Buying a Distressed Property? Here Are 6 Things You Need to Know

buying a distressed property

As a home buyer, you’re always looking for the best price. But when you do find a wonderful bargain, there’s often a catch.

But that catch doesn’t have to be something overly complicated – it may simply be a distressed property!

These properties are homes whose owners can’t afford to maintain them. They’ve usually suffered from some amount of neglect or are at risk of foreclosure due to non-payment of mortgage or taxes.

Because of this, you can buy a distressed property at an awesome discount.

Enticing, right?

But before you run off looking for a distressed property to purchase, you need to understand what you’re buying. To help with that, check out the following 6 tips you should follow when buying a distressed property.

Everything You Need to Know About Buying a Distressed Property

1. Get Preapproved

Don’t play the offer-and-wait game without knowing you can back up your offers with money. Get preapproved for a mortgage far in advance – that way you’ll know exactly what your finances look like before you engage with the seller.

One of the biggest reasons for doing this is so you can be prepared to compete with investors.

A lot of investors interested in buying distressed properties are called “house flippers” because they fix damaged properties and resell them at a markup. They often make their purchases with cash, which can be much more convincing to a bank than someone looking for a mortgage.

Tip: Check out this helpful list of 6 Simple Tips for Buying a Flipped House!

If you have trouble getting preapproved, you may need to consider alternative lending sources. Credit unions or small regional banks may be more flexible when it comes to buyers with imperfect credit. You can also look into FHA loans offered by the US government.

2. Have the Property Inspected

buying a distressed property

The biggest risk in purchasing a foreclosure of any kind is the condition it’s in.

In some instances, because foreclosed homeowners are often forced out of their homes, the damage left is intentional. This means there could be problems that aren’t immediately obvious to the naked eye.

And unlike normal situations, the seller of a distressed property isn’t responsible for damages at the time of the sale. Instead, it’s up to you as the buyer to take responsibility for repairs.

That’s why it’s so crucial that you have the property inspected by a trusted inspector. You need to know ahead of time exactly what sort of damage you’ll be dealing with once the property is yours.

3. Have Cash Upfront

If you have a lot of cash at your disposal when you prepare to purchase a distressed home, the process will go a lot smoother for a few reasons.

First, the larger the down payment you can make, the more seriously your lender will take your offer.

Why?

Because if you can put down 20 to 25 percent of the asking price, you’ll be convincing the bank that you’re a safe bet.

Second, the unique aspects of buying a distressed property tend to cost extra money. Home inspections and extensive repairs can’t always be covered by the loan you take out. In fact, if there’s too much damage, the bank may not even want to approve your loan.

You may have to create an escrow account to cover the repairs or take out another loan altogether.

But if you have enough money upfront to both offer a sizeable down payment and handle repairs and inspection costs, you’ll get through the process in no time at all.

4. Budget Carefully

Even after the property has been thoroughly inspected, there may still be more repairs needed. So, when you’re calculating your budget, add 10 to 20 percent extra to your renovations fund.

Be sure to take a hard look at your full financial picture and consider any assets you have. Determine the amount of capital you can spend on your purchase and stick to it no matter what.

Your credit score and financing options are the most important aspects of buying a distressed property, but every little bit extra helps.

And when you offer a price, try to be realistic about it. Don’t offer a high price and push your budget to the very limit if you think you might do just as well with a lower offer.

5. Take Advantage of Your Leverage

When negotiating with your lender, there is one area in which you have the upper hand.

If the distressed property is in poor condition and the bank refuses to lower the price, you can ask the lender to conduct a full appraisal of the property.

If the official appraisal is much lower than the asking price, you can use that to your advantage. Tell the bank you want to pay a lower price than they were initially asking, using the appraisal number as your evidence for why it should be lower.

6. Learn the State Foreclosure Laws

buying a distressed property

If you plan on becoming a regular investor in distressed properties, it’s critical that you familiarize yourself with local laws.

Many states tie lenders up in a complicated judicial process before they can ever foreclose on a home. Sometimes this takes up to 12 months, or even longer in some cases. These states are called judicial states.

Fortunately for us Texan buyers, Texas is a non-judicial state. The foreclosure process should never take as long here as it would in a state like New York or Connecticut.

But you would still be wise to stay up to date on laws affecting distressed properties in your area. An unforeseen change to the law could affect your purchase in significant ways, so you should always be prepared and in-the-know.

Buying a distressed property is undeniably a solid way to find a great deal. Not only are you guaranteed a low price, but you may get a fantastic return on your investment if you decide to sell the property later down the road.

Don’t expect everything to fall into place overnight, but don’t be caught off guard if you have to make any sudden decisions. If you work with a professional who has extensive real estate experience, you’ll have exactly what you need to get through the process like an old pro.

Interested in buying a distressed property in the Austin, Fort Hood, or Killeen area? Contact me today!