Foreclosure rates in the US are on the rise, being 14% higher in May 2023 than in May 2022.
There are many opportunities in the real estate world, and one that many people don't fully understand is distressed properties. Foreclosures can offer the chance to get very good deals on homes, but it's important to understand what foreclosure actually is.
Keep reading for a rundown of everything you need to know about buying a distressed property.
What Is a Distressed Property?
A distressed property is one that's either under foreclosure or the lender is currently selling it. This usually happens when a homeowner is failing to pay their mortgage or property taxes. As such, distressed homes are typically cheaper than they usually would be.
Types of Distressed Properties
Distressed properties can be a great investment as you can get a home for lower than its market value. There are multiple types of distressed properties you might come across.
This is the most common type of distressed property. A foreclosed property is one that the owner has failed to pay their mortgage on for several consecutive months. The lender follows this by filing a default notice.
When buying a home this way, you can do so at preforeclosure or full foreclosure. Preforclosure is usually when the owner hasn't paid in at least 90 days. Full foreclosure is a point at which homes are sold by the lender at public auctions.
An REO (retail estate-owned) is one that's being sold by the lender. This happens if it's foreclosed and doesn't sell at auction. The lender then tries to sell it on to recoup whatever losses they can.
A short sale is one where the lender hasn't yet taken back ownership of a property. They can instead make a deal with the owner to sell it before full foreclosure. Selling a home like this can settle things quicker to avoid a lot of stress.
Benefits of Buying Distressed Properties
The main benefit of buying a distressed property is that you can often get a low price. Lenders that aren't receiving mortgage payments will want to sell foreclosed homes quickly, so they'll settle for less.
Most people invest in real estate to make profits. Buying low and selling high can work very well, so getting a good deal on a property is always a good thing. Those who flip homes often look for distressed properties so that they can maximize their profits.
Risks of Buying Distressed Properties
Depending on the property, sales can sometimes take longer than you'd expect. Don't buy a foreclosed home looking for a quick resale, but rather a long-term investment.
Distressed properties are often sold "as-is", so you won't be able to ask for any repairs before your purchase. There may be some work to be done before you can sell a home for a profit.
If a house has unpaid taxes, they could also fall on you. Consider any financial issues you might have to face before purchasing a foreclosed property.
Should You Buy a Distressed Property?
Foreclosures can be a great opportunity, but they're not for everyone. If you want to start investing in real estate, make sure you consider all of your options so you can make the best choice.
PMI of the Triad is a full-service real estate asset management company that helps people buy and sell homes. We also offer various other services such as property management and HOA management. Take a look at our Buyer Resources page if you think you're ready to purchase a home.