Distressed properties include houses that are about to be foreclosed, or under foreclosure, because of the inability of the owner to meet the terms of their mortgage or property tax bills. A property could also become distressed because of a liquidation that occurs during a divorce or bankruptcy.
Sales of distressed properties became commonplace in the late 2000s, and from 2008 to 2011, a significant portion of the homes sold in the US fell under the distressed property category. However, in recent years, the sales of distressed properties have dropped significantly, despite predictions from real estate experts such as Charles Koch that the sale of distressed properties would increase in 2021.
But even with the current state of the distressed property market, investors can still make solid profits from these investments if they understand certain things and take certain steps. One such step is to properly study the area where the distressed property is before investing, and avoid buying properties in areas in decline.
This is because buying a property in an area with falling real estate values, or an area where many of the residents are moving out, is a very risky move. Investors who make such a purchase might end up holding onto the property much longer than they wish after they renovate the building, as the neighborhood might not be enticing to new buyers.
After the investor studies the neighborhood of the property and deems it worthy of an investment, the investor then needs to get a professional inspector to carry out a thorough inspection of the property before going ahead with a purchase. This inspection should give the investor a clear picture of the state of the property, the repairs the property needs, and provide a rough estimate of how much the investor will need to spend to get it into good condition.
Also, the investor should hire specialized inspectors to check for pest issues and mold, assess the property’s septic system, and look for other issues that might be hard for an untrained person to detect. This is important because a typical inspector might do a general inspection and overlook some issues that could become major problems for the investor later on.
Additionally, investors should ensure they have a clear budget for both the purchase and the renovation of the property. This budget should be carefully set up to ensure that the investor can achieve their goals with the property they purchase without putting a strain on their finances. Investors should also avoid purchasing properties at a price that forces them to go above budget, as this could affect the amount of capital the property requires after purchase.
Finally, investors should ensure they have a solid exit plan in place before heading into a distressed property deal. This is because real estate investments can be very capital intensive, and distressed properties are even more capital intensive than most real estate deals. As a result, investors should be careful with how much money they invest in a distressed property, and should set a limit on how much they will spend before exiting the deal permanently. While exiting a deal prematurely would most likely mean a loss of capital for the investor, it could also be a good strategy to avoid a significant loss that could limit future investments.
