How to Find Distressed Properties

How to Find Distressed Properties
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Learn how to find distressed properties, why they are so valuable and what you should know before buying one.

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In real estate, distressed properties are usually available for lower than the usual market value, primarily to invest or flip, but might require some repair. If you have been on the fence about buying an investment property, here are some tips on how to find distressed properties and how you might be able to identify any risks, and the pros and cons of investing in one.

What is a distressed property?

A distressed property is a property that is not maintained or relinquished by the owner, often because they cannot repay the mortgage or taxes associated with the property. Distressed properties include those either in the process of being foreclosed or already foreclosed because of bad debt. The definition also applies to properties owned by government agencies or banks or tax liens acquired because of non-payment of taxes.

While foreclosure or short sale (when a property is sold for the market value that is less than the mortgage to be repaid) are far from a pleasant experience for the property owner, investors might be interested in distressed properties to rent or repair before selling at a profit.

10 ways to find distressed properties

If you are considering buying distressed properties, there are several methods to help improve your chances of finding one as an investor. These tips may also help potential homebuyers get a good deal for a lower price.

  1. Keep an eye out for physical distress

There’s hardly any better indicator of distressed property than physical wear and tear. A lot of distressed properties are not maintained and are often neglected. You can often find such properties by paying attention to the upkeep of the property—the quality and the condition of the external paint or broken or unattended elements, including doors, windows or unkempt grass on the lawn. Besides these unmistakable signs, you might also want to pay attention to uncollected newspapers or mail on the property or suggestive bills, stickers or legal notices on parts of the property.

“You need to carefully evaluate the condition of the property you are purchasing to make sure you put together an accurate budget of repairs required for the property,” said Bill Samuel, the owner of real estate development company Blue Ladder Development from the Chicago area that specializes in refurbishing distressed properties “Most distressed properties have some maintenance that has been neglected and will require you to invest some money into fixing the property.”

Often properties neglected to this extent are abandoned as well. So, if you notice properties without adequate—and oftentimes any—lighting, you can spot a distressed property.

  1. Online resources

There are several online resources for finding distressed properties. Some of the most widely used resources:

  • Ownerly
  • foreclosure.com
  • hudforeclosed.com
  • auction.com
  • realtytrac.com
  • homesteps.com

You can also try online auctions of properties through investing websites such as Loopnet.com or find spot properties specifically among regular listings on platforms such as Ownerly and others.

  1. Real-estate owned (REO) or bank-owned properties

When a borrower is unable to repay the loan, the ownership of the property falls back to the money lender or the bank. In these scenarios, banks often put up such properties for sale just to reduce the liabilities on their balance sheets. Information about REO properties can be found at banks and financier-owned websites such as Bank of America or Wells Fargo.

  1. Seized or underutilized government properties

You can find available government properties either seized by government agencies or available for sale on account of being unused. To find underutilized properties, you may use dedicated portals, including the ones by the US Department of Agriculture, the US General Services Administration or mortgage lenders such as VRM.

  1. Delinquent tax records

Identifying property owners with high tax liabilities can be a good way to find distressed properties. Delinquent tax disclosures are part of the public record where you can find properties with pending tax liabilities (which may or may not be property-related) using state or county-specific online directories—such as this one by the state of Wisconsin—or search the entire country’s data in one single place using aggregator platforms such as Netronline.

  1. Court records

Some court records are available in the public domain and can provide information on properties due for foreclosure. This information can be sourced through default or foreclosure notices served to delinquent homeowners that can be found online or at your local courthouses.

  1. Reaching out personally

While online listings and auctions can help you find an investment-worthy distressed property, it is always a good idea to keep in touch with local real estate agents who can share potential options for distressed properties. This takes the pressure off of you, especially if you don’t want to undertake the cumbersome job of finding and evaluating a distressed property.

Other than real estate agents, it might be a good idea to contact attorneys dealing with foreclosures and settlements within a divorce or family. Lawyers who deal with probate cases—when a person with debt or assets dies—can often guide you to finding distressed properties, especially when the owner does not want to invest time and money into mending a distressed property. Even if you find a probate property for sale through your own personal contacts, you will need a lawyer for the proceedings.

Certain websites, such as Successorsdata.com and USprobateleads.com, specialize in guiding you through the process of investing in probate properties.

  1. Surf around the block

Driving or walking around a block scouring for properties in your area can be a time-consuming but effective method to spot available distressed properties. This good old-fashioned method is what full-time real estate owners often do when looking for properties they can either flip or help sell at a commission.

You can often reach out to the owner of a property when you see “For sale” signs on or around it. If you’re lucky, you will run into an owner eager to sell their house to avoid foreclosure. One of the biggest motivators in cases like these is the desire to avoid being barred from getting loans and mortgages for several years when a property is foreclosed.

  1. Search for city code violations

Public records around city code violations can be the goose that lays the golden egg. While it can be challenging to individually go through records of city violations for each country and district, the end result can be rewarding if you are persistent enough.

Distressed properties can be easily identified through repeated violations, indicating that the homeowner may not be paying adequate attention to the property.

  1. Contact out-of-state owners

Maintaining a property remotely can be extremely challenging for anyone who has moved out of a particular city or state. As a result, the property may deteriorate, even without an impending foreclosure. If you are a real estate agent, you might get a good deal by facilitating the sale of a property whose owners do not live nearby and cannot regularly visit for inspections and periodic maintenance.

How to close on a distressed property

When you find a distressed property that interests you enough to invest in, keep a few things in mind to ensure you make money instead of losing it. First, you must ensure you act promptly, especially if you need to apply for a mortgage for payment. This is because distressed properties may involve roadblocks from a legal or city code’s purview.

Secondly, it is imperative to get an inspection before committing to distressed property. Besides apparent signs of the property being subjected to neglect and abandonment, there might be more concerning issues that can cost you much more than you had previously anticipated.

“Always get a property inspection done before purchase,” said Rick Wallace, founder and CEO of LLC Dojo, a company that specializes in the incorporation of limited liability companies (LLCs). “Don’t go too downmarket as these properties are difficult to manage. Avoid properties with Section 8 tenancies, and always invest via an LLC. This kind of corporate structure protects your personal assets if you are sued for any reason relating to the investment property.

It is also recommended that you make a straight-up offer for full upfront payment if you can afford to. This will give you higher leverage if others are in the race to buy a specific property. You might not only move higher in the seller’s priority list but cut a better deal because you are cutting out their waiting period.

“A final suggestion is to not get too greedy in terms of rate of return,” said Wallace. “ [I]f it looks too good to be true on projected figures, it probably is, and real returns will be eroded by maintenance, vacancy and damages.”

Making this calculation as accurate as possible is key. “You will also need to make sure that you know how much the property will be worth after you complete the repairs (ARV = After Repair Value) so that you can determine if the property is listed for a good price or not,” said Samuel.

Sale of regular vs. foreclosed properties

In case of a foreclosure, properties are often sold through banks in an auction, and there is always a chance of being outbid or bidding to pay more than you wanted. It can be difficult to strike a good deal without an expert who works with distressed properties.

Nonetheless, buying distressed properties comes with its set of advantages and disadvantages.

Pros

Distressed properties are usually available for much cheaper than the market value because the seller needs to close the deal as soon as possible. Because you get the property for lower than the usual value, it can be a profitable proposition if you want to hold it and flip it eventually. In some instances, the geographical location may make it worth it for you to tear the entire thing down and build it from the ground up. That’s where calculating your ARV comes in.

Besides lower selling prices, you might also benefit from easier mortgage options if you buy directly from a bank. Lastly, if you are an individual, you can aim to buy a property in a better neighborhood than what you could otherwise afford.

Cons

While buying a distressed property has its advantages; it is equally important to note potential problems before buying it. You must assess the repairability of the house. But even after careful analysis, you cannot ensure you will not run into unforeseen repairs.

Besides, there is always a possibility the property may not sell for the expected price or, worse, not sell at all. Getting a loan or mortgage for properties other than those sold by the bank might be more complicated than you thought.

Conclusion

Distressed properties can offer plenty of return if you make the right decision at the right time. But it is equally important to note when and at what value to buy a distressed home. There are several ways to spot the right deal for yourself, but you must act swiftly yet cautiously.

Always have a legal and financial aide by your side, and use various tools to determine the correct value for any distressed property you want to buy. Lastly, be prepared to deal with unforeseen circumstances or late resale if you want the correct value from selling a distressed property.

Frequently Asked Questions

Which city has the most distressed properties?

McCracken County, Kentucky, had the highest percentage (33%) of distressed properties among counties in the US with populations of 50,000 or more as of 2020. Here are the top five: McCracken County, Kentucky (33%) Blount County, Alabama (25%) Bulloch County, Georgia (22.9%) Ward County, North Dakota (18%) Ashland County, Ohio (18%)

Disclaimer: The above is solely intended for informational purposes and in no way constitutes legal advice or specific recommendations.