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 just be what you need.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
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 institution 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.
Why Should Anyone Invest in Foreclosed Real Estate?
For many people, the way some of these properties look make 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 10-20 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.
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: 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 the 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.
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 the fact that they are also a connected source to banks, mortgage companies, and real estate agencies.
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!