Investing in Residential Distressed Properties

​Within competitive real estate markets, distressed properties present one type of ownership with significant potential upside. Such holdings occur when the property owner fails to keep up with property taxes or mortgage payments, or as part of a liquidation process associated with divorce or bankruptcy.

Situations of pre-foreclosure or foreclosure center on delinquent mortgage payments, with the lender taking repossession of the property, which is often sold at auction in an “as-is” state. In cases where the property does not sell at auction, it becomes real estate-owned (REO) property. The bank takes over ownership and sells it at whatever reduced rate the market will bear.

Another route is a short sale, which involves an “underwater” homeowner owing a greater amount on the property than the actual value of the house. In such cases, the lender oversees a short sale at a reduced price, allowing the bank to quickly make up some of the deficit.

For investors, distressed properties often provide a substantial discount on the potential market price achievable, after renovation or refurbishment, and a repositioning of the home. Some lenders will also lower mortgage and interest payments on such holdings, simply to have them off their books. There are downsides to purchasing distressed properties, however, including the potential of assessed tax liens and the need to evict tenants. Going the bank listing and real estate-owned property route typically removes such considerations. However, the properties may be those that auction bidders felt didn’t have the best potential.

Allen Boerner

Shop