If you’re in the market for a new property to renovate and resell quickly, the exorbitant prices of today’s sizzling housing market might be intimidating even for the most seasoned flipper.
Even though the market share is still small, it’s no wonder why more real estate investors and flippers are now looking at distressed homes for the best ROI.
But what makes a distressed property distressed? What are the benefits and risks associated with dealing in distressed properties? And, finally, what is the best way to finance your distressed property purchase?
Let’s take a look.
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What makes a “distressed” property?
A distressed property often comes at a lower price compared to similar-sized homes in the area—but it’s important to understand the reason behind this discount price.
Typically, the home is either under foreclosure or the lender itself is trying to sell it.
A homeowner’s inability to pay the mortgage or property taxes is the most common reason for a property to be classified as distressed.
What are the different types of distressed properties?
Real estate and mortgage professionals categorize various types of properties under the heading of “distressed.” To help you out, here’s an overview of the most common kinds you’ll come across.
Foreclosures
This is the most widely recognized form of distressed property—a foreclosed property.
In this scenario, the homeowner has repeatedly missed their monthly mortgage payments, leading the lender to issue an official default notice.
Some investors opt to purchase homes in preforeclosure—usually 90 days past due on payments—or through public auctions once they have been fully foreclosed.
Short sales
When dealing with a short sale, the lender hasn’t yet taken possession of the property.
Instead, a mutually agreed-upon arrangement is made with the current owner to sell it for less than its actual value.
This approach helps prevent the property from entering foreclosure, thereby avoiding further damage to one’s credit. While the property may be considered distressed, it’s typically at an early stage of ‘the distressing process.’
REOs
REO stands for real estate-owned, a term used interchangeably with bank-owned properties. When a property is referred to as an REO, it means that the lender has become the seller.
This occurs when the property has gone through foreclosure but did not find a buyer at auction. Consequently, the lender now is now looking to recoup its losses.
Pros and cons of distressed property purchases
When it comes to purchasing property, there are always numerous factors to consider. However, buying a distressed property presents a unique set of benefits and challenges.
Although a temptingly low price may catch your attention, it’s crucial to carefully evaluate these factors before embarking on the path of investing in a distressed property.
Pros of distressed property
Lower price
Not surprisingly, one of the primary attractions of purchasing a distressed property is the potential for substantial financial gain. When a borrower defaults on their mortgage, the lender’s priority becomes expediting the sale to remove the property from their books.
This scenario can be a golden opportunity for a buyer, giving them the opportunity to benefit from a significant discount.
Possible future profits
The old adage of “buy low, sell high” especially holds true in the realm of real estate investment.
Distressed properties could represent great potential for the adept investor who can navigate purchasing fixer-uppers and transforming them for profit.
Acquiring properties at a discounted price, investing in sweat equity, then strategically selling it gives them the potential to significantly bolster their financial resources.
Cons of distressed property
Potential repairs
Many distressed properties are sold as-is, meaning the buyer cannot request repairs before closing the deal.
If the previous homeowner struggled to make mortgage payments, it’s likely they also couldn’t afford to maintain the property.
While you may have confidence in your DIY skills, acquiring such a property could demand significant amounts of your time, as well as expenses, to bring it up to standard.
Possible outstanding taxes
While the outstanding mortgage may be erased on a foreclosed property, the question remains: What about the property taxes? If you find yourself buying a house with unpaid taxes, the responsibility to settle the bill could fall on your shoulders.
Financing issues
Finding a lender willing to work with distressed properties can be a challenge. Many traditional lenders are hesitant to finance properties in poor condition or with uncertain market values.
However, there are specialized lenders who understand the unique circumstances of distressed properties and are more willing to provide financing options.
It’s important for buyers interested in distressed properties to research and connect with lenders experienced in this niche market to increase their chances of securing the necessary financing.
Why hard money is ideal for buying distressed property
Hard money loans are a tailor-made financing option for purchasing distressed properties due to their unique advantages tailored to the needs of real estate investors.
Unlike traditional banks and other conventional lenders, hard money lenders are more flexible and understanding of the challenges that come with distressed properties.
Here’s why hard money is a perfect fit:
- Quick approvals: Speed is crucial when dealing with distressed properties, and hard money lenders excel in this aspect—a streamlined approval process, often securing financing within days, enables you to seize profitable opportunities.
- Asset-based lending: Loans are based on the property’s value rather than the borrower’s credit score or financial history.
- Repairs and renovations: Distressed properties often require significant renovations, and hard money lenders understand this—finance both the purchase and renovation costs to bring the property back to its full potential.
- Short-term loans: typically short-term, ranging from a few months to a few years—aligning well with the investors’ strategy of buying, renovating, and selling the property quickly for a higher ROI.
- No prepayment penalties: These loans often come with no prepayment penalties, giving investors the flexibility to repay the loan as soon as the property is sold and maximizing profits.
Explore hard money loans for buying distressed properties
In conclusion, hard money loans offer a practical and efficient solution for investors seeking to capitalize on the opportunities presented by distressed properties.
Their fast approval process, asset-based approach, and suitability for short-term investments make them an excellent choice for savvy real estate entrepreneurs looking to make a profit in today’s competitive market.
If you’re seeking trustworthy, transparent lenders to assist with your investment goals, reach out to Marquee Funding Group today. With us, you’ll experience reliable support tailored to your needs.
Unlike conventional lenders, we’re not confined by the same rules and regulations. Instead, we establish borrowing guidelines that benefit both our borrowers and ourselves.
Submit your loan scenario now for a prompt evaluation by our team.
Photo by Max Rahubovskiy