Flipping Houses

3 Reasons to Always Buy Distressed Property (& How to Find One)

Expertise: Real Estate Investing Basics, Personal Development, Landlording & Rental Properties, Real Estate News & Commentary, Business Management, Flipping Houses, Real Estate Deal Analysis & Advice, Personal Finance, Real Estate Marketing
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Exterior facade on abandoned foreclosed home

Are you looking to save some money? Do you need a property and don’t mind doing some repairs to get you started? Do you want to start investing in properties? Well, look no further—distressed properties might be just what you need.

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What Is a Distressed Property?

To better understand this, let us take a look at how a property will get to a state of foreclosure. A homeowner wants to buy a house, so they will approach mortgage companies or financial institutions to get a loan. After the loan is approved, it is the homeowner’s (mortgagor’s) responsibility to ensure that they meet their regular payment agreement that they made with the mortgagee. 

However, if the homeowner fails to meet the agreement, the mortgagee or lender will have to ensure that they get back the money that they have provided to the homeowner. This process is what we refer to as foreclosure or repossession. There are also instances where houses are distressed because of the state of the property—that is, old homes that need repairs or buildings that are in mid-construction state and were halted because the owners ran out of money and weren’t in a position to complete the construction.

And that’s exactly what distressed properties are. They are homes that are for sale not because the owner wants to sell but because of pre-foreclosure, foreclosure, or repossession. These homes are usually offered up through an auction in which the highest bidder gets the property. If the auction is not successful, then the lending party, usually a bank or financial institution, will have to assume ownership of the property.

Here’s the kicker: These houses are usually offered way below market value. Basically, with these kinds of homes, all parties are trying to cut their losses. So, if you take into account the actual cost that goes into trying to sell something for a good price, lenders want to make sure they don’t have to invest a ridiculous amount of money or time trying to get that extra dollar. That means low prices. All they want to do is make sure they get at least some of their money back.

This also means that these properties usually have some work to be done. Most likely, the previous owner wasn’t able to carry out maintenance on the property because they were short on funds. Unfortunately, some homes really look pretty awful and need a lot of work.

Weathered clapboard Cape Cod house with bay window and green shutters

Related: House Reclaimed by Wildlife: How I Found My Latest Deal by Investigating a Distressed Property

Why Should Anyone Invest in Foreclosed Real Estate?

For many people, the way some of these properties look makes them really unattractive. But here’s the thing. These properties usually have a lot of problems on the surface, but superficial issues aren’t the worst part. It makes so much more sense to buy distressed properties than to build new properties.

Now, most of you may not agree with me because of the risk associated with acquiring distressed properties. But consider the disadvantages associated with building a new property, such as the time, permits, construction loans, and legal implications. With the purchase of a foreclosed property, your core focus is on your ability to get a good bargain and maximize your investment returns.

Read on because I’m giving you three great reasons to invest in distressed real estate.

1. Low and Affordable Prices

Due to the nature of distressed properties, it is quite easy to get a house way below market value. You can easily buy distressed properties all across the Midwest from 10 to 20 cents on the dollar, which is one-third of the cost of building a new property.

Why? Well, you have all the power. This is because homeowners are usually in a position where they really want to sell—and sell fast. And that places you in a better bargaining position to get a great offer. Don’t get me wrong. It requires a lot of skill to get a good price, even under these circumstances. But combining the position you’re in with negotiation talent is guaranteed to save you a lot of money going forward. If you’re looking to build a portfolio, that’s exactly where you want to be.

2. Financial Gain

Distressed properties create opportunities for real estate investors to make a profit. Whether you decided to buy the property to rent or sell, because the prices are below market value, your margins are simply a lot better when you’re working with distressed properties. That also means that you’re taking on far less risk. Think about it. If you can buy two properties for the price of one, not being able to sell one of them might not even be that much of a problem. You’ll just hold on to it longer.

Especially when you have very little financial pressure, this also comes with more freedom. As soon as you can’t sell a property, you’re in a far better position to wait until you do or until you get the price you’d prefer. That means even more profits and far less stress.

The law of home equity states that as the value of your property grows, your equity increases. With the purchase of distressed properties, you are instantly in a position to get yourself some great financial gain because you have bought a house for a value lower than its market value. Your net worth will increase dramatically after you’ve renovated the property.

Dirty pool sits unattended covered in leaves

3. Fewer Delays for Approvals

When building new properties, you are exposed to outside influences that cause delays and usually lower your margins. Some good examples include when the approval on your construction plans does not go in your favor, when your developer was in charge of getting the permit but didn’t do it in time, or when your contractor made some error that resulted in a poorly built property. Situations of this nature make a bad situation worse. And the worst part is that they can all occur with the same property. Sometimes this will force you to make decisions that will seriously affect your bottom line. 

This is not the case when you, for example, purchase a distressed home. In this case, the previous owners would have already gone through this process so you will not need to worry about getting government approvals and avoiding exasperating setbacks.

But best of all is the fact that you don’t have to be dealing with delay after delay. Sure, you’ll have someone renovate the property. But I’m sure we can all agree that the complexity for getting an entire home built is far greater than doing some renovations. This has a major impact on the timelines you’re working with, so you’ll be making more money faster with distressed homes.

Related: Rehabbers Beware: 5 Big Issues Distressed Properties Hide (& How to Detect Them)

How Do I Go About Getting a Distressed Property?

So your next question may be, “How then do I go about seeking a distressed property to buy?”

The best place to start looking for distressed properties is at the bank or other financial institutions. Usually, they don’t have the time to advertise and will seek out real estate agents or companies to market their properties.

If you want, you can also take a look at foreclosed properties from government-owned institutions, such as the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs, or the Internal Revenue Services Department (IRS), to name a few. Usually, these institutions will advertise their properties in the newspapers.

Another place to find distressed properties is to do a simple Google search for properties in your area that are on auction or up for foreclosure. You can look for online public records at the county courthouse, which records and stores real estate transactions for a property in that county. Make sure to check out Craigslist daily, and try sending out some yellow letters.

Finally, it is always best to contact an experienced real estate investor who specializes in this area to guide and advise you with the best advice for your purchase. Apart from the fact that successful real estate investors have access to all kinds of lists, you can take advantage of their networks and their connections to banks, mortgage companies, and real estate agencies.

Key Takeaways

Now that you have all the facts, you are in better position to start owning your first distressed home in the future. Often the difference between a successful real estate mogul and a failure is not one’s better abilities or ideas but the courage that one has to bet on his ideas, to take a calculated risk, and to act.

Most of all, it will come down to your ability to sniff out the perfect opportunity. That means the highest chances on getting your bid accepted, the right location, and having manageable renovations. All these things factor into what makes a great deal or not.

In the end, it’s important to remember that you’re looking for an undervalued property—not just a cheap one. You can buy a $60,000 property for $10,000 and still end up with a loss. Some deals just never make sense, and if you understand that, you’ll love what distressed properties have to offer for you.

Do you buy distressed property? Why or why not?

Let me know your thoughts with a comment!

Engelo Rumora, a.k.a."the Real Estate Dingo," quit school at the age of 14 and played professional soccer at the age of 18. From there, he began to invest in real estate. He now owns real estate al...
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    Lisa Bryant from Washington, District of Columbia
    Replied almost 4 years ago
    Hi, Engelo- Thank you, for your article. In general, every investment in real estate may come with challenges. Even distressed properties. An investor may allow their budget to cover $15,000 more for an extra problem, for their rehab, but then find a major issue that is beyond their bottom-line. I think that no matter what strategy, you use, the unexpected should be expected, in real estate. Good information. Learn Apply, Produce!
    Engelo Rumora Specialist from Toledo, OH
    Replied almost 4 years ago
    Thanks Lisa, I have done 400+ deals to date and every single one of them went over budget lol Much success 🙂
    Charles Worth Investor from New York City, New York
    Replied almost 4 years ago
    Engelo, always buy distressed huh. Does this mean now that you have a brokerage you are focusing more on that than TK?
    Engelo Rumora Specialist from Toledo, OH
    Replied almost 4 years ago
    Thanks for your comment Charles, What does my business focus have anything to do with the blog? lol To answer tho, Ohio Cashflow is at a stage where I’m not needed 16hrs per day. List’n Sell is just another company added to the mix of the many I’m a part off. I’m not sure if I told you, but I see myself like Richard Brandon. Focusing on the people and running hundreds of different companies in different industries. Need to catch up soon, my travels haven’t taken me to NYC for a while 🙂
    Christopher Smith Investor from brentwood, california
    Replied almost 4 years ago
    Another Click Bait Headline – I hope one day we can get past this rather silly and unfortunate practice and more responsibly title what we write about.
    Engelo Rumora Specialist from Toledo, OH
    Replied almost 4 years ago
    Aren’t they all “Click Bait Headlines”? Maybe the problem is with you and not the articles mate. Start from yourself. Much success
    Christopher Smith Investor from brentwood, california
    Replied over 3 years ago
    No I don’t think so. People should develop readership based upon quality writing not gimmicks and carnival barking. Mate
    Engelo Rumora Specialist from Toledo, OH
    Replied over 3 years ago
    Maybe you are better suited for journalism rather then real estate investing. Just a thought mate 🙂
    John Teachout Rental Property Investor from Concord, GA
    Replied over 3 years ago
    All of our real estate investment properties have been distressed. The most recent one we purchased from the actual owner (not a bank/REO) for the first time. This seller was getting out of rentals so she could relocate to another state and retire. This one can hopefully be turned fairly quickly. The reason we buy distressed properties are: 1. We have the tools, equipment and knowledge to do all the refurb ourselves. 2. By doing our own work we have forced equity. 3. We are debt averse and only pay cash for properties. ie, we have no debt or mortgages including on our personal residence. We couldn’t afford to buy properties that aren’t distressed within those parameters.
    Engelo Rumora Specialist from Toledo, OH
    Replied over 3 years ago
    Thanks John, Great comment. When buying distressed, the process is more in your hands rather than anyone elses. You get to call the shots and thus have less risk. I love the saying “Business is easy, people make it difficult” We always try to minimise any outside folks from our business practices. Thanks again and much success
    Maciej Charyga Investor from Las Vegas, Nevada
    Replied over 3 years ago
    Engelo, this was a very well written article. Thank you for your insight. Good read.
    Engelo Rumora Specialist from Toledo, OH
    Replied over 3 years ago
    Thanks for your kind words mate Much success
    Ryan Robertson
    Replied over 1 year ago
    Hi! Thank you for sharing this helpful info! I’m interested in investing in “discounted” or “distressed” properties and I’m looking to find a good resource for Data so I can compare profitability, risk, and length of time to acquire each type of distressed property. (Foreclosure, short sale, REO, liens, Estate-sale…) Do you or anyone in this awesome community know of any good resources to find data like this? Thanks in advance!
    Deanna Opgenort Rental Property Investor from San Diego, CA
    Replied 9 months ago
    Word of mouth, tax lien sales (it might be possible to purchase from the owner, & redeem it before it goes to auction). Contact realtors who deal with probate properties. You might even check with city hall to see if they know of "problem" properties -- sometimes a private party can make a deal that works for the owner allowing them to at least salvage something, whereas cities can only penalize them with fines.