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The Ultimate Guide to Investing in Distressed Property

If you hear someone refer to a property as "distressed," they're not pulling a Toy Story and imputing emotions to the inanimate. Rather, they're talking about a specific type of investment property. Read to discover what distressed properties are and when they may represent good investments.
distressed property

Before you decide to invest in distressed property, you'll want to have some working knowledge of what this term refers to. A distressed property is "a type of real estate that is being offered for sale because of an impending foreclosure or repossession." A property officially can be considered distressed when its owner is in default on the mortgage—a condition which became quite common in the late 2000s.

When To Buy Distressed Properties

If you happen to be looking at the title for distressed property and see the name of an LLC, don't be surprised. Contractors, flippers, and real estate entrepreneurs generally tend to swoop in to purchase properties they consider undervalued. And no property better fits this bill than one in legal peril.

Horror stories abound from the realm of distressed property. Too often, buyers find themselves drawn in by a property's historical designation, for instance, despite the obvious and tangible presence of warning signs. So what's a good way to break through the clutter?

If you're a real estate professional who fits the bill for distressed property, it helps to keep two main mathematical variables in mind: how much the home is likely to be worth once it's fixed up, and how much those repairs will cost. If the first variable outnumbers the second by a healthy margin, you're in business (for more on this and other equations, see our blog on Property Metrics).

And if the property happens to be situated in a nice part of town, so much the better. In fact, another option for buyers of distressed property is to demolish the old structure in favor of new construction. Such investors invariably take the position that the property will offer significant return-on-investment in the longer-term.

How To Find Distressed Properties

Before you hire a construction company, it certainly helps you to have a property for them to work on. To that end, we've got three pieces of advice that should get you out of the chair and onto the construction site.

1. Run advertisements

Never underestimate the potential of a strong ad campaign. One company found that the three most effective means to find sellers were mailed postcards, classified ads, and bandit signs around the neighborhood. Although this latter isn't really an option, consider the first two good choices if you know the seller (mailed postcards) or the neighborhood you'd like to target (classified ads).

2. Recognize Desperate Sellers

Whether through advertisements, walk-bys, or the magic of online search, you may well have found a desperate seller without knowing it. In your first conversation with sellers, take note of any cues that may indicate tiredness, distaste, or even disgust with the property. Some of the more advanced buyers can convince sellers they want to sell even if that idea was not manifest at first.

3. Conduct Advanced Searches Online

Property sites like the MLS contain troves of data on properties located around the U.S. The blogosphere would have everyone and their landlord searching databases like this. While it's true these people are searching for a reason, nevertheless, you should temper expectations and try the first few steps along with search.

How To Improve Distressed Properties

If you've bought or are strongly considering buying a distressed property, you don't have to reinvent the wheel to improve it. Investors who have gone this route in the past have left hoards of advice for those new to the club.

For starters, consider that anyone who lives near a distressed property will embrace the prospect of its revival. This goes in equal measure for neighbors of simple remodeling projects and those bordering full-scale renovations. When a house looks nice, it boosts the curb appeal of the neighborhood; and a house feels nice, it's more likely to attract stable tenants.

So it behooves you to seek out the help of people who live near to the distressed property. Ask them about the property's history, and find out if a neighborhood association exists. These groups may be willing to publicize your rebuilding effort, a boon for those with rental companies, for example, who may be looking for help leasing a property.

Besides neighbors, it always helps to work with a seasoned construction company. While it seems everyone likes a good fixer-upper, the downside to these projects is that they may contain unforeseen risks, obstacles, and expenses. The best contingency plan is a workforce reliable enough to finish quality work in a timely manner.

Conclusion

Now that you know good ways to find and improve a distressed property, it's time to put that knowledge into practice. The surest way to hone your skills as a real estate investor is to dive into the market armed with actionable techniques. Odds are there are would-be millionaire investors reading this very page.

So if you're ready, simply partner with a trustworthy agent. Far from a business partnership, this initial salvo into real estate investment is a chance to get advice. Questions like deal analysis, portfolio scaling, and the art of negotiation all are fair game for Clever Partner Agents.

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Jamie Ayers
Jamie Ayers

Jamie is the Director of Content at Clever Real Estate, the free online service that connects you with top real estate agents and helps you save thousands on commission. In the past, Jamie has managed columns for clients in a variety of leading business publications, including Forbes, Inc., CEO World, Entrepreneur, and more. At Clever, Jamie's primary goal is to provide home sellers, buyers, and investors with the information they need to successfully navigate the ins and outs of the real estate industry.

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