10 Recommendations for Purchasing Distressed Properties

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A distressed property is a property whose owner is behind on mortgage payments. Sales of these distressed homes became very common in the late 2000s. In fact, between 2008 and 2011, one third of home sales were distressed sales [source: Gibbs]. However, the number of distressed homes available for purchase depends on the market conditions. Regions where home prices have fallen significantly, such as California and Florida, tend to have more distressed homes, while areas with more stable home sales have fewer [source: Gibbs].

In a short sale, the final price of the home is less than the total amount owed to the lender, but the transaction closes before the lender forecloses, so you negotiate with the owner and the lender. A foreclosure is a home that has been repossessed by the lender for lack of payment. Foreclosed properties are either sold at auction or put on the open market as REO (real estate owned) listings.

If you’re looking for a home and want to save money, a distressed property may be a good option to consider. Banks want to remove these properties from their books, so they usually list them for lower prices [source: Re/Max]. However, there is a limit to how much you can save, as competition for these low-priced houses tends to spark bidding wars among eager buyers [source: McQueen]. Distressed homes are also not easy to deal with. They are typically sold “as-is,” require extensive repairs, and involve a lot of time and paperwork. Therefore, keep reading for tips on how to successfully navigate a distressed property transaction.

10: Obtain Mortgage Preapproval


Make sure you’re preapproved for a mortgage before you make an offer on a distressed house.
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One important factor to keep in mind when attempting to buy a distressed property is that the banks that need to approve your offer only want to consider serious offers. Therefore, make sure you are preapproved for a mortgage before making an offer on a distressed property [source: Re/Max]. You will be competing with investors, from house flippers who fix up damaged homes to resell at a higher price, to larger property management companies. Investors typically pay in cash, so you will have to prove that you are a reliable prospect in order to get the bank to accept your offer [source: Gibbs].

There are a few things to be aware of when seeking preapproval. If a house is too damaged, lenders will often refuse to finance the purchase [source: Gibbs]. Therefore, if the property requires extensive repairs, you may need to put up extra cash or take out a second loan to cover the costs. If you have difficulty obtaining preapproval, you may consider alternative lending sources. Small regional banks and credit unions are often more willing to loan money to borrowers with imperfect credit than larger banks [source: Gengler]. Additionally, the U.S. government offers FHA loans (through the Federal Housing Administration) that require smaller-than-usual down payments [source: Re/Max].

Tip #9: Find a Realtor Experienced in Distressed Sales

When it comes to distressed property sales, there are unique challenges that must be considered. Therefore, it is important to choose a real estate agent who has experience in handling these issues. Fortunately, there are several certifications available for agents who have completed continuing education courses in selling distressed properties. For instance, the National Association of Realtors introduced a Short Sale and Foreclosure Certification Program in 2009. To obtain certification, Realtors must complete several hours of training and familiarize themselves with national and state laws surrounding foreclosures and short sales. Another certification is the Certified Distressed Property Expert certification, offered by the Distressed Property Institute. Nonetheless, whether the agent holds a certification or not, it is crucial to ensure they have closed on distressed property sales before. Typically, a dozen short sales or foreclosures is a good indication that the agent has gone through the process enough times to guide you through it knowledgeably.

Tip #8: Avoid Investing in Distressed Neighborhoods

Purchasing a distressed property in a desirable neighborhood can be an excellent opportunity to buy a home for less than you would normally pay, while building equity as its value increases. However, not all cheap distressed homes are created equal. Be cautious about searching for homes in severely depressed neighborhoods. If every house on the block is in foreclosure or if every condo in the high rise is vacant, you should consider other options. The market in an area like that may not rebound, leaving you stuck in a vacant neighborhood where your cheap house may decrease even further in value. In the worst-case scenario, you could end up with a mortgage that exceeds the value of the house.

Tip #7: Get a Professional Home Inspection

It is crucial to have a thorough home inspection done every time you purchase a home, but it is even more important when considering a short sale or foreclosure. These types of sales are always “as-is,” meaning the seller of a distressed property will not be responsible for damages to the home at the time of the transaction. Consequently, you as the buyer take responsibility for any necessary repairs once you sign the sale contract. Since the listing prices for distressed homes are already typically lower than comparable sales, banks usually won’t give price concessions to cover any repairs. The inspection will give you an estimate of how much money you might need to spend to make the house move-in ready. You should also consider getting specialty inspections done, such as those for mold, pests, and septic systems. If an owner or lender denies an inspection, you should walk away from the deal immediately.

6: Prepare for Repairs


Distressed properties are typically sold “as is” and require repairs.
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Homeowners who have been foreclosed on often leave their properties with intentional damage. During the housing crisis that hit the United States in the late 2000s, some homeowners even stole appliances and fixtures in an attempt to make some money out of their situation [source: Fulmer]. Once a property is vacant, it can become a target for vandals and squatters who can cause additional damage and leave it in a filthy state. Empty distressed properties are also vulnerable to theft, with valuable items such as copper wiring and pipes being targeted by thieves who may tear up walls to access them and sell them for scrap [source: McQueen].

Although this damage can be daunting, if you are willing to put in some work — or hire someone to do it for you — you can save money on the more damaged “fixer-upper” properties. As you will likely need to make repairs to a distressed property, it is important to have a contractor examine the property before you make an offer. This will help you estimate the cost of repairs and factor it into your offer [source: Gibbs].

5: Practice Patience

Buying a distressed property can involve numerous delays, frustrations, and red tape. Unlike a regular sale, distressed sales require you to deal directly with the lender who must approve the final sales agreement. This bureaucracy can take a long time, and you may have to wait weeks or even months for the bank to respond to your offer [source: McQueen]. You may be eligible for government assistance to speed up the process if the property is eligible for the home affordable foreclosure alternatives program (HAFA). This program can force the bank to respond within 30 days [source: Gibbs].

Closing a deal can also be held up if there is a secondary mortgage or if the owner was refinancing. The second lender must also sign off on the deal [source: Re/Max]. Securitization can also cause delays. During the real estate boom before the housing crash of the late 2000s, lenders sold bundles of their loans to investors who then traded them as securities similar to stocks. This means that the current investment manager who owns the securitized loan must approve the deal, adding another party to an already crowded negotiating table [source: Gibbs].

4: Understand the Foreclosure Laws of Your State

When buying a foreclosure property, it’s important to consider the laws of your state, as they can impact the purchasing process. Some states have a judicial process that can take up to a year, while others have a more lenient non-judicial process that is faster. It’s important to determine which process your state follows and to understand the foreclosure laws before making a purchase.

3: Be Prepared with Sufficient Funds

Buying a distressed property can be a great deal, but it’s important to have enough cash on hand to make the process smoother. A larger down payment will show the lender that you’re a safe bet and can increase the chances of your offer being accepted. Additionally, unique costs associated with distressed home sales, such as home inspections and repairs, can add up quickly. Buyers may need to create an escrow account or take out a second home improvement loan to cover these costs. Finally, buyers of bank-owned properties may be responsible for paying closing costs, real estate transfer taxes, and settling any liens on the home before the sale closes.

2: Prepare to Offer Seriously

When making an offer on a distressed property, it’s important to remember that you can’t just lowball and expect the lender to accept it. Banks are willing to take a financial hit to sell a property, but they won’t take too big a hit. The listing price of a foreclosed home is usually close to what the bank thinks they can get for it, even in a terrible market. The asking price is based on comparable sales in the area, similar to non-distressed homes. Therefore, if you plan to make a lower offer, you need to back it up with some comparable sales. Banks don’t spend a lot of time on multiple counteroffers, so you can’t start too low. If they think they can get a better price, they will reject you after two or three offers, or even one.

1: Use Your Lender’s Appraisal Strategically

As a buyer, you have some leverage in negotiating a price with the lender when buying a distressed property. This is especially true when the property is in poor condition. If the bank refuses to make any concessions in price for a home in bad need of repair, ask your lender to conduct a full appraisal of the property. If the appraisal comes in below the asking price, you can use that to try persuading the bank to accept a lower offer.

More Information Available

Related Articles

  • What’s a short sale, and why can they take longer to close?
  • Top 10 Things to Know About Short Sales
  • How can you buy a home in a short sale?
  • 5 Tips for Purchasing a Short Sale Property
  • How House Flipping Works
  • How Foreclosures Work
  • What caused the recent rash in home foreclosures?

More Great Links

  • State Foreclosure Laws

Sources

  • AOL Real Estate. “How to Buy Bank Owned Property.” Aug. 4, 2008. (April 30, 2011)http://realestate.aol.com/blog/2008/08/04/how-to-buy-bank-owned-property
  • Fulmer, Melinda. “Buying a Foreclosure? Plot Your Strategy.” MSN Real Estate. (May 31, 2011)http://realestate.msn.com/article.aspx?cp-documentid=20508059
  • Gengler, Amanda. “Making the Right Moves.” Money. Vol. 39, No. 3. Page 81. April 2010.
  • Gibbs, Lisa. “Why to Buy Trouble.” Money. Vol. 40, No. 3. Page 78. April 2011.
  • McCrea, Bridget. “This Old House?” Black Enterprise. Vol. 40, No. 3. Page 21. Oct. 2009.
  • McQueen, M.P. “Are Distressed Homes Worth It.” The Wall Street Journal. Oct. 1, 2009. (April 31, 2011)http://online.wsj.com/article/SB10001424052970203803904574430860271702396.html
  • Perkins, Broderick. “Is Your Agent Experienced in Distressed Properties?” Realty Times. Nov. 5, 2009. (March 31, 2011)http://realtytimes.com/rtpages/20091105_agent.htm
  • RE/MAX. “Buying Distressed Properties.” (April 30, 2011)http://www.remax.com/learningcenter/realestate101/realestatedistressed.aspx
  • The Wall Street Journal. “How Not to Buy a Home: Learning from a Rookie’s Mistakes.” (March 31, 2011)http://realestate.msn.com/article.aspx?cp-documentid=21301877&gt1=35000

FAQ

1. What are distressed properties?

Distressed properties are properties that are in a state of financial distress. This can include foreclosures, short sales, and bank-owned properties. These properties are often sold at a discount because the owner is in a hurry to sell and needs to get out from under the financial burden.

2. Why should I consider buying a distressed property?

Distressed properties can be a great investment opportunity for those who are willing to put in the time and effort to get them back into good condition. Because they are sold at a discount, you can often get a great deal on a property that has a lot of potential. If you are handy and have some construction knowledge, you can save even more money by doing some of the work yourself.

3. What should I look for when buying a distressed property?

When buying a distressed property, it’s important to look for a property that has potential. This means looking for a property that has good bones and is in a good location. You should also look for a property that has a clear title and no liens or encumbrances.

4. How do I finance a distressed property?

Financing a distressed property can be challenging, but there are a few options available. You can try to get a traditional mortgage from a bank, but this can be difficult if the property is in poor condition. Another option is to get a hard money loan, which is a short-term loan that is secured by the property itself. Finally, you can consider using your own funds to purchase the property.

5. What are the risks of buying a distressed property?

Buying a distressed property can be risky, as there may be hidden problems that are not immediately apparent. You may also encounter difficulties with financing, as lenders may be hesitant to lend money on a property that is in poor condition. Finally, there is always the risk that the property may not appreciate in value as much as you had hoped.

6. How can I minimize the risks of buying a distressed property?

To minimize the risks of buying a distressed property, it’s important to do your homework. This means doing a thorough inspection of the property and getting a clear understanding of its condition. You should also work with a qualified real estate agent who has experience in buying and selling distressed properties. Finally, you should have a solid plan in place for renovating the property and bringing it back up to code.

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