When you’re just getting started in the home buying and selling game, it’s important to know which types of properties are best to invest in. Not only do foreclosed homes and short sales come with a heavily discounted price tag, but because competition is generally lower for a distressed property, if it sells quickly these types of real estate investments can be very lucrative.
Still, there are many important factors to consider before you dive into buying distressed real estate. Here are a few things you’ll want to consider:
Short Sale vs. Foreclosure
First things first. It’s important to know the differences between the types of distressed properties you’re considering and what makes each one unique.
First, there is a short sale. This is a property that most likely needs to quickly be offloaded by the current owner because they owe more on the mortgage than the home is actually worth. In this scenario, the home buyer is able to avoid the bank repossessing the property and the buyer can get a steep discount.
Foreclosure is the end-result when a borrower has failed to make payments and the lender has stepped in to repossess the home. To avoid any additional costs coming from the property, they will typically auction off the home in hopes of recouping the funds or the lender will take possession and then sell it as quickly as possible.
Investment Benefits of Distressed Properties
As we’ve alluded to above, there are many benefits that can come from getting into one of these properties. In addition to the chance to purchase it for well below market value, buying short sales and foreclosed homes can also come with greater profit margins when done right. If there is little additional work to be done to list it for sale, this can keep profit margins higher.
What to Watch Out For
While the above may sound like a great chance for a real estate investor to get a property, there are some things to consider. Just as there are investment benefits with these lower cost transactions, they also come with a fair amount of risk. The best thing to do is become familiar with any conditions or terms the property is subject to – and then weigh your options. Things like significant repairs and updates needed to get the home back to livable conditions should be considered with caution.