How to Find Distressed Real Estate — 9 Tips for Investors
The end of pandemic mortgage bailouts has caused a rise in foreclosures that are expected to increase and then plateau. Nationwide, one in every 2,112 homes had a foreclosure filing in the first half of 2021, with Delaware, Illinois, and Florida reporting the highest rates.
Finding distressed properties with potential for growth requires a discerning eye and business acumen. The last thing you want to do is to get involved in a property that will end up being a waste of your money and your time. The process of how to find distressed properties should be taken seriously and handled by experts, which is where our team at 33 Realty can help.
If an investor purchases the property for a lower cost and can afford to weather downturns, tenant vacancies, and subsequent cash flow challenges, they may have a profitable fix-and-flip investment. Here's how to find real estate distressed properties with the help of our real estate investors.
Types of Distressed Property
If you've heard about the upsides of buying distressed properties, it's important to first start with a basic definition so you have a strong understanding of how to find distressed properties. Distressed property deals are on the brink of the foreclosure process or they are already owned by a bank. These foreclosed properties are usually targeted by real estate investors as they have the opportunity to purchase the home at a discount.
However, the purchase of this type of property doesn't come without its risks. In some cases, distressed properties for sale come with many repairs. Here are three common reasons that you might see potentially distressed properties in your area, and we will go into each in a bit more detail.
Many distressed homes that you see on the market are in the pre-foreclosure process or have already been foreclosed. This means that there have been missing or delinquent mortgage payments and the bank or government agency forecloses on the home and takes over the property. In some cases, the lender might accept a deed instead of a foreclosure in order to assume ownership.
When a foreclosure occurs, lenders are motivated sellers that want to get the property off of their hands as soon as possible. This is where foreclosure auctions come into play.
Real estate investors might also find their target in the form of an REO property, or real estate owned property. These homes are considered to be distressed properties and lenders don't want the responsibility of maintaining or repairing these properties. As a result, they're willing to sell them at a discount. If you know where to look for an REO property, you could find one of these distressed properties online in your area.
Short sale properties occur when property owners are unable to fulfill their mortgage payments, resulting in more debt than the property is worth. In this case, the property owner is likely interested in a short sale, or one that happens when a buyer purchases the distressed property for less than the amount that's owed in the mortgage. A short sale property helps the current owner to avoid going into foreclosure and can be a good deal for those looking to buy distressed properties.
Pros and Cons of Buying Distressed Property
Advantages of Buying Distressed Properties
One of the main benefits of purchasing a distressed home is that you'll find that real estate prices are below market value. In the case that a lender isn't getting the necessary mortgage payments that they need, they will want to speed up the timeline of the sale to help recoup as much money as possible. As soon as a borrower defaults on the loan, the lender will look for a way to get the money and move forward with another rental property. This means that home buyers will be able to capitalize on this otherwise unfortunate situation, and you'll have the possibility of buying in an area otherwise unaffordable. Plus, there's easier financing if it's a bank-owned property.
The Potential for Future Profits
You've heard the saying "buy low, sell high" regarding real estate properties. Many distressed properties are ideal for those who are experienced in real estate and are happy to take on projects often called "fixer-uppers." This is especially true if the property is in the right area of town. The low price together with built-in equity provides more exit strategies, including long-term hold or fixing and flipping.
Risks of Buying Distressed Properties
The Potential of Endless Repairs
Hidden repairs and damage may require additional cash that exceeds the initial budget that was put toward the listing. Because the property is sold as is, there's a risk that there are many investments that need to be made in terms of upkeeping the property. Even if you're strong at fixing things yourself, there could be serious issues that require outside vendors or you simply won't have the time and energy to put toward fixing it. After all, there's no guarantee you'll make a profit on a distressed property and it may be in an undesirable location.
Even with the previous mortgage eliminated, what about the property taxes? Unpaid taxes could fall on your shoulders, putting you in a stressful financial situation. Plus, title insurance can be challenging to obtain when buying foreclosed property from the bank or at an auction. You'll want to look into these property details beforehand if possible.
Long Closing Period
Today's housing market moves quickly and you might think that if you can find properties that are distressed, the transaction time will increase. However, in many cases, it can be the opposite. In some instances, these sales can take up to a full year to close. Patience is key when you're looking to find REO properties.
9 Resources for Finding Distressed Properties for Sale
Because the distressed property isn’t typically listed on traditional property portals, a common query from first-time investors is “How do I find distressed properties?” There are a variety of avenues available, from real estate wholesalers to MLS to property auctions; you just have to know where and how to look.
1. Driving for Dollars
Assuming you already have a target area in mind, driving around is the oldest, cheapest, and simplest way to find a distressed property. Up-and-coming neighborhoods, i.e. those undergoing gentrification, are a sound choice; developers are likely already investing in the area, and it provides a unique opportunity to invest for appreciation.
Many homeowners are priced out of popular areas and look to up-and-coming neighborhoods, which means if you’re purchasing to flip and then rent or sell, you’ll appeal to a larger pool of buyers and tenants. You could potentially see buyers competing for an already upgraded property when you sell.
Driving around the neighborhood provides an indication of atmosphere, amenities, and general accessibility that’s not discernible from photographs. A first-hand look at the place offers insight into subtle nuances like safety and potential neighbors who can make or break a good investment.
Common Signs of a Distressed Property
Here are some examples of a property that is distressed:
- Boarded-up doors and windows with the house being totally vacant;
- A yard that's neglected or overgrown;
- Uncollected newspaper and mail;
- Significant exterior damage such as broken windows, peeling paint, or roof damage;
- Unclaimed notices on doors, windows, mailboxes, walls, etc.
You should also be able to search online to find contact information through the website of your county assessor. Here, you'll find more information on the owners and be able to get their contact information.
2. Foreclosure, Probate, and Family Attorneys
Local law firms specializing in foreclosure, probate, or family law may have leads on available homes for the following reasons:
- Family law attorneys: Couples filing for divorce or separation may be going through a foreclosure process.
- Probate attorneys: People with inherited property find themselves with massive mortgage payments and have no option but to sell to settle the costs.
- Foreclosure attorneys: These attorneys work directly with banks that have foreclosed homes.
3. Real Estate Wholesalers
Real estate wholesalers are experts at finding distressed properties because they know owners are motivated to sell. Investors use real estate wholesaling as a short-term investing strategy to turn over large profits in a short time. A real estate wholesaler will conduct an ARV and offer a below-market price. They often have properties that aren’t listed on the market yet and are a good source because they’re eager to spin a profit.
A multiple listing service (MLS) is a database established by cooperating real estate brokers to provide information about properties for sale that may include distressed real estate. Access to an MLS requires a license, so you may have to work with a broker or real estate agent. If a property has been listed for longer than three months, there’s a good chance it’s distressed.
The longer a property is on the market, the more desperate owners are to sell, creating a desirable situation for investors. Short sale and pre-foreclosure homes are frequently listed on websites like Zillow, Homes.com, and Realtor.com. It’s useful to conduct initial research on these sites first before getting a local real estate agent involved.
5. Property Auctions
First-time investors often ask, “how do I find distressed properties online?” Real estate sites like Auction.com, RealtyBid.com, and Tranzon.com are good starting places, but keeping tabs on the local auction scene can lead to a good deal. The only downside is the competitive nature of bidding processes can deter some buyers, especially if the bid is higher than they initially anticipated.
6. Distressed Property Sites
There are websites solely dedicated to real estate distressed properties. Some only list foreclosures, while others have REOs and government-owned properties. Depending on the site, they may have a monthly subscription fee:
- Wells Fargo REO Properties: Requires you to communicate directly with the listing agent.
- Hubzu.com: A platform designed for licensed real estate brokers and sellers to market properties, with a special section for foreclosure real estate.
- RealtyTrac: For a small subscription fee, you can have access to over 1 million real estate properties, including pre-foreclosures, house auctions, and bank-owned homes.
- CitiMortgage: This site lists properties owned by Citigroup. Interested investors can contact the listing agent associated with the property they’re interested in.
7. Individual Bank and Lender Websites
Banks usually have their own REO foreclosure listings currently in their possession. REOs offer bargain prices without “sight-unseen” risk. Investors have the opportunity to tour the property and get a feel for what they’re buying and its potential value before placing an offer to purchase. Bear in mind, even though the property is distressed, you can still negotiate the price.
8. Government Agencies
While government foreclosures can be an excellent source of high-potential investment properties, they require buyers to use a real estate agent or licensed broker before making an offer. Government agencies such as the HUD, IRS, and Army Corps, among others, have plenty of foreclosed and repossessed real estate to their names, mainly due to unpaid taxes or mortgage loans.
9. Local Foreclosure Listings
If you want to invest locally, it’s worthwhile looking at your county tax assessor website or through your local sheriff’s department. It can be somewhat tricky to find, so Googling “XX county delinquent mortgages/taxes” may help. Delinquent tax records tend to suggest a homeowner may be underwater and a likely candidate to be a distressed property owner.
How to Qualify Distressed Property Deals
Although there are many upsides to distressed property, they aren't always easy to find. They are usually a rare opportunity and competitive as many people are looking to find a deal in this booming real estate market. It's important that you outline multiple strategies combined with persistence and patience in this process. Here are various ways that you can find distressed properties in your area.
1. Drive through Neighborhoods
There's nothing wrong with driving through different areas to look for homes that might be distressed. If you think that you found one, you can get in touch with the homeowner to see if you can take it off their hands. There are apps such as DealMachine or PropStream that track this information for you, but you can also do it completely on your own by using Google Maps. Make sure to look in areas that are up-and-coming or areas near housing markets that are already established.
2. Look Online
Using the multiple listing service (MLS), which is a large online database that also lists foreclosures, is another option for retail buyers looking to score a deal. You'll need to search by the listing code such as "short sales" to get a list of homes in a particular area. To stay competitive, set alerts to see when these types of homes are listed.
3. Use Direct Marketing
Consider cold calls or direct mail to find other investment opportunities for these types of properties. Using direct marketing, your goal is to compile hundreds and even thousands of options, and the longer your list is, the higher the likelihood that you'll get a response. Specific apps such as DealMachine make it easier than a manual approach in finding these homes. Once you have a list, craft a message that empathizes with the homeowner without coming off as insensitive.
4. Check Public Records and Court Filings
Any tax delinquencies are public records that are findable on country assessor websites. If needed, you can also utilize a third-party company to go through county tax records on your behalf. The best starting point is the county recorder's office, either online or through an updated website.
5. Go to Property Auctions
One of the most popular ways to find distressed properties is to visit property auctions where you can find properties that have been repossessed by lenders or banks. Check county court records, websites, newspapers, or direct advertising. As a starting point, we recommend attending an auction to observe first.
Finding Distressed Properties: The Bottom Line
The resources listed here provide a sufficient start to begin looking for distressed properties. After a preliminary search, your query will likely shift from “how do I find distressed properties?” to “which distressed property should I buy?” That’s where 33 Realty comes in. Our experienced team has completed in excess of $150M in distressed note and property sales. We know how to find a good deal. Contact us today to learn how we can help you find the perfect investment.