The secret to our real estate investment success is, in fact, no big secret at all.
We’ve often shared that we create gains for our clients by purchasing properties in distressed (but up-and-coming) areas and then we begin to earn monthly income and let the properties appreciate in value.
A distressed property is a home that is being sold for less than it is worth, usually because the owner is in financial trouble and facing foreclosure. Buying homes like this is a good opportunity for buyers.
And while we freely share our general strategy, the key differentiator in our service is how we choose the right distressed properties for the biggest gain.
You don’t want to risk buying into a building that will be so expensive or problematic that you won’t be able to get the ROI that you want. Instead, you want a bargain that will be profitable for you in the long run.
Here are three things to consider when looking for a distressed property.
The idea is to find a good deal but to strike a balance between cost-effectiveness and quality. The last thing you want to do is go into unnecessary debt that significantly decreases your return on investment.
1. Understand where, when, and how people sell distressed properties in your area.
There are a few situations where a property can be purchased at an uncommonly low price and if you can effectively evaluate the potential purchase, you will be able to make an informed choice.
- If a house is in foreclosure and is already repossessed by the bank, the bank will try to sell it and will accept a reasonable offer below the listed price. If it is not sold during that sale or auction, it becomes a real estate-owned property (REO) and it might be available for an even deeper discount.
- Often homes that are in preforeclosure will go on sale at a lower price because the owners are delinquent on their payments and want to sell it before they go through the foreclosure process. These houses might be discounted to a price that is less than they owe on the mortgage; that situation is referred to as a short sale.
Which is better, a foreclosure or a pre-foreclosure?
Remember, a foreclosure is a house that has already been repossessed by the bank. The previous owners were behind in their payments, and some repairs and maintenance may have been neglected. So these properties will have a low price because the banks don’t want to own houses. But they might have issues, repairs, and matters which require tending to before the property can be put into play.
Preforeclosures will also have a low price and they may also have been neglected. But they will likely be in better shape and the sellers are highly motivated because they want to sell before a foreclosure damages their credit. Your best bet is to contact owners who are in a pre-foreclosure status before they put their house up for sale so that there will be less competition.
Where to find information about foreclosures and bank auctions?
When you start looking for foreclosures, pre-foreclosures, and other distressed properties, you might notice that there are a lot of websites that provide information for a fee.
Why is that?
You can…
- look through court records to find out who is delinquent on their property taxes,
- drive through neighborhoods to see which houses have a pile of junk mail piling up ,
- take note of which houses have signs of neglect,
- look for notices for houses that must be sold legally due to bankruptcy or divorce,
- ask around to see which owners actually live out of state,
- or talk to real estate agents to find out about distressed properties that are available within their listings.
The point is that identifying distressed properties is totally possible but can be difficult. Plus, the laws and requirements vary from state to state for when a bank discloses this information to the public. Sometimes they provide only the bare minimum of notice.
So investors turn to use paid platforms because they do the searching and provide you with a list of leads so you don’t have to do as much digging. Or in the case of BG Wealth Group, we do the work of sourcing properties through our significant network across North America.
2. Know how much you can afford in cash (and time).
An issue that might come up when buying a foreclosure or a pre-foreclosure is that there may not be enough time to get an inspection, and even if you did, the previous owners do not have the money to repair the property.
Furthermore, since there may not be an inspection you will probably have a hard time getting financing for this type of property. So these sales are often as-is sales and in cash.
In addition, you can expect more delays when you buy a house like this. The closing process can take up to 6-12 months rather than 6-8 weeks and there may be more administrative work involved in the sale.
3. Get a clear understanding of how much you can invest in repairs and what will be required.
Some repairs are easy to make and lucrative
If you are planning to flip the property, there are some renovations and upgrades that can improve the value of the house quickly, like replacing the countertops in the kitchen, upgrading light fixtures, replacing the exterior doors, updating the bathrooms, or fixing the landscaping.
Other repairs are expensive and complicated
Some repairs are notoriously expensive and difficult, for example.
-
- Foundations.
- Roof problems.
- Damage from termites or other pests.
- Water damage.
- Electrical or plumbing issues.
- Mold removal.
Even if you can’t get an inspection, you can keep an eye out for signs that the property needs one or more of these types of repairs and avoid buying it.
Distressed properties can give you a good deal if you choose wisely
Keep in mind that there are outside forces that might affect the price of the sale that have nothing to do with the quality of the house. The owner is underwater in their mortgage, they are behind in their taxes or their mortgage and they can’t recover, or there has been a life-altering event that makes it unavoidable for them to sell the house. If you know how to identify these properties and weed out the problematic properties, you are well on your way to capitalizing on the opportunity of investing in distressed property.
At BG Wealth Group, we employ a finely-honed formula for researching and sourcing high-potential real estate properties. For more guidance or to discuss your own bespoke real estate investment plan, book a call with a BG Wealth Group associate here.