Is Buying a Distressed Property Right For You?

2020 was the year of the unpredictable.  From how kids attend school to how we socialize, the world has seemingly turned upside down.  That includes the housing market.  Homes are selling at record speed and prices are soaring from the same period last year, making many home buyers start to look outside the box.  Namely, at distressed properties. Is buying a distressed property right for you?

Before we go too far down the rabbit hole, what is a distressed property?  A distressed property is a home on the brink of foreclosure or already owned by the bank.  Investors often seek these properties out because of the opportunity to buy a home at a discount.  As with anything that seems too good to be true, there’s a catch.  And in some cases, a big one!

A foreclosed home is a home where the owners have neglected to keep their mortgage in good standing and the home is repossessed by the bank.  The bank in turn sells the home at a slightly discounted price in order to recoup it’s losses.  These sales typically happen at auction or a special foreclosure sale.

Properties that fail to sell at auction are also referred to as REO, or Real Estate Owned property.  These homes are considered distressed.  Lenders usually want to sell these homes quickly rather than take responsibility for maintenance, and you can get a nice deal on one.

Another version of distressed property is a short sale.  This is when a homeowner knows that they are facing foreclosure, and choose to sell their home for the remainder of their mortgage in order to walk away from the property.  This can be attractive for owners whose homes are no longer worth what they paid for it.

So now you know exactly what a distressed property is.  Now let’s discuss why they can be a tricky deal to navigate.

First, distressed properties can be difficult to finance.  In many states, cash payments are required for distressed properties at auction.  When financing is allowed, it can be difficult for an appraiser to assess the value of a home and all lenders have guidance surrounding how to finance homes according to value.  Attempting to use a VA home loan for distressed properties would be an extremely tall order due to restrictions, regulations, and inspections needed to fund the purchase.

Next up is risk.  There are often delays and expensive repairs associated with distressed properties.  Most distressed properties are sold as is and it’s very difficult to inspect a distressed property.  Also, negotiating for repairs is pretty much nonexistant.

There is no guarantee that you’ll actually be able to purchase the home.  You can be outbid at auction, or wait weeks or months to hear back on approval from the powers that be at a bank.  While a traditional purchase can take 4-8 weeks, a distressed property can take 6 months to a year to finalize!  For many military families, that is time that you just don’t have.

Also, you’ll want to consider why the home is distressed in the first place.  This is particularly important when it comes to short sales.  Why are the home owners underwater on their mortgage?  Are home values plummeting in that area?  You’ll want to make sure you don’t end up in the same situation once the home is yours.

So why would anyone want to take on a distressed property?  For the savings, of course!  But keep in mind that most purchasers are investors with access to contractors and plenty of time on their hands.  Most people do not buy distressed properties planning to live in them.

Distressed homes offer a unique buying opportunity, but the average home buyer should probably look towards the traditional market.  If you’re still interested in purchasing a distressed home, make sure your real estate agent is familiar with working with them.  There are different hoops to jump through and a qualified realtor who knows their stuff can be all the difference in the world!

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