Ultimate Guide to Leveraging Distressed Properties with Hard Money Lending
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May 10, 2024

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Distressed properties generally enter the market at prices below their true value, presenting unique opportunities to real estate investors who are up for the challenge.

In this article, we’ll explore the types of distressed properties and how to create a successful investment strategy—including the best source of funding.

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What is considered a distressed property?

A property generally becomes distressed when a homeowner is unable to keep up with their mortgage payments.

The “distress” comes from various scenarios, including bankruptcy, foreclosure, or the owner’s urgent need to sell.

As a result, the lender seizes the property and it is sold at auction, often for less than its true value.

Types of distressed properties

Let’s take a more in-depth look at what makes a property “distressed” and common types of distressed properties.

Foreclosure properties

Foreclosure properties have been repossessed by the lenders after the owner fails to make their mortgage payments.

The foreclosure process ends with a public auction, where the property is sold to the highest bidder.

If it doesn’t sell, it becomes a real-estate-owned (REO) property and the lender will usually take over the property.

Real-estate owned (REO) properties

REO properties are owned by lenders following an unsuccessful foreclosure auction.

Banks typically are eager to get rid of these types of properties, so they often are sold at prices below market value.

REO properties may require significant repairs or come with unresolved liens or other legal issues.

Short sale properties

Short sale properties are sold for less than the outstanding mortgage balance with the lender’s approval.

They’re generally a last-resort effort from homeowners who want to avoid foreclosure if they are unable to continue making mortgage payments.

Auction properties

Properties sold at auction might include:

  • Foreclosures
  • Tax lien sales
  • Estate sales

Auction buyers are often required to pay in cash and purchase the property as-is.

Opportunities and challenges of distressed properties

The most attractive aspect of distressed properties is the price.

Banks want to recover the amount owed quickly, so they often sell these properties below market value.

As a result, they present a good entry point for investments due to the potential for significant profits and the lack of competition.

Of course, distressed properties also come with risks and challenges, including:

  • Neglected or abandoned homes with structural issues
  • Liens, unresolved debts, and legal issues that could potentially complicate the purchase process
  • Market fluctuations could impact a property’s potential for profit

Successful investment strategies require that investors conduct thorough due diligence on a property—and secure the right type of financing.

The role of hard money in distressed property investments

Hard money loans are offered by private lenders rather than traditional banking institutions.

These loans are primarily secured by the property rather than the borrower’s creditworthiness, which allows for more flexible terms and a faster loan process.

Let’s take a look at the reasons why hard money is well-suited for distressed property investments.

Asset-based lending

The top reason hard money loans are best for distressed property purchases is that many of these properties simply wouldn’t qualify for traditional financing due to their condition.

Hard money lenders evaluate the property’s potential after improvements, which places the primary focus on the overall merits of the project.

Fast funding

Hard money loans can often be approved and funded in a fraction of the time it takes to secure a traditional loan.

The ability to close deals quickly gives investors a significant advantage when it comes to distressed properties. Hard money lenders, like Marquee Funding Group can fund and close a loan in as quick as two weeks.

Flexibility

Finally, hard money lenders understand the unique challenges and the potential of distressed property investments.

They are willing and able to structure loans in a way that best supports the project’s success, including factors like repair and renovation costs.

How to work with a hard money lender

Hard money lenders are primarily interested in understanding your plan for the property and your exit strategy.

Here’s how you can prepare to work with a hard money lender:

  1. Present a detailed project plan that includes the purchase price, renovation budget, timeline, and after-repair value (ARV)
  2. Detail your exit strategy that explains exactly how you intend to repay the loan
  3. Ensure you understand all costs involved with the loan, including origination fees and closing costs
  4. Inquire about the drawing process for your renovation project

Working with a hard money lender is simple—with the right lender.

Remember, not all hard money lenders are the same. 

It’s important to conduct your due diligence with your lender, too, and understand their experience with the type of loan you are seeking and their reputation in the industry.

Marquee Funding Group has funded over $3.1 billion in loans across 14 years in business.

Each loan officer is highly trained and capable of structuring mortgage options for unique business and owner-occupied loan scenarios.

How to develop a successful investment strategy

A successful investment strategy is easier to achieve with the right team of professionals by your side—including your lending partner.

Hard money lenders can help you ensure your financing seamlessly meets your investment goals, whether you are fixing and flipping or fixing and holding a property.

Let’s take a look at the key strategies for a successful “distressed” investment:

  • Define your goals: Determine whether you are looking for quick profits through a fix-and-flip or long-term through a rental
  • Determine your risk tolerance: Distressed properties can offer high rewards, but they come with their own set of risks
  • Conduct market research: Look for areas with appreciating values and strong demand
  • Perform due diligence: Conduct thorough inspections and perform a title search
  • Build a team: Create a team of experts who can help you throughout the process, including a private lender, real estate agent, attorney, and contractors

Distressed properties require careful planning and ongoing management for the best ROI.

Apply today with Marquee Funding Group

Marquee Funding Group provides accessible real estate financing to those who are often overlooked by traditional channels.

By focusing on the merits of the deal rather than your credit score or certain property restrictions, approvals are simple and fast. Submit your unique loan scenario to work with the Marquee team and receive personalized support and guidance for your investment goals.

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