Whenever a property owner fails to pay the taxes or misses the mortgage payments regularly, that property is said to be going in 'distress'. It means that the owner is no more capable of paying the outstanding dues on the property. A financial depression, like COVID nowadays, decreases the income, inviting foreclosures and vacancies, therefore creating opportunities for real estate investors to buy these distressed properties. It is like this because their owners are ready to sell them for a price that is less than the market value.
There are 3 (three) types of distressed properties :
a) Foreclosure: Owner goes under the mortgage and lender/bank arranges an Auction
b) Short Sale: Mortgage owed to the lender/bank is more than the property selling price.
c) Real Estate Owned (REO) or Bank Owned: Status after failing at a foreclosure auction.
There can be a huge potential in acquiring such properties and then turn them into profitable assets by investing in them or simply flipping them later. Though there are few tips that you should always keep in mind before buying a distressed property :
1) Distressed Property, not Neighborhood
This is a very important pro-tip that is often ignored by first-time investors in distressed properties. Sometimes, instead of just an apartment in a building, the whole building or neighborhood is distressed. There can be several reasons for that, ranging from rising crime rate to inadequate facilities, but if you see in your initial research that this is the case, run far away from such property.
2) Ready Cash Availability
Not just for the extensive repairs and maintenance of the acquired property, cash is also needed to woo the seller and the lender by increasing the down-payment percentage. It not only increases your chances of beating other investors to the fight but also improves the chances of getting a mortgage pre-approval.
3) Mortgage Pre-Approval
Before you can purchase any distressed property, you need to get approval from the bank/lender to finance your purchase. If a home is too damaged or worn off, you may need to put up extra cash to get pre-approval.
4) Professional Guidance
This point cannot be stressed enough because the sale of distressed properties is not a straightforward matter like other properties. From choosing the right location/property to completing its inspection and evaluation, a real estate professional who is well-versed in the field of distressed properties will be a true blessing. A sincere guide in this field will assist you in all the paperwork including the task of getting the lender's approval for buying the property, making things easier for you.
5) Patience: A Necessity
Closing a sale on a distressed property is not the same as on a normally functioning and healthy property. Too many factors are at play, and things are not that simple. For the same reason, buying a distressed property requires patience, restrain, and strong will as you have to go through some delays.