Distressed Properties: Everything You Need to Know
A good deal on a home is something new home buyers are always searching for. Despite what many may think, there are actually plenty of deals available on the market. A great way to land a good deal is to look into distressed properties. While there is much risk associated with a purchase like this, many people, particularly real estate investors, purchase homes below market value with the intention of flipping them and making major updates in order to lease out or sell the property at a later date. For the average buyer with the financial bandwidth, this risk could be one that is worth taking on, especially since they can save a lot of money in the long run as long as they make smart decisions.
What Is a Distressed Property?
A distressed property is a home that is close to foreclosure or owned by the bank. Let’s highlight the three situations in which there will be a distressed sale held for a property.
Homes go into foreclosure due to a buyer defaulting on their monthly payments. At that point, the bank will send the home into foreclosure and repossess it. Lenders want to get these homes off of the market as quickly as they can and so they will list the property in a foreclosure sale or auction it off to the highest bidder.
Another type of distressed property is an REO property (real estate owned property), which is one that is unable to sell at an auction. Lenders do not want to hold on to these properties for extended periods of time, so they are more than happy to sell them to buyers at a significant discount.
The last distressed property type is a home that is listed as a short sale. Homeowners at risk of foreclosure opt to do this sometimes when they owe more money on their home than it is actually worth. In a short sale, the buyer or investor will purchase the home for less than what the owner owes so that they can avoid a foreclosure.
Can You Finance?
If you wish to finance a distressed property, it will be quite difficult due to the fact that its value is not easy to determine. Not to mention, most auctions require buyers to pay for distressed properties in all cash. While you likely won’t be able to finance a distressed property, you will probably be able to get away with offering a low price. Lenders want to get these properties off of their hands to prevent foreclosure, so there is a high chance you will be able to come to an agreement.
What Are the Risks?
You are assuming a lot of risk when purchasing a distressed property. Take some time to think about the risks and weigh whether they are worth taking on or not. When purchasing a property like this, you are purchasing it as-is since the seller cannot afford to do any needed work on the home. Any issues that come with the home are your responsibility and you will have to cover them out of pocket. You also run the risk of going to an auction and being outbid. Auctions are extremely competitive, and even if you take the lead in a bidding war, someone can always come around and offer more. The property is not officially yours until you are able to finalize the sale. It is also worth mentioning that the process of buying a distressed property is a lengthy one. It is not as seamless of a process as it would be with a buyer who is not behind on their payments. Typically, it takes anywhere from two to three months to close on a home. Distressed properties can take anywhere from six months to a year. The process is much more complex, there is more required on the buyer’s part than usual, and lenders have multiple properties that they are handling. So, while they do wish to be free of the property, they will likely become tied up in other things. As you can see, while distressed properties can be an excellent deal to take advantage of, it is important to consider all relevant factors before closing on this type of property.