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Buyers Beware: 3 Things to Look Out for When Purchasing Property During a Recession

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viewing in a magnifying glass the design of a house layout / inspection of construction objects

As we enter into a COVID-19-induced recession, many real estate investors say that this is the time to have cash ready to buy properties. Good investors understand that there are opportunities during times of panic, but wise investors know the obstacles to navigate when finding some of these properties.

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This article will focus on a few aspects of investing to watch out for when buying a property in the midst of an economic downturn.

Deferred Maintenance

Let’s be honest, there is a pretty small chance that you are going to find a well-maintained property with great tenants during a recession, where the owners just couldn't pay for it anymore. Most owners of investment real estate who take great care of their property and have reliable, well-behaved tenants in place are doing well across the board—they also understand the importance of asset reserves and protection in times like these.

caution spray painted in yellow on cement

Odds are if you find a great recession deal, you’re looking at a lemon when it comes to deferred maintenance. This isn’t necessarily bad, though. You can score some great deals on these types of properties and turn those lemons into lemonade! Just understand that you will likely have some big fixes to attend to, because the sellers probably used every last dollar they had to just keep the ship afloat in the first place.

Have an inspection done on the property and be prepared to front a little more for capital expenditures. When it comes to reserve dollars, it's better to have them and not need them, than to need them and not have them.

Related: The Essential Importance of Cash Reserves in a Crisis

Non-Performers

Another type of property to be aware of is the classic “non-performer.”

These properties often show characteristics of poor management. Non-performing properties may consistently have problems obtaining rent, whether it’s from irresponsible tenants or pushover management. We have commonly seen this in properties that are fully paid off and have no debt service (often self-managed).

You can spot a non-performer by identifying lazy bookkeeping and shoddy maintenance practices. These properties are frequently sold by sellers who need help making ends meet. And if they’re in a pinch, you might be able to get a good deal.

There are a host of reasons why targeting these properties is a good idea in recessionary times, but just understand that you’ll have an uphill battle when you buy one. You need to have a plan in place to recover the asset.

Evictions

Recessions can really hit hard for people who live paycheck to paycheck. This can turn into a problem for investors who are purchasing property during a recession.

Nobody really wants to evict tenants because of economic instability and job loss—but sometimes it happens. And in some places right now, you wouldn’t be able to evict a nonpaying tenant even if you wanted.

tenant-red-flag

Now, that’s not to say that all properties are going to have tenants that are unable to pay during a recession, but there might be a few non-paying tenants that go “unreported” on sellers’ books to make the property appear more attractive.

Related: 5 Principles for Investing in Uncertain Times

You need to do your due diligence and dig deep to make sure that the sellers are not offloading a property to sidestep a hefty round of upcoming evictions that will fall into YOUR lap after closing. You can negotiate these things into a contract and help avoid some serious headache and financial strain post-closing.

Review the seller’s numbers and see if they match what the leases say. If they don’t, maybe ask to see proof that the payments were submitted, such as bank deposit statements. You need to feel confident that you are getting a property that has paying tenants.

It's a tough pill to swallow if you purchase a property and then don't have any rent coming in to pay the mortgage—on top of already mounting eviction fees—when you were planning to use the rent to cover expenses. So be sure to do your homework!

These are just a few things to look out for when buying properties in a recession.

I personally think an economic downturn is a great time to purchase assets at a discount. By applying a little wisdom, you can begin paving your path to financial freedom.

Recession-Proof Real Estate book blog ad

What other types of issues have you experienced when buying property during an economic downturn?

Share your experience in the comments below!

Ryan Sajdera is currently serving as active duty aviation officer for the United States Army. He is a combat veteran of Operation Resolute Support, having served in multiple regions of Afghanistan,...
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    Eric Thompson Real Estate Agent from Sarasota, Florida
    Replied 5 months ago
    All true. Thanks for sharing.
    Dave Rav from Summerville, SC
    Replied 5 months ago
    No doubt, the market will see some of these scenarios from sellers. People tend to sell problems. However, there WILL undoubtedly be some deals from folks who are fearful, those with properties *temporarily* underwater from rents not coming in during the crisis, or from those who plain just need money. These deals are not necessarily "ticking time bombs" but rather truly motivated sellers for other reasons
    Luis A Caez Diaz from Hollywood, FL
    Replied 5 months ago
    Great article. Thanks for sharing!
    Kevin Leonce Investor from Atlanta
    Replied 5 months ago
    Good points. I do think that regardless of the environment there are great deals to be made. Your relationship with the seller will determine how good a deal you get and not all will have hidden issues or money sucking issues.
    Ryan S. Rental Property Investor from Enterprise AL / Manhattan, KS
    Replied 5 months ago
    I think relationships are one of the most important parts of buying, but sometimes they can be detrimental. We had one property that we purchased once, where we knew and communicated directly with the sellers. Heck, they even bought us lunch (mistake number one of many). This led us into a false sense of trust with them and caused us issues down the road. We took their word on some issues and found out they were all lies.
    Quincy Lockett from South Holland, Illinois
    Replied 5 months ago
    Good article. But how many owners are going to sell their properties just to avoid an eviction?
    Ryan S. Rental Property Investor from Enterprise AL / Manhattan, KS
    Replied 5 months ago
    Thanks Quincy! Some owners may not be able to afford an eviction in a recession. Acknowledged, this recession is unlike any other we’ve had in regards to evictions, however, each eviction can cost you thousands in expenses and lost rent. If you have a 10 unit building and 5 units are occupied but not paying, you’re looking at a huge chunk of change to get rid of the tenants if they don’t want to leave on good terms like cash for keys etc. The sellers may not necessarily be avoiding it- but they might be getting rid of the asset before they have to deal with the problem.
    Daniel Fitzroy
    Replied 5 months ago
    Great article! How might an investor acquire a new rental property the maybe doesn't have a tenant at all? Ive heard several times throughout some of the bp podcasts that "inheriting bad tenants" can cause problems. Would you have to be a cash only type of investor that can afford to buy a really run down property or are there other options?
    Ryan S. Rental Property Investor from Enterprise AL / Manhattan, KS
    Replied 5 months ago
    Thanks Daniel! I think your question hinges widely on a lot of factors. You, your lender, and your market. For example, if its an 8 unit building and you need to get a commercial loan, the bank is going to look at the deal and underwrite it. They are going to look at you and your financial credibility but they are really focused on the asset, so if its in a good location and there’s optimistic opportunity, there’s a better chance of getting a bank to buy off on it. If its in a ghetto... well.. good luck. Lol. If you are using a residential loan, the bank is LIKELY going to sell the note anyway so they are a little less focused on the asset and more focused on your ability to pay for it. In both cases, an appraiser will determine your fate to them. Appraisers know (or should know) what it is worth- both vacant and occupied.
    Susan Maneck Investor from Jackson, Mississippi
    Replied 5 months ago
    The link on evictions is dated. As of April 1 evictions were suspended in Mississippi for instance. I believe this is now the case in most places.
    Ryan S. Rental Property Investor from Enterprise AL / Manhattan, KS
    Replied 5 months ago
    Hey Susan, you’re right on evictions. This article was written for investing in economic downturn, not necessarily COVID specific. :)
    Daniel Sylvia
    Replied 5 months ago
    I think some of these precautions are good to be aware of in good times also. There are always people trying to pull a fast one on you.
    Samvel Gevorgyan Investor from Jacksonville, Fl
    Replied 5 months ago
    I love the article. It is definitely important to do the due diligence and then do it again, just to make sure the numbers do work. Please share your favorite cities that you think will outperform the national average in regards to sustainabilities of rents and the prices of the properties. In my personal opinion, there will be a huge migration of labor from expensive cities like LA and New York to relatively cheaper areas such as Dallas, TX, Orlando, Florida, Nashville, TN, etc.
    Tyler Gibson Rental Property Investor from Orlando, FL
    Replied 5 months ago
    Samuel the migration to Orlando and Florida in general had already been happening prior to Covid 19. Close to 1100 people a day were moving to the Orlando area prior to Covid 19. I suspect this trend will continue.
    Ryan S. Rental Property Investor from Enterprise AL / Manhattan, KS
    Replied 5 months ago
    I wish I could write a entire book about doing due diligence twice! We closed on another property this month that has a freshly non-paying tenant due to COVID. I think people are attracted to affordability and I think a lot of people are not afraid to move to find it. I’m certainly not one to speculate the markets, but one thing I do know is that there is a big demand for affordability.
    Andrew Barenz
    Replied 5 months ago
    Thanks for sharing. I viewed a property yesterday and there was a TON of deferred maintenance and it had only been half-rented for the 8 months that the current owner has owned it. Great reminders to be aware of.
    Ryan S. Rental Property Investor from Enterprise AL / Manhattan, KS
    Replied 5 months ago
    It's crazy how out of control people will allow things to become!
    Lawrence Boan from Vero Beach, Florida
    Replied 5 months ago
    I'm new to acquiring rentals, presently have 6 single family rentals. How do I locate rentals in this COVID crisis. Thanks for the article and inside. Most helpful.
    Ryan S. Rental Property Investor from Enterprise AL / Manhattan, KS
    Replied 5 months ago
    Hey Lawrence! My favorite lead generation technique is relationships! Someone out there knows someone else that is selling something! Get out there and meet with realtors and brokers and let them know what you're looking for. Add value to others and the rest will follow suit.
    Tomer Versano Investor
    Replied 5 months ago
    Great points. Thanks, Ryan!