Buying a distressed property can be a great deal for rehabbers, but it is essential that you do some research first. Distressed property sales were prevalent during the real estate meltdown, accounting for an estimated one-third of all home sales between 2008 and 2011, but are far less common today, accounting for approximately 10% of home sales last year. Properties in this category are usually offered at reduced prices and marketed as short sales or foreclosures. The greatest risk factor associated with distressed properties is that the home is being sold “as is”; meaning that the owner or lender won’t be taking responsibility for needed repairs. As a result, these properties are often priced below market value to entice buyers to overlook this risk.
Low price is the main reason to buy a distressed property. One of the principal disadvantages is that you may not be able to gain access to the property for a walk-through and inspection. Many of these houses have been neglected for years and are thus in poor condition. Extensive repairs to walls, plumbing and/or electrical may be required before the house can be re-sold. In addition, because of poor condition, some distressed properties may not meet the requirements of the lender. In some cases, the lender may ask for an appraisal to help decide whether the property has value.
Buyers of distressed homes must also be patient since these deals can involve complicated paperwork and unpleasant surprises such as second mortgages, unpaid water bills and court liens against the property.
Here are some other points to keep in mind when shopping for a distressed property:
1. Drive around to find properties.
One of the best ways to identify distressed properties for purchase is to drive around neighborhoods, looking for homes with obvious signs of neglect such as overgrown yards, exteriors in need of paint, no lights on after dark, legal notices on doors or windows, and newspapers piling up on the porch. Once a distressed property has been identified, you can visit the local tax assessor to obtain information on the property owner. Some property owners are eager to sell to avoid foreclosure while others won’t respond to your inquiry. Another strategy is to hire a realtor specializing in distressed properties to contact the home owner.
Rehabbers can also use online sources to obtain information on distressed properties. However, some of these sites charge user fees and listings may be outdated or otherwise inaccurate. Realtor.com has a free “Homes for Sale” site that can help you narrow your search and RE/MAX has an online function that searches for distressed properties.
2. Buy in a good neighborhood.
Distressed properties in up-and-coming neighborhoods can be terrific deals, but avoid purchasing in neighborhoods where foreclosures and empty homes are abundant. There are many reasons that neighborhoods become depressed and no guarantees that the area will ever stage a comeback. In the case of a worsening neighborhood, you run the risk of your bargain-priced house losing even more value down the road or even becoming unsellable.
3. Walk through the property with a general contractor.
The purchaser of the distressed property will be responsible for making all necessary repairs. Since the house is already priced below market, most banks won’t make further price concessions for repair work. A home inspection may help you to determine the materials and work involved in prepping the property for re-sale. For some distressed properties, it may also pay to hire a specialty inspector, who will examine the property more carefully for big ticket repairs such as mold remediation or replacing the septic system. Some rehabbers walk through the property with a general contractor to get estimates of repairs. A good rule of thumb is to add another 15-20% to the general contractor’s estimate to cover unexpected fixes. A thorough title search should also be done to avoid headaches later.
4. Be prepared for a long, arduous process.
Delays and complications are typical when acquiring a distressed property. In most cases you will be dealing with a bank or other lender rather than the home owner. Weeks or even months may pass waiting for the bank to respond to your offer. Closings are often delayed as well by the discovery of a second mortgage, tax lien or other encumbrances on the property. If you aren’t familiar with the process, it may be advisable to work through a real estate agent specializing in distressed properties to handle the sale. The real estate agent will know how to push the bank and other involved parties to move the process along.
In general, foreclosures move faster than short sales since the property is already controlled by the lender. Another advantage of a foreclosure is that you deal directly with the lender rather than the home owner, which takes emotion out of the process. A bank is much more likely to price the property realistically than the home owner. On the flip side, a home owner motivated to sell is more likely to have maintained the property in good condition. Since the foreclosure process varies from state to state, you should check whether your state requires a judicial process for foreclosure since court proceedings can take 12 months or even longer.
You may be able to speed up the purchase process if the home qualifies under the Home Affordable Foreclosure Alternatives program (HAFA). If the home qualifies, the bank is required to respond to your offer within 30 days.
5. Have financing in place.
Competition for fix-and-flip properties can be fierce in some markets so you need every advantage, including ready-to-go financing. Many distressed houses are purchased for cash so if you don’t have cash ready, you should take the necessary steps to get pre-qualified by your lender. Pre-approved and cash buyers have the best odds of closing the sale when multiple offers are on the table. In addition, most banks disposing of foreclosed homes won’t even consider a contingency offer, such as needing to sell your current home before closing on the foreclosed property.