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When people think about which properties are attractive to real estate investors, many of them will picture nice houses in good neighbourhoods, but that is not always the case.
For some investors, the most attractive property to buy is the one that is visibly distressed but still has potential.
Distressed properties are an interesting commodity in the real estate market because the visible flaws on these properties are part of their primary appeal.
So, what are the benefits that make distressed real estate so popular? And what disadvantages come alongside these high-potential investments?
But first, did you know that different types of distressed properties can be harder to finance? If you plan on buying and selling distressed properties, you need a skilled mortgage professional by your side to help you succeed. That is why we want to offer you a free strategy call at the link below to help you get your plan in order today.
What Are Distressed Properties?
Before you can fully understand the strengths and weaknesses of investing in distressed real estate, it is important to be able to identify what most investors are talking about when they say, ‘distressed property.’
Distressed real estate is essentially any property that is physically or financially neglected by the current property owner. This can include things such as houses with worn down siding and cracked tiles on the kitchen floor as well as pre-foreclosure properties that a property owner may want to sell before it is repossessed by their lender.
Often, these properties are identified due to visible signs of distress such as noticeable weathering, mail piling up, or an unkempt lawn. At other times, you may find these properties on the MLS (Multiple Listing Service) being sold ‘as is’ below market value.
Advantages of Buying Distressed Real Estate
Distressed real estate comes with a few key advantages that can make it an excellent choice for investors. Some of these advantages include:
Low Purchase Price
Since distressed properties have noticeable issues, the average purchase price compared to a newly renovated or well-kept property is going to be significantly lower on average. As well, depending on the type of problem facing the property and its severity, you can often find room to negotiate the price even lower than the seller may initially have asked for.
This can allow you to find excellent deals on properties that will allow you to dedicate more money to fixing up the property. As well, this can allow you to invest in higher value neighbourhoods at a much lower price, meaning that you discounted investment property can more easily become a high-value investment over time.
High Potential for Appreciation
Speaking of distressed properties having a strong potential to increase in value. Distressed real estate has a few key advantages that help them to appreciate more quickly and help you earn more equity in your property much sooner.
Since you would be buying the property at a lower initial price, there is going to be much more room for you to force appreciation through renovations due to the property value starting lower than the average market value.
For example, if the average three-bedroom house in a neighbourhood is valued at $350,000 but you buy a distressed one at $210,000, the room for your property to increase in value before getting slowed down by the rest of the local market is incredibly high.
This is great for investors looking to utilize the equity from their investments to make additional investors, as well as flippers who make their profits off of the forced appreciation they cause on distressed properties through their improvements.
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Disadvantages of Buying Distressed Real Estate
Despite the incredible advantages distressed properties can carry for real estate investors, there are also some key disadvantages to buying distressed properties that you should be aware of.
Damages Can Be Worse Than Anticipated
If you are buying a property that has noticeable issues and damage, you need to be careful that the damages are not worse than they appear. After all, you may be prepared to replace an old, warped countertop, but if you discover that behind the damaged counter is water damage and mold growth. These unexpected repairs can throw a wrench into the works and make the process of rehabbing the property significantly more expensive overall.
For short-term investors such as flippers, these unexpected costs can destroy the potential profit margins the property could have offered and potentially even cause the property to net a loss for the investor upon sale under extreme circumstances.
Potential for Increased Competition
Real estate investors are constantly looking for a good bargain in order to expand their investment portfolios. Distressed properties offer the types of bargains that they are looking for.
This is great if you can catch a property early or locate a lead to buy one off-market. However, that means that once the property is publicly listed, you are more likely to have competing offers that you will need to beat in order to get the property. This can result in higher purchase prices and declined offers from sellers.
No Promise the Property Will Sell Later
Another risk you run when buying a distressed property is the fact that you do not know if you will be able to sell it later. While distressed properties are a hot ticket item for investors looking to find a deal, once you have finished improving the property, it is at the mercy of the rest of the market and that means that when the market is slow, you may not be able to sell your property.
Remember: Find a Lender Who Supports Buying Distressed Properties
When you are trying to buy a distressed property, you need to make sure that you are working with a lender who is experienced in financing and working with distressed properties. Choosing the wrong lender on these types of property can be incredibly detrimental and result in higher interest rates or even getting your application declined.
That is why at LendCity we work a wide array of different lenders so that you can be approved at the best available rate for all of your investments. To get started today, you can visit us online at LendCity.ca or call our office at 519-960-0370 Alternatively, click the link below to book a free strategy call today.