How to Find Distressed Real Estate — 9 Tips for Investors
Finding distressed properties with potential for growth requires a discerning eye and business acumen. 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.
What Is a Distressed Property?
Often referred to as “opportunistic” real estate, distressed properties are sold at discounted prices due to the following: deteriorating physical condition, incorrect pricing, mismanagement, short-term environmental problems, or excessive debt resulting in foreclosure vulnerability. Usually, it’s because an owner can’t keep up with mortgage obligations. Distressed property typically falls into three categories:
- Foreclosure or pre-foreclosure: A homeowner falls behind on monthly mortgage payments, and the lender repossesses the property and places it on auction.
- Real estate-owned property: If a lender cannot sell the foreclosed property at an auction, the bank seizes control and sells the real estate for a reduced rate.
- Short sales: When a property’s mortgage is higher than its worth, the lender agrees to a short sale at a reduced price, ensuring the bank can recoup some of the cost.
Pros and Cons of Buying Distressed Property
The allure of cheaper property is enticing, but to gain true ROI, you have to be certain you can cure the distress with an effectuating business plan that doesn’t rely on uncontrolled sources. Before buying a distressed property, you should conduct an investment property analysis and estimate after the repair value (ARV) to assess its potential.
Key investor concern is whether the property is occupied or empty. While vacant properties sell for a higher price, the task of evicting tenants from occupied real estate can be time-consuming, unpleasant, and costly. Additionally, you’ll want to avoid buying in areas where foreclosures are high, as there’s no telling when the market will bounce back.
- Real estate prices are below market value
- Possibility of buying in an area otherwise unaffordable
- Easier financing if it’s a bank-owned property
- Low-price together with built-in equity provides more exit strategies, including long-term hold or fixing and flipping
- Potential for high profits if in the right area
- No guarantee you’ll make a profit on a distressed property
- May be in an undesirable location
- Stiff competition from other investors
- Hidden repairs and damage may require additional cash exceeding the initial budget
- Title insurance can be challenging to obtain when buying foreclosed property from the bank or at an auction
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.