Have you ever driven by a neglected, rundown property in a neighborhood and envisioned its potential?
Distressed properties represent golden opportunities for the right real estate investors.
However, finding and buying distressed properties requires specific skills and support from other real estate professionals.
In this article, we’ll share strategies you can use to sharpen your senses and spot the right properties in the right neighborhoods.
Start your application with Park Place Finance.Why invest in distressed properties?
Distressed properties typically fall under the following categories:
- Foreclosures: Properties that have been repossessed by the lender after the owner failed to make their mortgage payments
- Short sales: Occur when a property is sold for less than the amount due on the mortgage—with the lender’s approval—to avoid foreclosure
- Real estate-owned (REO) properties: Properties owned by a lender, typically a bank, after an unsuccessful foreclosure auction
They often have visible signs of neglect or include incomplete construction projects.
However, for the right borrower, these properties present numerous opportunities.
Benefits of investing in distressed properties
Less competition
Distressed properties generally attract less interest from the public due to the work and uncertainties involved.
Your biggest competitors will typically be other real estate investors, but distressed properties are complex and don’t suit everyone’s unique investment goals.
For example, some investors may jump at the opportunity to perform extensive renovations and construction work, while others are more interested in quick, simple flips.
The reduced competition allows those serious about the purchase to step in and make more favorable deals.
High ROI
You’ll likely be able to purchase a distressed property at a significantly lower price than its market value.
Once renovated, it can be sold or rented at market rates.
This gap between the low purchase price and the market value or rates can result in significant profits for investors.
Versatility with investment strategy
Do you plan to fix and flip or fix and hold?
Distressed properties allow investors to quickly renovate and sell the property for a profit or transform it into a long-term investment that provides continuous passive income.
Your decision will most likely depend on current market demand and conditions, as well as your own investment goals.
How to find distressed properties
Investors can locate distressed properties using several strategies, including:
- Online listings: Search online real estate platforms for distressed properties and set up notifications for new listings
- Public records and auctions: Visit local government websites to access foreclosure notices and scheduled auction information and attend private auctions
- Real estate agents: Build relationships with real estate agents and wholesalers with inside knowledge about distressed properties
- Direct outreach: Visit properties that show signs of distress and speak directly with owners
Using one or a combination of these methods will increase your chances of finding the right property for your goals.
Strategies for evaluating distressed properties
Not every property is right for you. It’s important to establish a strategy to help you efficiently and quickly evaluate new distressed properties based on their profitability and risks.
Determine the property value
You’ll need to know the after-repair value (ARV) to accurately calculate a project’s potential profit and feasibility.
To calculate ARV:
- Look at recent sales data of similar properties in the area, making sure they are truly comparable in terms of size and condition
- Consult with a local real estate agent who can offer insights
- Consider current and future market conditions, including interest rates and the local job market
- Use online tools like Zillow’s Zestimate or Redfin’s Estimate for a general figure that you can fact-check with your own research
Estimate the repair costs
Your total investment and potential return rely heavily on the repair and renovation costs.
To get the most accurate estimate of repair costs, hire a professional inspector or contractor to help you identify all work that needs to be completed.
Then, you can create a detailed renovation plan and get accurate quotes from contractors.
Don’t forget to include a contingency budget to cover unexpected costs.
Perform legal due diligence
Legal issues have the potential to derail your project completely.
Make sure you perform your legal due diligence on the property, which involves:
- A title search to confirm the legal property owner and uncover any liens or unresolved debts
- Verifying local zoning laws
- Understanding local ordinances or HOA rules
- Performing environmental assessments to check for issues like asbestos or lead paint
These steps will help you create the most accurate budget—which, in turn, will lessen your risks and improve your profit.
Financing your purchase
Investors have numerous financing options when it comes to distressed properties.
However, you are unlikely to find this type of financing with traditional lending institutions like banks or credit unions. These lenders view distressed property projects as too high-risk.
Instead, hard money loans are ideal for real estate investors.
The hard money advantage
Hard money loans are asset-based, focusing more on the property’s potential than the borrower’s finances.
As a result, they offer investors greater flexibility with terms tailored to the project’s unique needs.
Park Place Finance is a direct hard money lender with in-house capital.
We offer the following loan solutions for investors:
- Fix-and-flip loans: Provide funding for the purchase and renovation of a property
- Bridge loans: Offer quick funds to compete with cash offers
- DSCR loans: Best for long-term rental properties, so investors can refinance to this type of loan once renovations are complete
- Ground-up construction loans: Funding for ground-up, new construction, or to renovate a mid-construction project
A dedicated Account Executive can help you determine the best loan for you.
How to buy distressed properties
Distressed property sales often require swift decision-making.
Have your financing pre-approved and be ready to make an offer quickly to capitalize on opportunities.
If you have performed your due diligence on the property, consulted with your network of real estate professionals, and established an accurate budget, you can confidently move forward with your offer.
Find your ideal financing solution with Park Place Finance
Park Place Finance is your trusted hard money lender for your next investment property.
Over our 17 years in business, we have funded over $1 billion in loans nationwide—and we hope your project is our next!
Complete our brief online form, or call (866) 407-1599 to speak with a dedicated account executive and get started.