My Thoughts on Purchasing a Distressed Property

Incomplete developments and subdivisions, as well as vacant properties, are visible all over the landscape. The growth of distressed properties has increased rapidly in the past three years, due to foreclosures, declines in property value, and the large number of homes for sale. Any reasonable real estate market analysis should consider the option of purchasing distressed properties, for the potential investment value they could provide.

Many banks and developers have distressed properties to unload. Overwhelming numbers of foreclosed properties are reverting to banks' ledgers, placing them more in the business of property management, than in lending. Developers and investors with incomplete projects are looking to sell their troubled assets, sometimes for far less than they are worth.

As experienced investors know, a cheap property is not necessarily a good value. If distressed properties are pieces of low-income housing, in unappealing neighborhoods, then the properties will bring either low sale prices or low-quality tenants. No determinant of value is more important than location, and investors make sure that comparable homes, in a market analysis, come from similar neighborhoods, to compute appropriate values.

Investors may choose to buy short sales. Short sales are properties, which are being sold for less than the mortgage balance, by homeowners looking to avoid foreclosure. Purchasing these properties provides an advantage for the buyer, who receives a property for less than its value. Purchasing short sales also benefits the seller, who avoids a major hit to his or her credit score, and the bank, which does not have to carry distressed properties on its books.

Foreclosures require some skill and probably an attorney. These properties may be found

in a variety of conditions, and may not come with a clear title. Buyers should always check out the neighborhood, to ensure that property value will rise, and should evaluate whether they have the skills, and the cash, to bring the property to livable condition.

REO's also make good potential investments. REO, which stands for real estate owned, is a foreclosed property, which has been through auction, but failed to sell. The biggest advantage of an REO is that the bank is the primary lien-holder, so the property comes with a clear title. Clear title is not always the case with regular short sales or foreclosure.

Investors may also purchase non-performing notes. These notes are usually held by banks or private investors, and are mortgages that are underwater, or in arrears. Again, to avoid the foreclosure process, many banks will sell these notes for a considerable discount. Investors who purchase notes may choose to work with the homeowners, to reduce payments or to reduce the mortgage balance, or they may begin foreclosure proceedings, and then take ownership of the property.

Any legitimate real estate market analysis, in the current economy, has to include distressed properties. These properties represent tremendous investment opportunities for buyers who are willing to endure a process that will be just a little more complicated than normal purchases. Of course, buyers should always discuss purchases with a real estate attorney, and should ensure that any property is in good condition, and in a good location, before agreeing to buy.

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