Investing in Distressed Properties

If you want to invest in distressed properties, there are many factors you need to take into consideration. Dealing with distressed properties requires more work on your part to make sure you aren’t setting yourself up for a bad investment.  Read the following article and find out just what you should be looking out for when investing in these types of properties.

In today’s economy, many banks and developers are dealing with distressed properties. The quantity of these properties continues to grow, as declines in property value, unemployment, and limited credit opportunities force people to abandon new developments. No real estate market analysis should exclude these kinds of properties, because they provide potentially great values. However, buyers should do due diligence before making purchases, and should expect a few added complications.

Many banks and developers have distressed properties to unload. Overwhelming numbers of foreclosed properties are reverting to banks’ ledgers, placing them more in the business of property management, than in lending. Developers and investors with incomplete projects are looking to sell their troubled assets, sometimes for far less than they are worth.

When considering distressed property, buyers have to find diamonds among the rocks. Many distressed properties are low or moderate income housing, which will bring a low sale price, poor tenants, or high repair costs. Buyers should take care to know the location of their property, and should beware of comparing distressed properties in poor areas to distressed property in flourishing areas. As in all real estate, the location of the property is the number one consideration, when determining property value.

Investors may choose to buy short sales. Short sales are properties, which are being sold for less than the mortgage balance, by homeowners looking to avoid foreclosure. Purchasing these properties provides an advantage for the buyer, who receives a property for less than its value. Purchasing short sales also benefits the seller, who avoids a major hit to his or her credit score, and the bank, which does not have to carry distressed properties on its books.

Foreclosures require some skill and probably an attorney. These properties may be found in a variety of conditions, and may not come with a clear title. Buyers should always check out the neighborhood, to ensure that property value will rise, and should evaluate whether they have the skills, and the cash, to bring the property to livable condition.

REOs also make good potential investments. REO, which stands for real estate owned, is a foreclosed property, which has been through auction, but failed to sell. The biggest advantage of an REO is that the bank is the primary lien-holder, so the property comes with a clear title. Clear title is not always the case with regular short sales or foreclosure.

Investors may also consider non-performing notes. Purchasing a non-performing note means purchasing a mortgage that is in arrears. If the property is in good condition, in a good location, then these notes may represent great value, since banks usually sell them at a discount. After purchasing the note, investors may choose to work with homeowners, offering mortgage balance reductions, or modified payments. If not, investors may start the collections process, or initiate foreclosure.

Purchasing distressed properties often becomes a complicated process, and investors should always consult a real estate attorney as part of the purchasing process. However, with the amount of money to be made from these properties, investors should always make them part of a real estate market analysis. The investor’s challenge is to ensure that properties are valuable, and in a good location, before choosing to buy.

Todd McCauley

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