As a real estate investor, you would always want to maximize profit and chalk out ways for passive income opportunities. However, the real estate market seems to be an ocean Pacifico where to find properties at cheaper rates, you might have to be nautical. So what is the solution?
Look for real estate that are under adverse conditions. Amidst this situation of finding dilapidated-looking properties, what could be better than distressed properties for sale?
This could be a long process, but you do not need to brainstorm. In the following article, we shall navigate the sources, how to find distressed properties for sale and other relational attributions, formulating an all-comprehensive guide for you.
What are distressed properties?
A distressed property for sale is one that is on the verge of being foreclosed, is in probate, or has been reprocessed by the bank. The distressed properties are those which could erupt due to financial hardship or any natural disaster. These properties often present an attractive opportunity for investors who are looking to repurchase a home at a slashed price.
Advantages of buying distressed properties
As we know distressed properties for sale are bonanza offers for the real estate investor, below are listed some reasons which assert why are they beneficial.
1) Reduced prices
Distressed properties for sale, are somewhat like a second-hand handset that the owners wish to sell off and crack any possible deal. Distressed properties for sale are those for which you would get a slashed and half-price.
This happens when the banks or any other financial institution is eager to offload these properties, to recover the losses. The lower costs further translated to higher profit margins for investors who can successfully rehabilitate, sell or lease the property.
2) The competition is less.
Another advantage of investing in distressed properties for sale is that real estate investor has to face lesser competition, as compared to traditional real estate investments. There can be a dual thought, hesitation may prevail to enter the distressed properties, as there can be potential risks and complexities involved. Once these bottlenecks are removed, the opportunities flourish, sourcing and acquiring more properties.
3) Value-adding attribute
A distressed property is a hub of opportunities for investors. Remember the bottlenecks. (any renovations, repairs or development). When these are removed and fixed you will see your property valuation is increased. As a real estate investor, you would see that you can profit from capital appreciation or rental income, once the property is improved. What can be a bonus is the high return investment.
Potential sources of buying distressed properties
Well aware of the advantages and benefits. But how to locate, and navigate these properties? Let’s glance through some sources.
1 Look out for symptoms.
Remember how observant you were when COVID-19 was wildfire. Even the smallest cough was perceived. Similarly, while looking for distressed properties look for areas and their upbringing. Lock your target, and look for areas which look old, cheap, and dilapidated. Look out for properties that are victims of gentrification.
What to look for and consider as a distressed property for sale, you would see boarded-up doors and windows, and houses are completely vacant. The house you drive through would have signs of neglect or overgrown. Uncollected newspapers and mails. Unclaimed notice, on doors, windows, mailboxes and walls.
2 House in Probate
These are those houses which help you to get inherited properties with massive mortgage payments leaving them with no option but to sell the settled costs.
A house in probate is usually reviewed by a probate court. Probate courts provide for the final ruling on the division and distribution of assets to the beneficiaries. Once the legal process begins, the executor first finds out whether the house in probate has a legal heir, if yes, it is an open-and-shut case. If not, the executor pays all the debts preparing for it to be sold at the real estate market. The rest is taken care of by the real estate investor.
3 MLS (Multi listing service)
Have you heard of key search engines and databases, this is a database for all established real estate brokers providing information about distressed properties for sale? Accessing an MLS requires a license so you have to work with a broker or a real estate agent. If a property has been listed for longer than three months, then there is a good chance it is distressed.
4 Property auctions
As primitive as it can get, yet effective. This works as a pool of leads associated with one roof. Be in a house in probate or any distressed property for sale, you name it and you get it here. Earlier it was only offline, where physical presence was a mandate.
With digitalization ushering in, properties have now started to be auctioned on real estate sites like Auction.com, Realtybid.com and Tranzon.com. Consider these as these are effective starting points. When a deal is cracked with a bidder bidding the highest the former has to pay a total of 10%, this seals and cracks the deal on to go. Post the deposition of money, legal proceedings begin a fortnight later.
5 Specific distressed property websites
Not to be confused with MLS, these are solely dedicated to distressed properties for sale. Where in an MLS one finds a pool of properties, here the sources are strict and specific. The novelty of these distressed properties is that you can communicate directly with a listing agent. These are platforms designed for real estate brokers and sellers to market properties.
Often these databases are paid, demanding a minor subscription fee. Once you pay the subscription you will have access to over a million real estate properties. Finally, with the help of the investors can directly contact the listing agent associated with the property they are interested in.
6 Government records
There is nothing as authentic as that of government records. They serve as a high-potential investment property. These are available in all locations and all districts, there are specific websites listed, for the investors or sellers. You can always look at these websites to get regular updates on certain listings. Government agencies such as the HUD, IRS, and Army Corps, among others, have plenty of foreclosed and repossessed real estate to their names, mainly due to unpaid taxes or mortgage loans.
7 Local foreclosure listings
You can also look for properties in the local province or the cities of the neighbourhood. There is a local listing website at all levels. This is more than googling and keyword searching. The best source for these foreclosure listings is delinquent taxes. Local bank mortgage records are also fond to useful in looking for such leads.
8 Delinquent leads
These delinquent leads are property owners who have recently fallen behind in their property tax payments. Often there are cases that owners of the house are unable to pay the taxes, and on not being able to tax on a specific date (before 1st February, then that property becomes a delinquent). As an investor when you have the provision of paying the remaining tax and getting this house at a desired cheap price. The rest unfolds as and when you clear the taxes and are ready to sell these at profitable rates.
The best way to approach a distressed property seller?
Although there are different sources, approaching the distressed property owners is the best. They are approachable but in a specific way.
A. Initiate transparent communication
The owners of these properties are already going through a rough patch. So do not jump directly to make an offer. It makes you look desperate and insensitive. Make sure that you are in communication with them, and show that you are interested. Discuss the profit margin and the repairs that you have to bear. Make sure you engage in an ordeal of issues, like what are the existing facilities that you can get? How much do you as a real estate investor have to make on the property?
B. Some mathematical calculations
i. 70% rule
As an investor, you cannot get carried away. So no room for emotions. Here you need to figure out whether you can keep the profit margin and, the repair cost is not surpassing the cost selling price. Confused? Follow this. A plain and simple formula of the 70% rule is where the ARV is equal to $350,000 and the repairs are equal to $60,000, therefore, the profit margin would be like [$350,000 = $245,000Minus $60,000 = $185,000].
ii. 50% thumb rule.
The 50% rule is a basic guideline in real estate that suggests that half of the rental property gross income should be estimated to cover the operating expenses. For example, if you have a rental property which generated $30,000 in annual gross rent, keeping in mind the 50% rule you will only spend $15000 in operating expenses, which further leaves another 15000$ in balance as the net operating income.
Conclusion
Being a real estate investor, your prime objective is to look for profit. But real estate is not cheap, a little on the hefty side as you can call it. So what can be done is look for properties which are in severe conditions, like houses in probate or distressed properties. To find a distressed property for sale as a real estate investor, a multifaceted approach should be followed. You need to look for several credible sources, which will help you to find the cheapest properties for sale. Above in the article, there are some sources, which you can consider looking at for your next investing venture.
