If your clients are wondering what a distressed property is and what that means, here’s what they need to know about how it can help them buy a home when there aren’t many options.
The housing market around the country is hot, and there isn’t enough inventory to go around. Enter: distressed properties. What does that mean? Are they a good value for your money? What do you need to know? Let’s dive in.
What a Distressed Property Actually Is
First, let’s talk about what a distressed property actually is. While it’s true that a distressed home may need substantial repairs, the term “distressed” actually refers to the financial situation of the seller rather than the condition of the home. These homes are often listed at a lower than market value to encourage a quick sale. Here are three situations where a home is considered distressed.
Foreclosure—The owner can no longer pay the mortgage on the home and the lender seizes the property. The owner must vacate the home before the sale, and then it is auctioned to the highest bidder.
REO property—This is a real estate owned property that has reverted to the lender’s ownership after not selling in foreclosure. The bank may choose to pay off tax liens and do repairs before listing the home for sale.
Short sale—This is when an owner needs to sell because of financial problems and sells the home for less than the amount owned on the mortgage. The bank agrees to the sale in order to get a portion of their money back.
Things to Consider When Buying a Distressed Property
While a distressed property can be a good deal, it isn’t always a good deal. Here are some things you should consider if you’re looking at one.
If the home has any issues, the seller isn’t going to be in a position to make repairs—these are as-is sales. But selling a home as-is does not mean that the seller doesn’t need to disclose what they know about the house and any problems it may have.
If the home is a fixer-upper, the buyer may be able to save a lot of money compared to other homes in the area. Buyers who are willing to tackle projects might find this to be a good solution if they can’t find another affordable home, but they should always get a thorough home inspection.
If the projects are potentially beyond the buyer’s skills or budget, buying a distressed property may not make much sense. In this case, a more expensive home could actually be the better option.
Buyers Need a Strong Pre-Approval
The lender will need to pre-approve the buyer, and the offer needs to be a serious one. Additionally, distressed properties often get all-cash offers from investors, so showing that you’re a serious buyer is key.
If the home has major issues, the lender may not want to finance it or the buyer may need to put up extra cash or even get a second loan. This is why an accurate appraisal is so important.
Use a Real Estate Agent with Experience When Buying a Distressed Property
Pick a real estate agent who has experience with distressed home sales in the area where the home is. The right agent can help you through this unique purchase and help you find any pitfalls that you may not see. The right agent can also help you know when a distressed property is a really good opportunity.
Consider the Neighborhood
It’s always important to consider the neighborhood when you’re buying a home, but that goes double if you’re buying a distressed property.
Make sure that your distressed property is not the norm in its neighborhood. If every house in the neighborhood is in foreclosure or is vacant, you may want to look elsewhere. If the entire area is depressed, the home may not be as good of a buy as it seems.
Think About Taxes and Fees
In some cases, the buyer may be required to get property taxes back in the green; that can be a substantial amount of money if several payments were missed. If the home is part of an HOA and the owner didn’t make payments, the new owner may be required to make back payments to the association. Do thorough research on what this may cost before signing on the dotted line.
In short, a distressed property can be a really good deal, especially in a market like ours, where inventory is low around much of the country. If you have any questions about this or any other topic, reach out to us here. We’d love to hear from you!