How to Find Distressed Homes For Sale

How to Find Distressed Homes For Sale


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Did you know that you could save anywhere from 20 to 50% by buying distressed homes for sale? Then, depending on the market, location, and investment strategy, repairing that rundown property could net you a lot of money.

As incredible as it sounds, there’s more to buying distressed properties than walking up to a dilapidated property, knocking on the door, and thrusting cash in the homeowner’s hand. It takes a savvy investor who understands the ins and outs of buying these rundown houses and turning them into profitable investments.

In this guide, you’ll learn more about distressed properties, how to find them, how to buy them, and much more!


Identifying Distressed Homes for Sale

First and foremost, what, exactly, is a distressed home?

Real estate investors often use the phrase “distressed property” to describe a property that isn’t generating enough income or is underperforming. However, since “underperforming” can have different meanings for different people, this definition is very general.

From the lender’s point of view, a home is in trouble when the owner is more than 30 days behind on their mortgage payments. In addition, should the homeowner not make any mortgage payments for more than 90 days, the loan is now considered a “non-curable loan.”

A non-curable loan means that the loan will remain on the bank’s records as a non-performing loan. This means the loan will stay on the bank’s records as non-performing until the borrower can pay off the debt in full, or the bank needs to sell it because it has racked up too many non-performing loans and needs the funds.

It’s important to remember that there are significant differences between properties that are physically and financially in bad shape. For example, sometimes a property’s owner is facing financial troubles, but the property is in good shape. In a situation like this, investors could find a great bargain and gain a valuable asset.


Physically Distressed Properties

When most people hear “distressed real estate,” they picture a rundown building sitting on an unkempt lot. They picture buildings with crumbling roofs or houses with severe water damage from a leak. Whether you paint it or not, it is evident to them that maintenance is required.

Even if there are no apparent signs of damage, a property can still be in bad shape if it hasn’t been taken care of for a long time. A property can also be considered distressed if its appliances and fixtures are old and need to be replaced or updated.

These outdated features will make renting the property at market prices easier. But unfortunately, some homeowners need more cash to bring their homes up to current market standards, and as a result, the property stays in distress.

Homes can also be distressed if dangerous substances are found, which could cause serious injuries. For example, if an older house is renovated, asbestos could be discovered that no one knew about. In addition, asbestos removal can be expensive, and it may be too much for a homeowner to afford.

Another example is land used for “toxic” uses in the past, such as gas stations or dry cleaners. But, once more, it might need expensive repairs before it can be used for anything that will make money.


Financially Distressed Properties

There is only one type of real estate difficulty: financial distress. As was said above, a property is only considered “distressed” if the cost of fixing it up is more than planned. It’s not the properties themselves that are problematic, but rather the financial side.

As we’ve already discussed, one way to define financial trouble is when a homeowner is 30 days or more behind on their mortgage payments. Not paying essential bills like the mortgage or taxes is the first and most obvious sign of financial trouble. A public records check will show if a lien has been placed on the property in such situations (we’ll discuss this later).

A second, more complicated way to figure out if someone is in financial trouble is to look at the loan-to-value ratio of a property to see if the property’s market value doesn’t match up with the risk of not paying back that debt.

If a property’s value drops to the point where they owe more than the house is worth, homeowners might wonder if it’s worth it to continue to pay the mortgage. Of course, the owners could refinance, but if there’s little equity in the property, that would mean they have to put up more money that they may not have on hand or would instead put it elsewhere.


Distressed Properties Due to Personal Issues

Some properties become distressed because their owners are focused on whatever problems they’re dealing with at the time. This can lead to the property losing value because the home’s upkeep needs to be addressed. If someone faces a severe health problem out of the blue, they will have to spend more money on medical costs.

Someone else might be going through a nasty divorce. Maybe one of them isn’t paying the mortgage because they feel it’s not their responsibility, or they’ll get more money when the divorce is finalized and the shared assets are sold off.

Some owners are discovering that selling assets that aren’t doing as well as others is an excellent way to get the cash they need to protect their more valuable assets. For example, their primary source of income comes from their day job, but they want to use the money their real estate investments generate to put aside for their retirement or start a business. But they can sell off some of those investment properties as a safety net if they should ever lose their day job.

The homeowner may find themselves “too busy” for various reasons and unable to give the property love and care, even when times are good.

In smaller investors with fewer than ten units, the owner might choose to manage the properties rather than hire a property manager. However, if one of the properties has an emergency, like a burst pipe or a malfunctioning heater, the owner might need more time or money to have an emergency repairman come out to make the repairs.

Then there are personal issues that could cause a property to become distressed. The owner needs to be made aware of the current market, and they’re content with how things are currently going. They need to stay on top of market trends and see how the property’s value has fallen through the years.

This is more common with “legacy properties,” where the owner invested in an apartment complex with 100 units more than two decades ago and hasn’t increased the tenant’s rent to reflect today’s rental market.

Even well-maintained buildings need to be updated in these situations. Some utilities may not work, there may be no modern conveniences, and the decor may look tidy but be decades old. These properties are considered “distressed” because they aren’t making enough money, which makes them appealing to investors who know what they’re doing.


Types of Distressed Properties

There is no universally accepted definition of distressed property. As we’ve already said, the reasons why a home might be in trouble vary from one owner to the next. Still, the following things must be avoided, and investors ready to act can often get great deals from them.


  1. Defaulting on Taxes and/or Mortgage Payments

    Homeowners who don’t pay their property taxes or mortgage payment on time will be slapped with penalties and fees. For people who are having trouble paying their bills, this is a clear sign of having money problems since these bills are usually the first ones to be paid.

    Homeowners who face financial difficulties will look for ways to get out of the red and avoid the stress that comes with going through the foreclosure process. For many underwater homeowners, selling their properties is their best option.

  2. Going Through a Divorce or Bankruptcy

    Going through a divorce or bankruptcy is hard for anyone, to be sure. But unfortunately, when one or both of these life-changing events happen to a homeowner, they often can’t afford to keep the house.
    Divorced couples need help settling disputes over who should pay for what and how the property should be managed. Divorced couples often decide to sell their shared residence and divide the money rather than keep living in separate spaces.

  3. Probate Properties

    When someone dies, their estate is administered by a probate court. Once the dead person’s debts have been paid off, the probate judge’s job is to oversee the distribution or sale of the estate’s assets, such as real estate, bank accounts, retirement accounts, vehicles, etc.

    If the property is in bad shape and needs a lot of work, the heirs might consider selling it to an investor for a fair price.

  4. Real Estate Owned or Bank Owned Properties

    “REO” or “bank-owned” properties are homes that have been taken back by their bank or mortgage lender because they are in bad shape. This is because banks and mortgage companies would rather not sit on foreclosed homes and would rather sell them off. After all, they’re not generating any income.
    Extensive real estate inventories could be better for mortgage lenders and banks since they create no income. Therefore, they would rather get these foreclosed properties off their books than keep them.


Benefits and Drawbacks of Buying Distressed Homes

As part of your financial plan, you’re hoping to increase the amount of money coming in from your real estate portfolio. However, if you’re serious about making it big in the real estate industry, you’ll want to learn how to flip a property or get it ready for renting.

The real question is whether it would be more profitable to invest in a foreclosed home or to flip a house that is in decent shape.

Before investing in distressed real estate, it’s crucial to consider the pros and cons. So let’s have a look at some of the pros and cons.


Benefits of Buying a Distressed Property

When an investor buys a house in bad shape, they can usually get it for less than what it is worth on the market. However, as real estate prices keep increasing, intelligent investors always look for properties that can make them the most money.

As a result, you, the investor, are doing more than just saving money. You’re also helping a homeowner out of a jam by supporting them through a tough time.

When the repairs have been made, the property will start gaining equity. As a result, homebuyers can earn a better return on their investment without worrying about how the property will appreciate in the current market.


Drawbacks of Buying a Distressed Property

Distressed properties can be expensive because they often need to be fixed up and require a lot of work. You should know that when you buy a distressed home, you’re essentially taking on someone else’s problems.

Even after an investor has bought a home, it is common for the repair costs to increase if hidden problems are discovered during the renovation process.

If you want to get the most money out of the distressed property, you’ll need to invest a lot of time, money, and energy into fixing and resolving any house problems.

Remember that hiring reputable contractors and trying to manage them is a huge responsibility you want to take into account. If you hire the wrong contractor, you could wind up with shoddy work or, worse, a contractor who takes your money without doing any work!


How to Find Distressed Homes for Sale

In a real estate market that is getting more competitive and expensive, distressed properties offer a rare chance to get good deals. The sellers of distressed properties, whether homeowners facing foreclosure or banks selling confiscated homes have strong incentives to close a deal.

In other words, you will have a higher chance of negotiating a lower price, better terms, or both. The challenge is that it can be challenging to find these distressed properties. Depending on your method for finding the best deals, you might have steep competition. Also, other investors may want to find a suitable investment property with a good chance of making a lot of money.

You must be patient and keep looking for the best real estate deals. So, here are 7 tried-and-true ways to find distressed properties, along with advice that can give you a leg up over other investors.


  1. MLS (Multiple Listing Service)

    You can go to several places to find distressed properties, including a multiple listing service (MLS) for your target neighborhood. Have your real estate agent look for properties that have been on the market longer than usual, listings that have expired, or houses that have been listed more than once.

    There are many pre-foreclosure and short-sale listings on the Multiple Listing Service. If you want to do an initial search on your own before enlisting the help of a local real estate agent, you can use one of the many property listing websites that get their data from the MLS, like Zillow, Homes.com, and Realtor.com.

  2. Driving for Dollars

    Driving for dollars entails driving around a neighborhood looking for properties that appear to be neglected. When you encounter a distressed property, you’ll need to call the owners and ask them if they’re eager to sell.

    You can earn money as a driver in two ways:
    1. You do everything yourself. From manually recording property information to charting your progress on Google Maps, it’s up to you to keep track of your progress and potential leads. It will take a lot of work, but it is doable. Plus, the only cost you’ll incur is gas.
    2. Downloading a Drive for Dollars app. You can use DealMachine or PropStream to keep track of this kind of data for a monthly fee (both apps offer a free trial period if you’re curious). They can also look up information about properties and owners and work with in-house direct mail services.

    Planning out the areas you want to focus on before beginning to drive for dollars is essential. Research and find good places to buy real estate, like trendy new neighborhoods or nearby hotspot cities.

  3. Online Databases for Distressed Properties

    The internet is a great place to look for bad-looking homes in today’s digital age. Here are just a few of the most popular online listing sites, which include:
    HomePath by Fannie Mae
    HomeSteps by Freddie Mac Homes

    New Western has agents

    Going straight to the source is another good way to find a property in trouble. For example, when the housing market crashed in 2008 and 2009, banks had to foreclose on so many properties that they created REO divisions.

    The Bank of America REO, Bank Owned Homes, Wells Fargo’s REO websites, local credit unions, and community banks are fantastic places to start looking for distressed properties.

    Of course, you cannot forget government websites like:

    GSA.gov: Government Property for Sale or Disposal
    USDA RD/FSA Properties: Single Family Housing, Multi-Family Housing, Farm and Ranch

  4. Property Tax Assessors

    When a homeowner fails to pay their property taxes on time, it can be seen as an early sign that the property may become distressed. You can often find, download, and study records of properties with unpaid taxes on their local tax assessors’ websites.

    You can find these websites by Googling the phrase “(County name) tax assessor.” The search results should lead you to the county’s tax assessor. You can also use an online directory to find your area’s public records and vital statistics.

  5. Marketing and Advertising Online

    Instead of looking for foreclosed homes, you can save time and effort by making an online marketing plan that brings them to you.

    You’ll need to create a website that introduces you, explains what you do, and explains how you can help struggling homeowners. It should be simple, but it should provide a few ways to reach you.

    For example, social media can be a part of your marketing strategy but consider springing for paid ads on platforms like Facebook and Google because you’re more likely to get results. Also, if you buy advertising space on these sites, you’ll be able to reach your target audience in the neighborhoods you like.

    Squarespace is an easy-to-use website builder that provides free templates for real estate professionals. Once your website goes live, grow and update your content regularly. For example, if you want to target different neighborhoods, creating landing pages that are geographically specific to those markets can make a big difference.

    If you are overwhelmed by the prospect of creating and maintaining this system, consider hiring a marketing team that can do it for you.

  6. Real Estate Auctions

    Homes foreclosed by the mortgage lender or that have already been the subject of probate are sold at property auctions. Most of the time, these auctions are advertised by local governments on their websites, in newspapers, and sometimes even by other lending companies.

    For a first-time auctioneer, watching a local auction is the best way to prepare. Auctions typically have their own set of guidelines, proceed quickly, and bidders need to be able to make quick decisions. When you know how the events will unfold, you’ll be more confident when placing your bids. Also, to be deemed a serious bidder, you may have to have a certified check in a certain amount to walk in the door.

    Due to the need for more information, buying distressed homes at an auction can be a high-risk investment. You won’t have much (if any) time to do pre-purchase inspections or even physically see the house before buying it “as is.”

    In addition, you’ll need to pay cash for the home and make a sizable down payment as an earnest money deposit. Even if you don’t bid on anything or win any bids, there will be many other investors you can network with.

  7. Real Estate Agents and Wholesalers

    When looking for investment opportunities, teaming up with a real estate agent who focuses on foreclosed homes, short sales, and home flips can be a huge help. Real estate agents usually know the ins and outs of their markets like the back of their hands, and they’re typically some of the first people to know when a property is coming to the market.

    On the other hand, you can look for real estate wholesalers to work with. They are experts at finding foreclosed homes, figuring out how much it will cost to fix them up and what their ARV (after repair value) will be, and then selling them to investors. Then, for a small wholesale fee, the distributor sells the purchase agreement to an investor who wants to buy foreclosed or abandoned homes.

    Even when renovations are complete, purchasing a house at a discount can yield a quick return on investment. Do your research to ensure that the property fits well with your investment plan.


Final Thoughts on Finding Distressed Homes for Sale

As a result of the recession in 2008, there were a lot of foreclosed homes on the market. Many people who invest in real estate worry that the way the market has been acting lately could be the start of another bubble. Due to the current market trends, housing prices are higher than they’ve been in a long time, and the higher interest rates need to be revised. Both factors make it more challenging to find distressed homes for sale with real potential to make money.

There’s no denying that buying underpriced and below-market distressed properties that need work could turn into a promising investment. Even though the TLC part of this tactic involves a certain level of risk, if you have a solid team and game plan, the outcome could be highly profitable.

When smart investors find and buy distressed homes for sale, they can get instant equity, own cheap property in desirable areas, and see a significant return on investment (ROI).

Disclaimer: The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.