AN INSIGHT INTO DISTRESSED PROPERTIES
Definition of Distressed Property -
Distressed properties are a type of real estate that is being offered for sale because of an impending foreclosure or repossession. This usually results from a company's inability to meet its financial obligations. Distressed securities can include common and preferred shares, bank debt, trade claims (goods owed) and corporate bonds. As a result, these financial instruments suffer an extensive and tangible reduction in value.
Why Invest In Distressed Property?
Cardinally, what all distressed properties have in common is a low price tag, much below its market value. Distressed sales often occur at a loss because funds tied up in the asset are needed within a curtailed time span. They can sell for anywhere from 30%, to 45%, even up to 60% off what they are actually worth, which makes them an incredible opportunity for home buyers and real estate investors.. After purchasing the property, most investors or homebuyers opt to undergo momentous renovations and expedient set-offs that are paramount to an accelerated sale of the concerned property.
The Rationale Behind The Colossal Deflation -
Distressed sales often occur at a loss because funds tied up in the asset are needed within a curtailed time span. The funds from these assets are most often used to pay for debts, medical expenses or other emergencies. Distressed properties indifferently suffer a reduction in their market price because of pressures operating on the owner, such as threatened foreclosures, divorce, settlement of an estate, or fear of economic changes that might be responsible for the abrupt downturn in value.
Due to their reduction in value, distressed securities often become attractive to investors who are looking for a bargain and are equipped to accept a substantial risk. The logic behind this investment is that the company's situation is not as bad as the market believes it to be and either the company will survive or there will be enough money upon liquidation to cover the original investment.
Types of Distressed Property -
There are many different kinds of distressed properties, generally depending on what stage of the foreclosure process the property is under. There are distressed properties for sale:
(i) Offered by homeowners who have recently defaulted on their mortgage and are looking forward to sell their property before they get any further behind, (E.g. bankruptcy) or
(ii) Scheduled for public auction by lenders or local courts as the last stage of the months-long foreclosure process.
Distressed Property Under Foreclosure –
All mortgages are loans, and when a homeowner fails to make their required monthly payments toward their mortgage loan, the lender will have no choice but to seek a foreclosure to get back the money they provided for the loan. A foreclosure allows the lender to ultimately pursue a public sale of the homeowner's property. By putting distressed homes up for sale, the lender can use the proceeds to cover the amount lost on the loan.
Auctioned Distressed Property –
If the homeowner does not sell their property before the scheduled date of the foreclosure sale, the property will be sold at public auction by the lender or a trustee of the lender. Distressed home auctions are the most common way that most buyers find foreclosure homes for sale. Auctions happen all the time all over the country, and they are certainly one of the most straightforward ways to buy real estate of any kind. You have to be sure to secure your financing beforehand so you can pay the amount of your winning bid, and you have to do as much research as you can into the property you want to buy before the sale to make sure it's a good, valuable investment. Effectually, you'll be issued a Bill of Sale as soon as the auction is over. It's a fantastic way to buy property, and at 30% to 60% off market prices, the discounts are just as deep as you'll find anywhere else.
REO Homes and Bank Owned Distressed Properties –
If a foreclosure auction does not produce a buyer, or the winning bid is below a certain 'minimum bid' amount set by the auctioneer, then the property will be awarded to the lender at the close of the auction. The lender, usually a bank or government agency, will then take full control of the property and offer it for sale themselves. These properties are known as ‘Bank-owned homes’ or ‘REO (real estate owned)’ properties. Almost all banks offer repossessed homes for sale, but the dire straits lie on the fact that they usually don't have the time to advertise or market these properties, they instead rely on local agents to exhibit the homes for sale on their behalf. Buying distressed real estate for sale as an REO can offer the same great discounts as you'll find on any other distressed real estate investment. Banks will often undersell distressed properties just to get them off their hands, and prompt fortuitous buyers can get to find some fantastic deals out there.
Pros & Cons of Buying Distressed Property –
Prospective homebuyers are always looking for a bargain price but, typically, when a property can be snapped up for a low price there’s a reason. Most often, a house with a drastically reduced price will be on the market as a short sale because the owners are hoping to avoid a foreclosure or because the property has already undergone foreclosure.
While the price may be enticing, it’s important to understand what you are buying. First and foremost, a foreclosure or a short sale will nearly always be sold “as-is,” meaning that the owners, whether they are a bank or the residents, won’t be fixing anything before the sale.
Advantages of Buying a Distressed Property -
The main reason to buy a distressed property is the price. In most cases, a foreclosure or short sale will be priced below market value because the sellers are in a hurry to complete a sale and because they don’t want to spend the money to repair a property in order to bring a higher price.
If you are eager to become a homeowner or want to invest in real estate, a foreclosure can be a good place to start, provided you know what you are doing. A REALTOR® experienced in distressed properties can guide you to make sure you purchase a home that will eventually increase in value.
When mortgage rates are low, you can take advantage of inexpensive financing to buy a bargain and then sell it later for a profit.
Disadvantages of Buying a Distressed Property -
The main risk in purchasing a foreclosure is the reason the property is set at a low price: the condition.
If you are purchasing a house that is in bad shape, you will need to set aside funds to hire contractors or to pay for materials to improve it. Some foreclosures are in OK shape, but others lack appliances, have damaged walls, and may need extensive electrical or plumbing repairs. You may or may not be able to have an informational home inspection on a distressed property, but even if you do, it will be up to you to finance any repairs.
You should also be aware that not all distressed properties can meet the requirements of a lender, given the property’s condition. You will need an appraisal, and for many loan products the lender will need to assess whether the property can be lived in and has value.
Tips for Buying Distressed Property -
Acknowledged skill and experience in flipping homes and acquaintance with a team of trustworthy adroit contractors are indispensable criterions if one intends to invest over a distressed property. A distressed property in a perplexed standing may still fetch a good deal if expiated and refurnished accordingly yet thoughtfully enough so as to refrain from overdo or over-expend.
Many investors purchase distressed homes with cash, so it’s best to be prepared for potential competition from cash buyers. If you don’t have the cash yourself, you can work with a lender to secure a strong loan prequalification. To be an even stronger bidder, you may want to increase the size of your down payment or your earnest money deposit.
In some cases, a distressed property will require complex paperwork before you can take possession of the property, so be prepared to be patient.
Most importantly, educate yourself and work with expert professionals who can recognize the value in different properties so that you don’t find yourself owning a distressed property that requires too much expense and work or sits in a location that negatively affects its long-term value.
Finding Distressed Property & Marketing –
Distressed properties can be searched online by browsing websites such as -
http://www.bankforeclosuressale.com/distressed-properties.php
http://www.buydistressed.com/welcome.html
http://www.realtor.com/foreclosure
http://langrealty.com/
http://www.loopnet.com/Distressed-Commercial-Real-Estate/
http://www.realtytrac.com/
Asymmetrically, it is well-acclaimed to fish for distressed properties yourself by the so-called ‘’driving for dollars’’ maxim. Set a target market area, exit strategy and multiple other factors such as: tax assessed value, house age, zip codes, crime rates etc (adds to individual priorities) and simply drive out to keep on the lookout for distressed properties. Additionally, taking pictures of any distressed and or vacant properties you may find and taking notes of the corresponding property, the environs and its surrounding features (both positive and negative), can be extremely helpful. When driving for dollars there are several “red flags” that should be paid attention to. For e.g. overgrown tall grasses, boarded up or broken windows, mailboxes filled to the brim, code enforcement taped to the door, piled up newspapers, deferred maintenance etc.
The next step is to research out the noted distressed properties on your counties local Central Appraisal District (CAD). During the research phase you will want to filter out properties that do not fit your criteria. For instance, if you are looking for high equity properties you need to look for deed dates 15+ years back. Once you have selected all the properties that fit your criteria, it’s time to create a final list. Conveniently, this list can be used during marketing of the jotted-down distressed homes. However, if you are unsure how to find your local CAD try google searching “[your county name]central appraisal district” or “[your county name]tax assessor.” Alternatively, you can research properties in the field with your smart phone or other wireless device on the CAD website.
When researching some investors like to delineate between absentee owners (land lords or inherited properties) and owner occupied homes (personal residence). It is very simple to check which category a property falls under when researching on the CAD. If the owner address and property address match, it is a owner occupied home. If the owner address and property address are a mismatch, it is an absentee owner. Here’s an example of how it appears on the CAD :-
Once the finalized distressed property list is ready, it’s simply a matter of time for you to get started with appurtenant marketing strategies that compliment concurrent objectives and prejudices of potential buyers on the nook. Using door hangers with short notes like “We buy houses for fast cash“, to tape on the front door and garage of vacant properties is a long-adopted idea whereas talking to neighbors when you are unable to track down the owner of the home can also be beneficial as they don’t want a ugly vacant property sitting next door dragging their property value down with it.
Above all, in today’s world there’s no better marketing apparatus than email marketing. Providing buyers with distressed property listings along with photographs and peripheral amenities attached you are good to go to start a new face-off in the real estate industry. Evernote is a great tool to work with remarkably, for vacant properties. Evernote automatically geocodes the location of where you take the pictures and can later research the deeds, mortgages, taxes, etc directly from your cell phone. Geo-coding is also provides commendable aid during business operations, a very powerful feature, especially with targeted lists such as vacant properties. When it comes to determining the ARV of a given subject property, it is absolute using comps off the MLS.
To clinch a definitive auspicious outcome, it is always a better idea to buy a distressed property and allow it to undergo a climatic overhaul to help elevate its merit, for the consideration that as a matter of course, distressed properties predominantly deficit even the most imperative set-offs, which results in a slower and cheaper deal. Therefore, even if you plan to sell a distressed property as an intermediator, you should be well-cognizant about the overall temperaments and prospects of the respective property or it may turn into a prodigal quietus in the distressed property endeavor.
Conclusion:
Direct investment in a distressed property offers the biggest potential returns. Buy at the right price in the right market and you can earn a hefty 8% to 12% return conjoined with appreciation.
The top-notch build quality and a straightforward buying process, are other factors that influence the decision to buy distressed property in the USA. Long-term capital growth in key locations, give property investors great reassurance in a meticulous and worthwhile investment. Investing over distressed property can be a great endowment in the long run provided the location and revamp expenses are contemplate with forethought before embarking into the venture.
Evaluating the anticipated pros and cons that are prerequisite, with experienced professional real estate instincts, investment in the distressed property arena can be a try worth a shot!
