Whether one is an amateur real estate investor or an established professional commercial real estate investor, probate sales and distress properties for sale offer great opportunities to make a profit.
As experienced investors might remember, 45% of all homes sold by the end of 2008, were distressed properties. However, distressed sales have declined over the years since then but things are expected to improve soon.
Seasoned professionals in the real estate investment industry agree that probate sales and distress properties for sale can offer very lucrative returns on investment, investors just need to understand how those processes work.
What Are Probate Sales?
When a real estate owner dies intestate i.e., without leaving a will behind, his or her property is sold off in a probate court-monitored process. The court generally appoints the deceased person’s next of kin to take care of the sale of the property.
Pros And Cons Of Probate Sales
- Probate sale real estate is often priced lower than it would be otherwise.
- Probate sales may not be listed on and may not occur through the usual real estate markets and normally, not many people are interested in purchasing via probate sales, so there isn’t much competition in buying such properties.
- The procedure to purchase a property via a probate sale can be a long-drawn-out process.
- A lot of probate sale properties are found to be in very poor condition or are in a dilapidated state and require urgent repair work.
- Probate sales come with additional regulations which can make the transaction long and complex.
Distressed Property Sales
What Is A Distressed Property?
A distressed property can be a property that is already under foreclosure or is in the pre-foreclosure stage or is in the possession of the lender or a bank. A property becomes ‘distressed’ when the owner has missed or stopped making his/her mortgage payments and/or has failed to pay the property tax. Properties can also become distressed properties during liquidation in the event that the owner has filed for bankruptcy or divorce.
A distressed property can be classified into 3 groups:
- foreclosure or pre-foreclosure stage: Pre-foreclosure refers to the first phase of a legal process by which a piece of real estate can be taken over from a borrower who has defaulted on his/her mortgage payments. In this stage, the lender files a notice of default against the borrower and his/her property when he/she violates the contractual mortgage terms. Foreclosure occurs when the lender takes possession of the property when the borrower fails to make the monthly mortgage payment. Lenders often auction off such properties to the highest bidder without making any changes or repairs. This is referred to as auctioning off as-is.
- Real estate-owned property: If a lender is unable to sell the foreclosed property at an auction, then the bank takes possession of such property and sells it on the market at a price that is below the market price.
- Short sales: A mortgage becomes ‘underwater’ when the borrower owes more on the mortgage than what the property is worth. In this case, a lender might agree to a short sale so that a bank can recover some of the cost. A short sale occurs when a property is offered at an asking price which is less than the amount currently due on the borrower’s mortgage.
What Are Distressed Property Sales?
Distressed property sales occur when a piece of real estate is sold off by a person/ organisation quickly and generally below market price, in order to pay off debts such as in the case of a foreclosure (where the borrower has fallen behind on paying mortgage instalments and the house is going to be taken over by the lender, usually a bank) or in the case of other time-bound emergencies.
Should One Invest In Distressed Properties?
Distressed properties can appear appealing to both professional real estate investors and general buyers because they are available at prices that are often far lower than the going market rates. Professional commercial real estate investors and general buyers hope to thus buy cheap and sell at higher prices later and in the process make a good profit. This strategy can be quite remunerative in areas where property prices are high. Banks also sometimes offer lower mortgage payments and interest rates on distressed properties just so that they can rid themselves of such distressed properties. However, all these positives mean that distressed properties don’t stay on the market for very long and sell out very fast resulting in a lot of competition for such real estate. Also, since distressed properties are sold as-is, the buyer is responsible for all repairs, improvement, maintenance and upkeep work needed to re-sell the property at a profit. Additionally, it is possible that the new buyer of such a distressed property will have to shoulder the burden of evicting existing occupants and paying any outstanding tax payments that the previous owner failed to pay to the government. There could be other related costs as well which the new property owner will have to bear.
How To Make A Profit From Buying And Selling Distressed Properties?
- Meticulously research the location: A distressed property might be available at a very good price and might also require the bare minimum in terms of repair but if it is located in an area that has a lot of distressed real estate all around, then it will be impossible to sell this property for a profit at a higher price later.
- Choose locations first, look for distressed properties second: A general real estate buyer should carefully select his/her ideal locations first and then keep an eye out for distressed properties in the area.
- Hire the services of an independent property inspector: Amateur real estate investors should always get an independent property inspector to prepare a report on the distressed property they are looking to purchase. Most amateur real estate investors cannot afford to play the long game when dealing with distressed properties unlike some large commercial real estate investors/investing companies can. Also, amateur investors should not rely only on the opinion of the seller’s property inspector as many times these inspectors, due to a conflict of interest, only tend to report the superficial cosmetic problems in the distressed property but fail to report any structural problems or structural damage in the same property.
- Have a clear understanding of the foreclosure process: At what stage of the foreclosure process a property is in can determine whether an investor can make a profit or not on purchasing that distressed property. Buying the property prior to the foreclosure process being complete and before the occupants have packed up and left, could result in the new owner of the property incurring all kinds of costs.
Many real estate investors either love probate sales and distress properties for sale or they just hate them, based on their personal experiences or what they have heard from the people they trust. However, the reality is much more nuanced. Because properties purchased via probate sales and distressed property sales are often purchased at prices that are lower than what the market offers, they present an attractive opportunity to investors to make a profit by selling them at higher prices later. However, there are certain pitfalls and mistakes that potential investors in probate and distressed properties should watch out for and avoid. This post informs readers about those pitfalls and much more so that investors in such properties will feel much more confident when they decide to take the plunge.