Understanding the details of a distressed sale can help you navigate the unique elements of the transaction, whether buying or selling. A distressed property sale differs from a traditional real estate sale, offering both pros and cons to both parties.
In this guide, we’ll walk you through our tips for distressed property sales for buyers and sellers. But before we dive in, let’s define a distressed property.
In most cases, a distressed home means one with an impending foreclosure or potentially a property already in foreclosure. If the property is financially distressed, it could also mean a homeowner is behind on their mortgage payments or loans.
Another form of distress is when physical damage has occurred, whether from delayed maintenance, vacancy, accidents, storms, weather events, etc. If the home has been vacant, it can also lead to damage from vandalism or neglect.
A property can become distressed for many reasons, including a shift in financial stability for homeowners caused by an extended illness or job loss. It may also be a property that is new to someone, often through an inheritance when a family member passes. Regardless of what led to a property falling into the distressed category, having a guide for buyers and sellers of distressed properties can help make a potentially stressful situation more manageable.
Why do distressed sales occur?
Distressed sales occur when the seller is motivated to sell, whether because of things like an impending foreclosure or recent inheritance. Due to the property’s condition or pressing financial constraints, a traditional real estate transaction may not be possible.
A traditional sale typically relies on a mortgage lender to finance the property, and that lender or related parties will require underwriting, inspections, title insurance, and more. Not only do these steps take time, but they often disqualify distressed properties. A cash buyer, however, can purchase a home without those constraints, meaning fewer requirements and, often, a much faster closing.
Importance of Understanding Distressed Sales
A successful distressed sale should benefit both the buyer and the seller because the seller wants to exit the property quickly and the right buyer can help make that happen. For buyers, a distressed property sale is an opportunity to purchase a property under market value and potentially have a greater return than a traditional sale. Buyers must navigate that potential return while assessing the inherent risks, which means fully understanding how to buy a distressed property.
Types of Distressed Sales
Distressed sales can include the categories below (and more):
- Owners who need to sell quickly
- Short sales
- Foreclosure properties
- Abandoned or vacant properties
- Real Estate owned properties
Understanding the type of distressed sales can help buyers decide which category makes the most sense for them. For example, working with an individual owner who wants to sell to a cash buyer will often require less time than working with a bank or mortgage lender through the short sale process. However, navigating the properties in a short sale, foreclosure, or REO status may provide the opportunity to get the property at a more discounted rate, leading to higher returns.
If you’re just beginning your research on how to buy a distressed property, we recommend investigating these categories and the associated risks and rewards. A seasoned real estate investor may feel more comfortable taking on a higher risk than a first-time distressed property buyer.
Distressed Sales – Pros and Cons
When discussing tips for a distressed property sale, it’s essential to discuss the pros and cons for both the buyers and sellers. For buyers, there is an opportunity to see a higher return on investment than a traditional sale, but it’s not without risk.
For sellers, the big appeal is often a quick sale to avoid future foreclosure or growing costs. However, that quick sale can mean accepting a lower sale price or having to navigate the legal process for a non-traditional sale.
Distressed Property Buyer Pros and Cons
Pro – Potential for below-market house or property prices.
Pro – Opportunities for investment and a greater return.
Con – Hidden costs to transition or restore the property.
Con – Property condition issues that may not be evident immediately.
Distressed Property Seller Pros and Cons
Pro – The potential of a quick sale.
Pro – Opportunity to avoid foreclosure or additional costs required to maintain or repair the property.
Con – Lower sale price than a traditional real estate transaction.
Con – Potential for additional legal steps to complete the sale.
How to Buy a Distressed Property
Start with Research
The first step to buying a distressed property is to research, research, research. You can’t assess if the property is a good potential deal if you don’t understand the area, location or community, condition and estimated costs of current construction, and market trends for the area. Research is the best place to start if you’re new to buying distressed property.
Next up, you’ll need to find a distressed property to purchase! Using our list above, you can select one or more categories to begin searching, whether from individual owners, foreclosed properties, REO properties, etc. You can also work with a broker who specializes in distressed property sales and can provide a list of options in your area.
Understand Your Financing Options
For most distressed properties, getting a mortgage is improbable. Traditional mortgage lenders avoid high-risk properties, including those in disrepair or financial constraints. If you plan to purchase a distressed property, you’ll most likely need to be ready to buy with cash. A cash purchase avoids the underwriting and inspection process of mortgage lenders.
Alternatively, you can also investigate hard money lenders. Hard money lenders provide the funds for higher-risk investments, such as distressed properties. While they may allow you to purchase quickly, they also come with stricter terms and higher costs, so take the time to select a hard money lender before you make any offers.
Complete Due Diligence
If you have cash or a hard money partner, you may be able to avoid underwriting and home inspections but that doesn’t mean you want to skip your due diligence altogether.
At Stress Free Homebuyer, we’ve established a process that allows us to investigate any legal constraints or restrictions on a property quickly. This step will be essential if you’re new to distressed homes. You don’t want to complete a purchase, only to find the person you worked with didn’t have a clear legal right to sell.
We also recommend that you tour the property to understand what level of repairs or construction is necessary at first glance. Stress Free Homebuyer is well established and has the funds to purchase any home in any condition, but if you’re working with a finite amount of cash or funding, it’s essential that you have an estimate for the purchase and repairs (and don’t forget margin for unexpected expenses).
Make a Competitive Offer
The best way to make a competitive offer is to understand your seller’s position, property condition, and the home’s potential value when fully restored.
If a seller needs to sell yesterday, they may be more motivated to be flexible on pricing, and if the home is in a highly desirable area, you may find more value in it, even if it will require extensive repairs. Once you submit your offer, be ready to move quickly to help your seller exit the property – and have your team begin work.
How to Sell a Distressed Property
Preparing Your Property For Sale
Preparing a distressed property for sale starts with deciding if you plan to sell as-is or if you want to complete some repairs before accepting offers. An as-is sale allows you to sell quickly without completing any work, but it typically means a lower price than a traditional sale might bring.
At Stress Free Homebuyer, our clients typically don’t want to deal with the headache of construction management or costs and would rather sell quickly and move on. They may also be dealing with an inherited property that they can’t easily access or maintain.
If you decide on an as-is sale, the only prep needed is to remove any valuable items or things you want to keep. It’s not necessary to clean up, but a cash sale with Stress Free Homebuyer can occur in two weeks or less, so preserving any items in advance may be helpful.
Select The Right Buyer
Selecting the right buyer depends on how you sell your distressed property. If you are able and willing to get it ready for a traditional sale, then you will likely work with a real estate agent who can market and show your property to potential buyers. Alternatively, if you want to sell your property quickly and in as-is condition, you will want to select a real estate investor.
When selecting a cash buyer or investor, experience matters. Look for someone who has worked in the local area for an extended period and has a professional team or partner network to ensure a smooth and quick transaction for your home sale.
Accept An Offer
One of the most exciting times on a home sale is when you get a great offer. This is true whether you go the traditional real estate route or work with a cash buyer. In a traditional real estate transaction, you may receive multiple offers, which is also true if you request options from multiple cash buyers.
With a cash buyer, it’s essential to evaluate the price offered alongside the experience and reviews of the teams. As a seller, you don’t want to accept an offer from an inexperienced investor, only to find out they can’t close after extensive time has passed (racking up more costs while you wait). Choose a fair offer from a professional team with a strong reputation and positive reviews.
Common Myths About Distressed Sales
Now that we’ve reached the end of our guide for distressed property buyers and sellers, let’s bust some common misconceptions about distressed sales.
Myth 1: Distressed Properties Are Always a Bargain – while this may be true with the right property, the wrong property can end up costing an investor much more than anticipated in legal fees and property repairs – driving down any chance of a significant profit.
Myth 2: Sellers Always Lose Money – a reputable cash buyer can ensure a fair price for distressed property sellers based on home condition, area value, and potential future worth.
Myth 3: Distressed Sales Are Complicated and Risky – distressed sales are more complicated and carry a higher risk than traditional real estate transactions, but with the right education, research, due diligence, and funding, they can be successful and create a good return on investment for buyers.
Want to know more about Stress Free Homebuyer or read more about distressed property sales? Call us at (631) 486-0607 or visit our blog at www.stressfreehomebuyer.com/blog.
Frequently Asked Questions
Are you looking for more tips on buying or selling a distressed property? Below are some frequently asked questions and answers.
What is a distressed sale?
A distressed sale means the sale of a distressed property. Typically, that term applies to a home in (or facing foreclosure) or where the homeowner is behind on their payments to the mortgage lender. A distressed sale can also occur when the home is in disrepair – due to weather damage, vacancy, neglect, and more.
What’s the benefit of buying a distressed property?
For buyers, the benefit of a distressed property is the opportunity to purchase a home under value. While the risk is higher than a traditional sale, the reward can be too.
What’s the risk of buying a distressed property?
Most often, the risks of buying a distressed property include unexpected costs, legal situations, or home conditions that are not evident immediately. These surprises can delay getting the home back on the market (or in a condition to rent) and drive expected costs higher, which eats into the returns. It’s essential (for new distressed property buyers especially) to anticipate some surprises and ensure there is enough margin to take the risk.
Is it worth buying a distressed property as an investment?
Yes, potential distressed sale benefits are the reason that many investors and individuals purchase distressed properties. The keys to success are taking the time to find the right property, clearly understanding the risks and rewards, and planning for contingencies of both time and budget.
