If you, as a real estate property manager or business owner, are planning to expand your portfolio and have a low budget for it, distressed properties might be a good investment for you. Though distressed properties are cheaper, they have some downsides too. Read this blog to find out. Before you plan your strategy and leadership and decide which way to go, we can give you a detailed study of the present distressed property market in the USA.
When your business is just starting out, running low on cash due to the after-effects of the pandemic or the grilling of the inflation rates, expansion can be tough. Especially when the base prices of houses are quite high in most American cities. You might want to start looking for distressed properties to get a better deal. If you have the minimum budget to give properties a makeover and sell them at a higher price, distressed properties are the way to go.
What is a distressed property?
A distressed property sale is where the owners try to sell properties at a lower price than the market value. The basic reasons behind this are that the owners failed to pay their property taxes or keep up with the mortgage. Real estate investors have forever been keen on investing in distressed properties to get a great return on their investments. But finding distressed properties with potential is a skilled task that, if not mastered well, can become a curveball for the business.
Lack of economic transactions and rising inflations have affected many across America and are increasing the number of distressed property sales. According to Bloomberg news reports, transactions on properties fell by a whopping 68% during the first year of the pandemic. Even people who already had properties had to sell them off at lower prices to keep up with mortgage demands.
Top Types of Distressed Properties
There are different types of distressed properties in this volatile real estate market. Here is a quick view of a few of the most common types.
Foreclosures
When the homeowners fail to pay the mortgage for a long time, the property will be foreclosed by the bank and sold off at lower costs to retrieve the mortgage value. In a foreclosed property, the title of the house is still in the owner's name rather than the money lender's name. This is the most common type of distressed property.
According to CNBC reports, after the pandemic, when mortgage rebates and bailouts ended, foreclosures jumped by 32% in the first quarter of 2021. This sent a lot of good properties into the distressed sale category. Many real estate investors and business owners made good use of this and bought good properties at cheaper rates. Are you planning to do the same but don't know how?
REOs
REOs or Real Estate Owned or Bank owned the bank already owns properties. The bank foreclosed on them where the previous owner had their mortgage. When the original owners fail to pay their due mortgage charges, the bank that gave the mortgage has an option to make the property in their name.
When this happens, even if the owners do not vacate the home, they can be evicted by the bank. After this, the bank can sell the property at a lower cost to get a return on its investment and recover some of its losses.
Short sales
Short sales are a unique situation where the money lender bank does not make the property in its own name when mortgage payments fail. But they agree with the owners to make a sale at a lower price to cover the mortgage costs and retrieve the lender's money.
Advantages of investing in distressed properties
Buying a distressed property comes with its own unique advantages that real estate business owners can benefit from. Here is how.
Cheaper prices
Since the owners or the money lending banks are selling these properties to retrieve their money, they have a lesser rate than the actual market value. You can evaluate and inspect the property and see that you are getting a great property at a throwaway price, then it is a great investment.
Has potential for growth in the future
As a real estate property manager, you must know how to upscale an existing property to get higher market value. So, buying a distressed property can help you “buy low, sell high.” You can flip these properties, revamp them and sell them at a much higher price than your original investment. This will positively impact your ROI and increase your grasp of the real estate market.
Disadvantages of investing in distressed properties
But before you invest in a distressed property, it is noteworthy that not all of these properties are good investments. You need to have an eye for it to understand its true potential. Here are a few drawbacks that distressed properties can have and become a setback for your business.
Can have lots of repair work
When people sell properties at lower values, there is a high chance that they did not spend money on repair works if they did not have money to pay the mortgage; they sell as-is. This means that some of these houses can be in seriously bad condition. So doing a house inspection before buying is a wiser investment journey.
Title and ownership issues
The previous mortgage on the distressed property will be wiped off the payments you make during the sale. They are in the previous owner's name, and you might get stuck with them. But there is a high chance of getting burdened with unpaid property taxes. It is better to investigate all these before investing.
It can take longer to close
Foreclosed or REO properties do not face this problem because they are already closed, and the deal has been closed. But if you are looking to bid on a short sale home, then there are chances that it might take a long time to close.
Partner with Assetsoft
If you are looking at distressed properties to expand your real estate portfolio at lower costs than investing in new properties, then you need to plan your strategy and leadership to take the right steps. Our team at Assetsoft can help you strategize better with our many years of experience working in the real estate field.