What Are Distressed Properties? | 7 Ways to Find Distressed Properties | Pros and Cons | Tips for Investing in Distressed Property
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House flipping — the process of buying a property in less-than-ideal condition, renovating it, and selling it for a profit — is an incredibly popular and potentially lucrative investment model.
In 2022, the average U.S. house flip yielded $67,000 in profit, and a 26% return on investment (ROI), though in some states it was much more profitable. Pennsylvania, for example, saw more than 100% ROIin markets like Pittsburgh and Reading.
The most important element in a house flipping venture is being able to find a steady stream of properties with good bones that need a little work. These diamonds in the rough are called distressed properties. They might be foreclosures, abandoned, or simply neglected by busy owners who’d love to sell. So, how do you find them?
Read on and we’ll cover what defines a distressed property, how to locate distressed properties for sale in your area, and tips for safely investing in distressed properties.
What Are Distressed Properties?
A distressed property is one that the owner has not properly maintained, or has failed to pay the mortgage on.
A distressed property can be:
- Vacant, abandoned, neglected or simply in poor condition
- In the foreclosure process
- Post-foreclosure (owned by bank or government agency)
- Short sale property
- Burdened with unpaid tax liens
A distressed property likely has a relatively low value. If you’ve heard the expression “buy low, sell high,” a distressed property is a great opportunity to do that first part.
How to Find Distressed Properties Near You: 7 Strategies
1. Take a Drive to Look for Early Signs of Distress 🚗
If there’s a particular neighborhood you’re interested in, watch for properties that aren’t being properly maintained. Properties rarely become distressed overnight, and it can be relatively easy to spot homes that are headed towards bank ownership.
They may be slated for foreclosure, affording you an opportunity to snatch them up.
Look for signs like:
- Overgrown yards
- Deteriorating siding
- Uncollected mail or newspapers
- Broken windows
- Notices posted on doors or windows
- Homes that are noticeably distressed compared to their neighbors
2. Partner With a Real Estate Agent 🤝
Partnering with an agent who specializes in distressed properties, preforeclosures, and house flips can give you the inside track on investment opportunities. Agents often have intimate, block-by-block knowledge of their neighborhoods and are the first to know when a property is headed for the market.
This is an especially wise strategy if you aren’t local to the area you’re targeting for investment. Start interviewing knowledgeable, local agents today!
3. Keep Your Eyes on MLS Listings 👀
The MLS can be a great source of distressed properties, if you know what to look for.
Look for properties that have been listed for a long time without selling, have multiple price drops, or are listed as foreclosed properties. These could all be distressed properties, or be on the way to becoming a distressed property.
4. Check Distressed Property Websites 💻
Many websites list distressed properties and foreclosures. Just keep in mind that anyone can view these listings, so you may find a fair amount of competition.
Some of the most relevant are:
- HomePath by Fannie Mae
- Realtor.com Foreclosures
- IRS Treasury
» Learn More: 5 Free, Helpful Real Estate Investor Tools From Bigger Pockets
5. Sift Through Government Records 📜
A search of local government records could yield very promising leads in your search for investment properties.
You can use searchable databases on most county websites (though some are a bit clunky) to find potential properties. Otherwise, you can visit your local courthouse or clerk and recorder’s office in-person.
When looking through local property tax records, look for properties with delinquent tax payments. These properties are likely headed towards foreclosure, and the sellers may be very motivated to sell.
If you’re looking through local court records, keep an eye out for delinquent mortgage payments, as these properties may soon be seized by the bank. The owners might be eager to sell, and you could get a great deal.
6. Look for City Code Violations 🏚️
Municipal health departments often maintain a public list of building code violations. Properties with a history of multiple, chronic violations are often a reliable sign of a distressed property.
More serious violations involving egress, mechanical, or electrical systems are strong indications of a property in disrepair, though yard-related violations are also a good sign.
Older homes tend to receive more violations, since they may not meet updated construction standards— a potential sign that a property is ripe for a renovation-and-resell, especially if it’s located in a desirable neighborhood.
7. Use a Real Estate Investing Tool 🔧
Investment apps are created specifically for real estate investors, so they’ll give you more curated listings than many of the government websites. They’ll get you straight to the source without having to canvas your city and dig through court records.
Most charge a fee, but it might be worth it to find your next flip faster.
If you’re looking for a helpful tool, we highly recommend working with our friends at DealMachine. Its software helps you find distressed properties in your desired area and connects you directly with property owners to start making a deal.
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Pros and Cons of Buying Distressed Properties
Buying distressed properties can be incredibly rewarding, but it’s not without risks.
|Pros 👍||Cons 👎|
|Low price: Distressed properties can be bought for a very low price, since they’re usually not even habitable as-is.||Renovations can overrun budgets: If scarce labor or materials drive up your costs, or unforeseen problems surface during renovations, your renovation costs could eat up all your profits.|
|High ROI: As long as you keep renovation costs under control, you can sell for much more than you paid, generating a high return on investment.||Competition: House flipping is becoming a popular investment model, so you’ll have to compete with other savvy investors for many distressed properties.|
|No retail buyers: Despite competition from other investors, the market for distressed property is less hectic than the residential market, where buyers routinely engage in emotional bidding wars.||Substandard locations: Distressed properties may be located in neglected or declining neighborhoods.|
Tips for Investing in Distressed Real Estate for Sale
Be Ready to Jump on Hot Properties
Once you determine your budget, have targeted specific areas for investment, and know what you’re looking for, don’t hesitate to act when you find properties that meet your criteria. In hot markets, desirable properties may get several offers the first day they’re on the market, so you have no time to waste.
As you get used to the purchase process, you can learn when to take calculated risks— for example, making a pre-inspection offer, if you know you can back out later if the inspection uncovers serious issues.
Set a Budget & Stick to It
Take a hard look at your finances and figure out how much you can safely spend on your investments. Then use that number to set a budget, and stick to it no matter what. Even if you discover an investment opportunity that’s hard to resist, remember that overextending yourself can lead to real financial pain.
Learn Local Laws
Make sure you understand local foreclosure laws, and how they apply to transactions of foreclosed property. Many municipalities have local ordinances that dictate how vacant, abandoned, or distressed properties can be seized, bought, or sold.
Understanding the details of these laws will help you steer clear of legal snags — and could open up great opportunities!
Cultivate Mutually Beneficial Relationships
Cultivate a network of local real estate professionals like mortgage lenders, home inspectors, county record clerks, zoning authorities, title agents, and general contractors. Offering consistent business to lenders and contractors can win you discounted rates, and other professionals can alert you to potential investment opportunities before the street hears about them.
Find a Trustworthy Inspector
A great home inspector can save you from a disastrous investment by unearthing hidden problems. Always have properties inspected before you make an offer, and if your inspector says there are serious problems with the home, be prepared to walk away from the deal!
» Learn More: Read This BEFORE Your General Home Inspection
FAQs About Buying Distressed Properties
What is a distressed property?
A distressed property is one that the owner has not properly maintained, or has failed to pay the mortgage on. Many owners of distressed properties are eager to sell for lower prices than normal because they’re facing foreclosure, missed tax payments, or a short sale. Distressed properties are ideal for investors looking to buy low and sell high. Learn how to find distressed properties.
How do you buy distressed properties?
To buy a distressed property, you’ll want a real estate agent on your side who knows the local laws around buying and selling foreclosed or distressed properties. Once you’ve negotiated with a property owner on a sale, the most common way to buy distressed properties is with cash. However, you may be able to finance a distressed property or get a home renovation loan. Learn more about buying distressed properties.