them. Often, such properties are in the hands of banks or mortgage lenders due to defaulted payment of the loan. And sometimes, they are state-owned due to repossession as a result of a tax lien. While poor physical maintenance is a clear indication of distressed property, it’s not always the case. Some owners are just neglecting their properties. 

Who buys distressed properties?

  • Home Buying Companies that buy distressed properties 
  • Real estate Investors 
  • House Flippers
  • Buy and Hold companies/ investors 
  • Cash Buyers like iBuyers
  • Private Investors on Distressed assets 

Where to find distressed properties

  • Government Agencies like USDA, VA, FDIC, US Marshals, IRS, HUD, and Army Corps.
  • Local Auctions
  • Mortgage Lenders
  • REOs listing 
  • MLS
  • Online – in distressed properties sites 

What is a distressed property?

It’s any property with a risk of foreclosure due to delinquent mortgage or repossession by the government due to tax lien.  Such properties are financially and physically (or either) not maintained by their owners. 

How to sell a distressed property

There are several options you can rely on to sell a distressed property. You can decide on which one to use depending on your situation and how much you want to get. 

Appraisal

This is the first most important step. You should know the current rate of your property in the real estate market. 

Lower your price

Thereafter, you can set the target that you want to obtain from selling your distressed home. But make sure it’s lower enough to attract buyers and satisfy you at the same time. After this step, you can choose any of the following options: 

  • Self Sale

If you believe in self-selling abilities, then your capabilities apply here. But unless you have excellent marketing skills and a rich network of buyers, be patient. This method only applies to those who are reluctant about selling their home. 

To start, get a home inspector to give you an outline of what needs repair or change in the house. If there are only a few manageable repairs, you are on the right track. However, if it costs thousands in repair, then work with another method of sale. 

If the sale can go through, you will have more to pocket since no agent fee will be required. However, all the effort will be on you, from advertisements to organizing open houses, to negotiations, and completing paperwork.

  • House Flippers

Here you are dealing with mega organizations that invest in distressed properties. Unlike Self Sale, you will sell the house in its current state without doing any repairs. They provide you with cash in exchange for your property and they are quick to respond. 

So, once you get in touch, within a few days you will get an offer to accept or deny. However, there is also a downside. House Flippers’ offer is not negotiable and unfair compared to the market price. Also, it takes more than a month to complete a deal with them. 

  • Real Estate Agents

You can sell your house with the typical route of using real estate companies. With this path, you can get a better offer. However, you will incur an agent fee plus renovation costs. Real estate companies only sell properties that pass both building code regulations and safety regulations. If there is a chance you can manage the renovations, go ahead. And one last thing, the sale is not immediate, therefore, you may still incur an escrow fee on top of the agent fee. 

  • Cash Buyers 

Lastly, Cash buyers are a lot like house flippers except for their offers. They will buy your home in the current condition without expecting renovations. On the bright side, their offer is negotiable and higher than house flippers. While they are few in the market, you can search and encounter reliable ones like iBuyers. 

How to find distressed properties

Finding a distressed property is challenging but can be relatively easy with the following options at hand. 

  • Probate Court –check records on bankruptcies, death, and divorces, they are all signs for pre-foreclosure. 
  • Follow up local auctions – you will find here seized properties by mortgage lenders and banks selling at a lower price. However, with the price biding means it’s the highest bidder who will get it. 
  • REOs listing – here, you will find bank reposed properties that failed to auction. It’s a place with the best investment options. 
  • Investigation – there is an online site for distressed homes. Do a thorough investigation to get a better offer. 
  • Tax records – You can use the public record to search for homeowners with delinquent taxes on property it’s a sign of pre-foreclosure 
  • Using Multiple Listing Service

How to get rid of distressed property

As a distressed property owner, sometimes disposing of the distressed asset is the best way to ease the financial pressure. What’s more, it’s a great way to ease mental pressure as a result of foreclosure due to what you owe. And depending on your loan circumstance, you can save or lose your good credit record. 

For those with lower loans, it’s a chance to start fresh with financial backing. But if you owe more than what you can gain from your asset value, releasing the asset is okay. Whichever way you choose, the following is how to get rid of distressed property: 

  • Hire an Appraisal

To get rid of your distressed property effectively, start by hiring an appraisal. They will help you determine the worth of your property. With the value, compare it with what you owe to determine the next cause of action. 

  • Strategic Default

This is the classic means of getting rid of your property in distress. But it only applies, if what you owe is more than the value of the property after the sale. So, what you can do is pack your things, move out and send the keys to the lender. 

Also, include a note indicating you’ve given them the property and are no longer interested. It’s informal but better than the fallout that happens during foreclosures. Also, you have a bit of control in this case. 

  • Deed in lieu

Unlike strategic default where you walk away, deed in lieu is more formal. Still, it doesn’t save you from a poor credit record. However, you have a chance to bargain with the lender to set you free from the mortgage or loan obligation. 

  • Deal with Cash Buyers

If the value of your properties exceeds what you owe, then act fast before foreclosure. At this point, banks, mortgage lenders, or any commercial lender cannot come to your aid. They don’t work with distressed properties and the best solution is selling your property to a cash buyer. 

Cash or professional buyers are a few but worth a try. Also, avoid those without actual cash, those sourcing private funds, or those liquidating some of their assets. They may not be as reliable as you may hope.

  • Short Sale

If a cash buyer sale doesn’t work out for you, consider a short sale. This means you will be selling the house at a value lower than what you owe. While it doesn’t save you from the remaining balance, it reduces what you are to pay. Also, it’s a good strategy for coming up with a new repayment plan without suffering more financial distress.  

  • Act Fast

On the brink of foreclosure, there is no room for second thoughts or waiting for better offers. Keep in mind, the longer the property is on market, the lesser its value will be according to buyer expectations. And through acting fast, you can avoid future financial difficulties, especially if you are forced out by a notice. So, if an offer is presented to you, grab it. 

NOTE: When contacting or showing the buyers your properties, stay calm and confident. Any sign of desperation will attract low offers. 

SUMMARY

Investing in a distressed property without a doubt is the best investment strategy in the real estate market. However, finding a distressed home is not as simple as it looks. But, when you combine innovative strategies in this guide it’s bound to be relatively easy. 

With tips on how to buy distressed properties, you can know where to start. And with distressed property leads from how to find distressed properties, you will find investments properties with great rewards. 

On the other hand, if you are the property owner searching for techniques of disposing of your distressed property, keep in mind your credit records. If it’s your least concern, then consider a short sale, strategic defaulting, or deed in lieu. They are ways to discard distressed property quickly. 

However, if you want to maintain a good credit record, then move out and rent out the place. Use the proceeds to settle the mortgage. Also, if what you owe is lower, then sell the house fast, clear the loan balance and save your credit record. 

How to Manage Distressed Properties
How to Manage Distressed Properties

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