Foreclosures and short sales can be some of the better deals in real estate. They often sell at a discount, and fewer buyers compete for them than for a move-in-ready home. If the property resells quickly, the return can be very good.
They also carry more risk than an ordinary purchase. Here’s what to understand before you buy distressed real estate.
Short sale vs. foreclosure
These two terms are often used together, but they describe different situations.
A short sale happens when the owner owes more on the mortgage than the home is worth and needs to sell. The lender agrees to accept less than the full balance. The owner avoids having the property repossessed, and the buyer may get it at a discount. Because the lender has to approve the deal, short sales can take a long time to close.
A foreclosure is what happens when a borrower stops making payments and the lender takes the property back. To limit its losses, the lender will usually sell the home at auction, or take possession and sell it as quickly as it can.
Why investors buy distressed properties
Price is the main attraction. Buying well below market value leaves more room for profit, whether you plan to resell or rent.
The best outcomes come from properties that need little work. If a house can go back on the market after cleaning and minor repairs, most of the discount stays in your pocket.
What to watch out for
The low price comes with trade-offs:
- As-is condition. Distressed homes are usually sold as they stand. They may have been empty for months, and some have serious hidden damage.
- Limited inspections. At some auctions you can’t see inside before you bid.
- Liens and title problems. Unpaid taxes or other claims can come with the property. Always have the title checked.
- Tight deadlines. Auctions and bank sales often require payment quickly.
Get familiar with every condition attached to a sale before you commit, and be careful with houses that need major repairs just to be livable. Those costs are easy to underestimate.
How to prepare
Find an agent who works with distressed property, set a firm maximum price, and arrange financing before you start bidding. Our post on finding and buying a foreclosed home walks through those steps.
Sachem Lending offers distressed acquisition loans for investors buying these kinds of properties. Contact us to talk about a specific deal.
