All about Investing in a Distressed Property
Did you know that distressed properties also make for a smart investment option? Foreclosure properties or Probate Sale properties are an ideal choice for investing. Many real estate investors consider these properties as investments with the best returns. Although this is quite a popular term in the real estate industry, however, having a clear idea of these is important before investing. Let’s check out what are these terms all about and why they pose a good investment option.
Distressed Property: Distressed properties are those properties that are on the brink of foreclosure or are already owned by the bank. These properties are sold by the owner to regain the loan amount to repay the bank or by the bank to recover the loan amount. Usually, distressed properties need to undergo a significant amount of repairing as they remain ignored and unmaintained for a long time.
Foreclosure: This is a legal process through which the lender or the bank seizes the property of the borrower to sell it and recover the loan amount. The properties involved in foreclosure are known as distressed properties. When a borrower stops paying the payment of the loan amount, the property is deemed for foreclosure and is listed in the bank for auction.
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Probate Sale: This is also a legal process executed at a court where the property of a deceased person is sold to divide it among the beneficiaries. However, the probate sale takes place when the owner of the property dies without making a will or bequeathing it to the family members.
The distressed properties are usually old or incomplete structures and so need some major repairment world. And so it is recommended to consider the amount before buying a distressed property. In the real estate industry, there is a 70% rule regarding the price of distressed property. While following the 70% rule, one can earn a significant profit on flipping that property.
Investing in a property can come with profit or loss, and it depends on the buyer on how smartly one handles the investing process to achieve the determined profit. Since investing in a house would involve a lot of money, it makes sense to calculate the pros and cons before finalizing.
Benefits of investing in distressed properties
- Distressed properties are usually available at a price lower than the market value of the property. Moreover, if it is a foreclosure property then chances are there to get a more rebated value as the banks would want to sell the property as early as possible to clear their books and do away with the liability. As a buyer, the discounted amount is a plus point as they can avail property at a low price and then sell it at a profitable price after some repairments.
- Real estate investors look at these properties as a prospective profit endeavor as they invest to flip these houses in the future. Finding distressed properties in prime locations can bring on some better opportunities in terms of profit as after repairing they can bring in great selling value.
- A distressed property offers better-negotiating power. Since the properties require some major repairing, the buyers have an upper hand on the price factor. There are higher chances that the buyer can close a winning deal through smart negotiations.
- Since distressed properties can offer a lower closing cost, it paves the way for an easy financing option. With a small amount, the financing becomes easier and with proper planning and repairing, a neglected property can be turned into an excellent property and bring along good returns.
Risks to calculate while investing in a distressed property
- Most risks associated with a distressed property are financial. As distress properties need to undergo some major repairing, so it is advisable to calculate the potential repairing charges before investing in a property. It should be maintained that the cost of the property and the prospective repairing costs don’t burden you with finances.
- Distressed properties sometimes take longer to get sold. Especially in cases of short sales, the deal takes longer to happen and that could be a fallback for those investing in these distressed properties for a quick return.
- Apart from the repair, a distressed property can also come with the burden of unpaid taxes. So buying a distressed property would also mean that the buyer needs to clear the property taxes and the mortgage amount when buying a distressed property.
These are some of the important benefits and risks that need to be considered before investing in a distressed house. You can either purchase a distressed property for living or flipping and earning a profit. However, when looking at the benefits the risks are significantly lesser.
If you are interested to buy a distressed property, try considering the available tips and take help from a regular investor, if you are a first-timer. It is also important to have an idea of the market value of the property to make a profitable deal. According to real estate and bank observers, the price of a distressed property should be at least 10 to 20% lower than the market value. So, make a proper investigation about the property and then plan your investment for it.