Is it a good idea to purchase a distressed property?

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Following the housing market crisis in the 2000s, the market has stabilized since late 2010 and early 2011. However, as of 2011, approximately one third of all homes on the market were considered distressed properties, meaning their owners had defaulted or were about to default on their mortgage payments [source: Gibbs]. Due to the difficult situation of the owners and their lenders, distressed homes are usually priced lower than comparable homes for sale. There are different types of distressed properties available.

A short sale occurs when a property is headed towards foreclosure, and the homeowner attempts to sell the house for less than what is owed on the mortgage. The lender agrees to take a hit on the price to avoid foreclosure and reduce their losses. These types of sales offer lenders and homeowners a way out of the loan agreement when the local housing market takes a downturn and prices plummet.

In a foreclosure auction, banks and other lenders auction off properties that have been repossessed from owners who defaulted on their mortgage loans. Auctions usually take place in public facilities like courthouses and are better left to investors with significant cash assets. Individual buyers should generally avoid foreclosure auctions, because all bids must be backed up with a check for the entire sale price [source: Fulmer]. Additionally, houses sold at auction are usually bought sight unseen.

An REO (real estate owned) foreclosure is the type of foreclosure that is typically referred to when people describe a property as being a “foreclosure.” This is a home that is owned by a bank or lender, and can be purchased directly from the lender through a process that is similar to that of a typical home sale.

All distressed properties come with both advantages and disadvantages. On one hand, the price of a distressed home is typically much lower than it would be if it were not distressed [source: Re/Max]. However, these homes are not necessarily dirt cheap. Widespread foreclosures drive down prices of non-distressed homes, which means you might not need to seek out distressed homes to find a good deal [source: McQueen]. On the other hand, distressed properties require more time and effort at every stage of the process, involve a significant amount of paperwork, and often require major repairs [source: Re/Max]. Continue reading to learn when purchasing a distressed property makes sense, and when it does not.

Questions to Consider

Ask yourself the following questions to determine if purchasing a distressed property is a wise decision for you and your family.

If you’re considering buying a distressed home, there are a few things to keep in mind. First, be prepared for a potentially lengthy process. Short sales, in particular, can take a while due to the extensive paperwork and documentation required. You’ll need to prove to the bank that the former owner can’t meet their mortgage payments and that the home’s value is lower than expected. This can be a sensitive process, and you’ll need to provide evidence such as pictures of damages and comparable home sales. Approval by the lender can take up to six months, and there might be mandatory waiting periods depending on your state’s laws.

Distressed homes are sold “as-is,” meaning you’ll be responsible for any repairs needed to make the home livable. Foreclosed homeowners might have let necessary repairs fall by the wayside, so be prepared for extensive repairs if needed. Smaller homes are currently in higher demand, so bidding wars are more likely to break out among potential buyers. Larger homes are less in demand, so if you’re looking to upgrade, a distressed home might be a good option. Vacation homes are also a possibility, as there are many foreclosed vacation homes on the market.

If you are thinking of buying a distressed property, you need to consider your financial stability. Banks have become more selective in lending money after the housing crisis, so having good credit and enough capital for a large down payment is important. The lender will also look for financial stability to avoid unreliable buyers who may back out of a deal. Distressed sales require the buyer to pay for expenses such as closing costs, transfer taxes, and tax liens. It is a good idea to include these expenses in your offer. If the total cost is the same or more than non-distressed homes in the area, a traditional sale may be a better option. Deciding whether to buy a distressed property requires careful consideration, but by asking yourself the right questions, you can determine if it is the right choice for your financial situation and lifestyle.

FAQ on Distressed Properties

What is a distressed property in real estate? Distressed homes are properties that are going through foreclosure or are owned by the bank and are cheaper than comparable homes on sale. The owners of these homes and their lenders are often desperate to sell them.

What is considered a distressed property? Properties that are headed for foreclosure or are owned by the bank are considered distressed properties.

Should you buy a distressed property? If you want a move-in ready home, then a distressed property may not be the best option for you. These homes are sold “as-is,” which means that you, as the buyer, will be responsible for any repairs needed to get the house in shape.

What is a con to buying distressed property? Distressed homes require more time and effort at every stage of the process, a large amount of paperwork, and usually need significant repairs.

How do you finance a distressed house? You can finance a distressed property with a loan, but banks have become more selective about whom they lend to since the housing crisis. If you don’t have good credit and enough capital to offer a large down payment, you may have trouble getting a loan for a distressed home.

More Information

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?

Sources

  • AOL Real Estate. “How to Buy Bank Owned Property.” Aug. 4, 2008.
  • Dempsey, Bobbi. “10 Steps to ‘Short Sale’ Buying.” Bankrate.com.
  • Duffy, Jack. “Vacation Areas See Opportunity in Foreclosures.” New York Times. Feb. 19, 2009.
  • Fulmer, Melinda. “Buying a Foreclosure? Plot Your Strategy.” MSN Real Estate.
  • 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.
  • RE/MAX. “Buying Distressed Properties.”
  • The Wall Street Journal. “How Not to Buy a Home: Learning from a Rookie’s Mistakes.”

FAQ

1. What is a distressed property?

A distressed property is one that is in poor condition, often due to financial difficulties faced by the owner, such as foreclosure, bankruptcy, or other financial problems. These types of properties are usually sold at a lower price than their market value to attract buyers.

2. What are the benefits of buying a distressed property?

The main benefit of buying a distressed property is that you can often purchase it for less than its market value. Additionally, you may be able to negotiate a better deal with the seller since they are typically eager to sell the property quickly. You can also potentially earn a profit by fixing up the property and reselling it or renting it out.

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

There are several risks associated with buying a distressed property. The property may require significant repairs or renovations, which can be costly and time-consuming. Additionally, the property may have liens or other legal issues that need to be resolved before you can take ownership. There is also the risk that the property may not increase in value as much as you had hoped.

4. How can I find distressed properties?

You can find distressed properties by working with a real estate agent who specializes in these types of properties, searching online real estate listings, or attending foreclosure auctions. It is important to thoroughly research any property you are interested in to ensure it is a good investment.

5. Should I buy a distressed property as a first-time homebuyer?

It may not be advisable for a first-time homebuyer to purchase a distressed property, as they often require significant repairs and renovations. This can be overwhelming for someone who is not experienced in home repairs. Additionally, there may be legal issues or other complications that a first-time buyer may not be equipped to handle.

6. What should I look for in a distressed property?

When looking for a distressed property, you should consider the location, the condition of the property, and any legal issues associated with it. You should also have a clear plan for how you will finance the purchase and any necessary renovations.

7. Can I get a mortgage for a distressed property?

Yes, you can get a mortgage for a distressed property, but it may be more difficult than obtaining a mortgage for a non-distressed property. Lenders may require a larger down payment or higher interest rate due to the property’s condition and potential risks.

8. How much should I offer for a distressed property?

The amount you should offer for a distressed property depends on several factors, including the property’s condition, location, and market value. You should work with a real estate agent or conduct your own research to determine a fair offer price.

9. What should I do before making an offer on a distressed property?

Before making an offer on a distressed property, you should thoroughly research the property’s condition, legal issues, and market value. You should also have a clear plan for how you will finance the purchase and any necessary renovations.

10. How long does it take to close on a distressed property?

The time it takes to close on a distressed property can vary depending on several factors, including the complexity of any legal issues and the condition of the property. It may take longer than a traditional home purchase, so be prepared for a potentially lengthy process.

11. Should I hire a professional to inspect a distressed property before purchasing it?

Yes, it is highly recommended that you hire a professional home inspector to inspect a distressed property before purchasing it. This will help you identify any potential issues with the property and ensure that you are making a sound investment.

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