Investing in distressed properties is a unique opportunity for real estate investors since they are at a lower market value. However, it's essential to understand the benefits and risks of investing in distressed homes, along with the types that can be more suited to your rental business and investment goals.
How Do You Find Distressed Properties?
Before you buy a distressed property, you must first know where to find one. They are not often found on the Multiple Listing Service (MLS) and aren’t typically advertised like standard real estate listings, so where can you find these investment opportunities?
Browse Online Real Estate Marketplaces
Although distressed properties are not typically posted on MLS sites, there are platforms like Zillow that have dedicated sections for them. You can use listing codes or filter your search specifically for bank-owned foreclosures or short sales. Other sites you can check are Realtor.com, Redfin, Coldwell Banker, and auction websites.
Consult Real Estate Agents
Real estate agents in San Diego often know about listings before they hit the general market. Look for agents who specialize in distressed properties, especially since these types of sales can be more complex.
Using County Tax Records and Court Filings
Real estate investors can find tax delinquencies on a county assessor website through a third-party company, but county court records can also provide information on distressed properties. Some of them can be in the form of notices of foreclosure and which are accessible through the county recorder’s office.
Direct Marketing
You can find distressed properties by using direct marketing strategies such as cold calls and direct mail to distressed property owners. Keep in mind that working with professionals like real estate agents or property managers to navigate distressed property deals is ideal since the process may be more complicated.
Driving for Dollars
Driving for dollars refers to scouting neighborhoods to find distressed properties. You can use tools like Google Maps to track the potentially distressed property's information, or ask the property owner directly.
Types of Distressed Properties
- Foreclosures: Foreclosed properties are usually bank-owned properties. These distressed real estate properties are being sold due to the previous owner's failure to make monthly mortgage payments.
- Short Sales: Distressed homeowners sometimes sell their property for less than the outstanding mortgage balance due to financial hardships or wanting to avoid the foreclosure process.
- Real Estate-Owned (REO) Properties: REO properties have already gone through the foreclosure auction but were not sold to a third-party bidder. That means that they are owned by the lender, which is usually banks or mortgage companies.
- Tax-Defaulted Properties: As indicated in the name, these are distressed properties that were seized by the local government due to the owner's inability to pay property taxes.
- Abandoned Properties: While not in foreclosure, these distressed properties may be in disrepair due to neglect and could demand a large sum for renovations. The challenge also lies in finding the owner of the distressed home.
Before You Buy Distressed Properties
Unlike standard real estate deals, distressed properties will always have a catch. They are below market value for a reason, and the reason behind it is a significant factor in whether real estate investors should purchase them or not. It's important to do your due diligence first.
Property Inspection
A thorough inspection can save you costly surprises later. Check for things like peeling paint, broken windows, water stains, and other damages that might require significant repairs. Work with a licensed home inspector to find deeper issues like plumbing, electrical, or structural issues.
Calculate Renovation Costs
Some potential properties may not need repairs or renovations, like seized real estate due to mortgage defaults or unpaid taxes. Buying distressed properties like abandoned homes is another matter entirely, since the home buyer will have to shoulder more repair and renovation costs.
Evaluate The Property's Potential Value
Calculate the potential for resale so you can make an informed decision. It's easier to find interested investors when the property is in top shape, and depending on the condition of the property, you might have to spend a lot of money and effort to get there. Look into market trends and determine whether the property would be easy to sell in housing markets.
Consider Potential Benefits and Risks
Home buyers need to consider that distressed properties come with both risks and benefits. Look into the circumstances surrounding the sale before you assume ownership. Overlooking certain property details in distressed sales can lead to you inheriting very costly problems.
Red Flags to Look for in Distressed Properties
- Undisclosed Information: When the current homeowner refuses to disclose information that you are entitled to, they may be hiding something so that the buyer purchases the property immediately.
- Legal Issues: It's understandable for property owners to be motivated sellers, but pressuring you to close the sale quickly is a major red flag. Just like undisclosed information, they could be keeping certain problems from you, such as title issues or code violations.
- Unrealistic Pricing: If the current owner sets a price that seems too good to be true, it might indicate hidden issues. This is especially true for short sales.
- Lender Issues: With properties that are contingent on lenders approving the sale, the pre-foreclosure process can be very unpredictable and lengthy. You might be better off finding properties that are easier to acquire.
- No Other Investors: Just like you, people are looking for investment opportunities. If the distressed property has been on the market for some time and still has no buyers, that may be a sign for you to avoid it.
Let the Real Work Begin
We know that identifying distressed properties for sale is already stressful enough, but that's only the beginning of your rental business journey. The real work starts with efficient property management, which is crucial for profitability.
Harland Property Management uses multiple strategies to help your property achieve its maximum potential. We'll worry about your operations as you earn passive income, so you'll have time to focus on expanding your rental portfolio.
Become a stress-free landlord as early as today and contact us!
