Is Buying a Distressed Property a Good Decision?

Have you ever thought about purchasing a diamond in the rough at a reasonable price? Look no further-distressed properties might just be what you’re looking for. Distressed properties are a lucrative opportunity in today’s real estate market. A distressed property is one that has been seized by a bank and is auctioned off to recover the outstanding dues from the owner. In most cases, this happens when a homeowner fails to honor four or more equated monthly instalments (EMI) in a row. Distressed properties provide homebuyers with an opportunity to enter competitive markets?

Let us look at the types of distressed properties.

Foreclosure: The most well-known type of distressed property is a foreclosed property where foreclosures can only be initiated by the lender. In this case, the homeowner fails to pay multiple monthly mortgage payments, and the lender files a default notice. Some people buy homes in preforeclosure (typically when the owner is 90 days past due on payments), while others purchase them at public auctions when they are fully foreclosed. Homeowners who undergo a foreclosure have to wait for a minimum of 5 years to purchase another property.?

Short Sales: In a short sale, the owner is unable to repay the mortgage and are often in financial distress. Such properties are sold at a discount- less than the amount owed on a mortgage. It is important to note that no short sale can be executed without the approval of the lender. Once the lender approves the short sale and the property is sold, all proceeds go to the lender, leaving the homeowner with nothing and still owing the remaining balance on their mortgage.?

REO Properties: REO properties are simply real estate owned properties which are not sold at the foreclosure auction and are then owned by the banks.?

Benefits of Buying a Distressed Property

Purchasing a distressed property can be a great real estate investment, allowing you to generate a handsome profit on a property that is listed below the market value.?

Take a look at some of the reasons to invest in a distressed property.?

1. Low-Priced

Distressed properties attract buyers for the sole reason that they are priced below the market value and sellers are looking to make a quick sale. Often, distressed properties will be listed for sale by the lender, who has an incentive to sell it as soon as possible and get it off their books.?They are more attainable and a great way to generate money in the real estate market.?

2. Exceptional Return on Investment

Purchasing distressed properties are not only tempting but also provide a significant return on investment. While the properties would be in the most dilapidated condition, a few necessary improvements can increase the value of the property manifold.

Risks Involved in Buying a Distressed Property

While purchasing a distressed property comes with its own set of potential advantages, these investments can be risky. If you're a first-time home buyer, think if the risks outweigh the potential rewards.?

Such properties may appear to be an incredible bargain. However, you must consider whether you are prepared to deal with the delays, disappointment, and costly repairs that frequently accompany distressed properties.

Here are some of the most significant risks associated with purchasing a distressed property.

1. Unpaid Taxes

The outstanding dues on the foreclosed property may have been settled, but what about the property taxes. If you end up buying a house with unpaid taxes, you may be responsible for paying them and occurrence of any additional financial issues you may inherit from a delinquent owner.

2. Unmaintained Property

Since the homeowner is about to lose the rights over the property, he does not have any incentive to get the maintenance done. The property is sold as-is and there is no scope for getting its inspection done before it is auctioned off. On successful closure of the deal, the repairs and maintenance of the property falls upon you. Not only this, you may have to evict the existing tenants from the property.?

3. Delay in Closing

You will probably need to wait before you can own a distressed property. The process of buying a distressed property is longer than you could imagine because the sale is less straightforward when working with a seller who is underwater on their mortgage. It usually takes 6 months to a year, and you may have to jump through hoops along the way to facilitate the sale.

4. Outbidding at Auction

Owing to the increasing competition in the market and distressed properties being sold at a low price, there are high chances that you may get outbid at the auction and someone else would walkaway with the property.?

The Bottom Line: Should you buy a distressed property?

With a limited budget, distressed properties are a wonderful option for owning your home. However, there’s an additional caveat to it. Buyers must conduct a due diligence of the property, and a complete check of the historical papers before purchasing a property to ensure a clear title. One must have an enormous risk appetite to accommodate for the economic fluctuations, policy revisions, etc, and a keen eye for negotiation to eventually sell the property at a profit.