Distressed property refers to a property that is under foreclosure or repossessed by a lender or bank in cases of non-repayment of the mortgage value. When a landowner takes a loan from financial institutions or any other moneylender in the market, they keep their property as loan collateral. On failure of repaying the borrowed money, the moneylending body has the legal rights to take possession of the property and sell it for recouping the loan amount. When the properties are sold under these circumstances, it is often regarded as distressed property.
The sale of distressed properties is mainly under the following situations.
- Foreclosures: This refers to a situation where the moneylender takes ownership of the property as a result of non-repayment of the loan amount. After seizing the property, it is made available for foreclosure sales and auction in the market. Thereby the property is sold to the highest paying investor in order to recover the maximum default loan amount possible.
- REO: Many a time, the foreclosed property fails to garner potential buying bids in an auction. In such cases, the bank seizes control of the property and sells it at a lower market price directly to the interested buyers. These are real estate-owned properties that are eventually sold under the distressed property category.
- Short sales: This is a result of homeowners becoming underwater on their home value. In simple words, when the loan amount is higher than the property value, the lender agrees to short sales by which it can recoup the maximum loan amount. Buying distressed property under this situation can be a profitable deal as the original homeowner is in immediate need of money and would settle on a lower market price.
Benefits of buying a distressed property
While investing in distressed property can be risky, there are multiple advantages to it.
- Profitable purchase
Whether the property is under foreclosure, short sales or real estate-owned, immediate sale is the primary objective. The purpose of selling these properties is to recover the default loan amount. Therefore, the seller be it a bank or the real homeowner is open to negotiations. As soon as they get a price that satisfies the loan recovery amount, they sell it off. You can make a profitable purchase by paying a genuine amount for the property that is below the market rates.
- Valuable asset
Investing in distressed property can be a valuable asset in the future. Renovating and reconstructing the property can increase its market value to a great extent. Investors usually buy such distressed properties at lower prices and spend additional amounts in renovating them. They further sell these properties at competitive market prices making a profitable deal. Also, with development in the neighboring areas, the property value is generally expected to increase. A little additional expenditure on the property can make it a valuable asset.
- Quick property transfer
Since the situations are not favorable, the seller intends to get rid of the property as soon as possible. Whether it’s the original homeowner or the bank, they look for potential buyers who can pay immediate cash to fulfill their monetary requirements. Hence, when you meet their minimum property pricing, they initiate quick property transfer. There are negligible chances of a last-minute dropout and you don’t have to indulge in frequent negotiations.
- No hidden liabilities
If you are buying a distressed property that is real-estate owned, there are no hidden liabilities that come with it. Being a distressed property with low maintenance and upkeep, the property condition might not be in a very good condition. In most cases, the buyer has to get a complete renovation done. Apart from the physical damage liabilities, there are no legal or pending expenses associated with it. Undergoing a legal process itself, these properties have no legal or construction disputes. However, you must get a thorough inspection done from your end.
Real estate investors have varied views on buying distressed properties. Whether the purchase is a profit or loss entirely depends on the buyer’s diligence. If you’re planning to invest or buy a distressed property, make sure to check on necessary factors like property condition, fair pricing, authentic documents, etc.
