Distressed houses?

Question

Generally speaking, what is a "distressed" house? Whenever I hear this term I think of something that sells for around $30k and needs about as much in repairs (if not more) just to be rent ready.

What major repairs should I expect to make? I guess I'm asking what the difference is between a total rebuild/gut job vs a distressed house.

Can I assume a distressed house is something that needs a lot of cosmetic work, but overall, should have no structural damage?

I'm also trying to get a feel for what a realtor means when they say they specialize in distressed house sales, and what I should expect to be shown when I say I am looking for a distressed houses.

Thanks in advance!

Account Closed · Answer

In my world, the houses aren't distressed.  Rather it's the sellers and circumstances surrounding the sale.  Property condition isn't always an issue. It's a "distressed sale" if there is a problem that makes it difficult for the seller to sell for top dollar today.  That could be property condition. But it could be debt issues, title issues, emergencies of all kinds, etc.  Pending foreclosure or tax sale or code violations or entrenched squatters or co-owners that aren't speaking or HOA issues or deceased owners......lots of distresses out there. :)

Joe Butcher · Answer

Kristine Marie Poe  are offering some sage advice here about the various "flavors" of "distress".

I found my own property by marketing for it. It was a great experience and I learned way more than I could have imagined. A realtor would have never found this property. It also taught me how to negotiate, and how to solve someones "distress" problem where we are actually both walking away VERY happy. (Even after the closing she called to say thanks for getting that house out of her life and 17K in her pocket)

Lets look at the scenario you mention. You said you want to buy a distressed property through a realtor, then rehab it yourself and turn it into a rental.

Most distressed properties on the MLS are gone quickly if they are really a deal at all, so unless your realtor has some sweet inside info (pending divorce, bankruptcy, etc) you may not have much luck there. Not only that but there's a hundred other guys trying to do the same thing.

Rehabbing it yourself is expensive in that it eats up your time, you'll still have to hire a helper who may or may not flake out on you or steal all your tools and unless you have a lot of experience it's gonna look amateur.

You may not be able to foresee problems that an experienced GC would spot a mile away.

I'm no stranger to swinging a hammer, trust me, but on this property I just acquired I have a GC handling the whole thing.  I'm in a hard money loan and I want out of it ASAP. It would probably take me 6 months to do all the work myself. This guy will finish it in 2 weeks. While his crew is busting their ass I will be in Florida at a music festival watching the Allman Brothers Band and partying with a bunch of hippies!

Ha!!

I don't know if I would say you're dreaming....you have a dream. Now adjust it according to what you are learning. Fine tune it. Make a plan....a real plan.. and take action on it. Run your plan by some experienced investors.

Keep moving forward.

Mike S. · Answer

In a hot market the MLS is simply an auction.  If you purchase something off the MLS you are likely paying more than any of your competition is willing to pay.  This is typically a poor decision unless you are extremely experienced or have more information that your competition does not or have a different exit strategy.

Account Closed · Answer

Glad to hear the Allman Brothers are still alive.

I'll stand by my statement that distress does not necessarily correlate with condition.  I just got the deed to a condo with all kinds of distress, but the rehab needed for sale is minor repairs and cosmetics (paint, carpet). I could rent it with no rehab. The distress? Pending foreclosure, pending HOA lawsuit, non-paying tenant, tax default.  The owner does not have the funds or the energy to take of these issues.  That's what I do.

Walt Payne · Answer

@Joe Butcher I don't think all in at 80% is a major indicator, when renting. If I am doing a major rehab on a buy and hold, I am more concerned with the cash flow than ARV. Sure, the potential for appreciation matters, but not current ARV.

In for $96K on a $120K property that rents for $1200 is not nearly as good as in for $48K on a $60k property that rents for $1000 ... under the right circumstances. Some pretty nice neighborhoods are still reeling from the crash and have too many REOs recently sold, and still on the books, to have a high market value. But the rental prices are killer. Those deals are getting more scarce now but they're still there.

@Rick Reed Yes, off MLS is where the deals are. Working with a Realtor can help though. We have a broker who will refer properties he feels won't show well, and tells them why we are their best bet (no commission, etc), and we refer back leads we get on ones that are too nice for us to offer on. But for that to work you need to be doing marketing too. You need to have something to offer in trade.

Rick H. · Answer

My friend Tony Alvarez (The Outspoken Investor) is a heavy hitter in California's Antelope Valley area. He has what I believe to be the best formula/strategy for finding bargain property deals from agents. Since he's retiring this year, you'd be prudent to get his stuff soon if you like it.

Otherwise, I suggest that you buy directly from owners or persons with marketable interests that can be assembled. The best deals are the ones that you find and are not on the market.

You will probably do yourself a favor by working on developing your sales and marketing skills, learn how to find people who are either hard to find or don't expect to be found.  Learn how to listen to them as well as how to talk to them.

Lastly, I believe there are niches in niches.  Find a niche that makes you itch.

Account Closed · Answer

So many assumptions.

1) Property has equity. There's no short sale involved. I reinstated the loan yesterday.

2) Owners are vacating the tenant on this one.  It's a family friend with community and employment ties. He took ok care of the place and has no grievance with the landlords.  He has money to pay.  He wasn't paying because the owners are MIA landlords and didn't force the issue.  Now he wants to pay but it's too late. I've taken over a lot of bad tenant situations and this isn't one of them.  Even so, I've never had malicious tenant damage, even when evicting with a sheriff lockout.

3) The HOA lawsuit is standard protocol for turning an assessment lien into a judgment.  I'm making the payoff, including attorneys fees on Monday.  The lawsuit will be dropped and the lien released.

Pre-rehab, I'm cash out of pocket at 25 cents on the dollar, and all-in (with loan balance) at 50 cents on the dollar. Not exactly pennies, but I'm not complaining.

Never had one not play out.  I'm not high volume so the deals need to be a good use of my capital and time.

Rick H. · Answer

Real estate doesn't know whether it's improved, distressed, owned by a criminal or whether the owner is alive or deceased.

Realtor.com definition was obviously written by someone with a limited understanding.

I've acquired plenty of houses at 10-15 % of market value. Were they 'distressed properties'? Well, they sure weren't show places.

What about the owners.  Why would they sell a property for so little?  I explain in precisely how it was explained to me:

"Well little Ricky, sometimes people own things and don't take care of them! Just like the like the plastic army rifle that you left on the front lawn last night.  It wasn't there this morning so I figure someone needed it more than you do. Sometimes, it's like the old desk your mom left by the trash. No one  would take it until she put a 'for sale' sign on it. Then it was gone before the end of the day."

Why do people move away and leave empty houses?

Drugs and alcohol, skip on bills and family, incarceration, severe mental and emotional issues, senility and death.

Your best deals come from doing your own fishing and hunting.

Manny Cirino · Answer

Per Realtor.com here is there definition of "distress property"

What Are Distressed Properties?

How to buy a distressed home at a discount price

"A distressed property is one that is under a foreclosure order or is advertised for sale by its mortgagee. It almost always refers to a property that is damaged or in poor physical condition due to the owner's precarious financial situation. A lender will initiate foreclosure proceedings if the owner of the property has been more than 90 days delinquent on his monthly mortgage payments. The bank or lender will then repossess the property and try to sell it on the open market in order to recoup its initial financial outlay. Since most banks do not want to hold thousands of properties, they will make every attempt to unload them as expediently as possible, first at auction and if there is no buyer, then to the general public. In order to sell quickly, the lender will drop the sale price up to 50 percent. Distressed properties offer tremendous opportunities for buyers and investors alike."

The easy answer is that it is usually property thats has sat vacant for a long time. May neeed heavy repairs, or may need cosmetic repairs only(carpet & paint etc..). Could be a foreclosure or could be owned by an out of town/state owner.

Account Closed · Answer

Think in terms of a 'distressed sale'. The asset itself could be real estate or any other type of asset -- stocks, bonds etc.

Typically the seller, due to some life condition or circumstance, has a need to dispose of the asset quickly, usually at a discount and below actual market value for whatever reason.

The property itself may be in great condition and sometimes may not. At the root of most forms of  distress usually is some sort of financial problem, marital problem, legal issues etc.

Distressed houses?

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