Buying distressed properties is a good way to secure better terms, but these types of properties often come with some terms that you need to be aware of.
Typically, a distressed property is a home that has fallen into disrepair in some way, but the owner may also be in other ways distressed due to a failing financial situation. Sellers are motivated, so asking prices and expectations may be lower, but cheap doesn't mean it's a bargain.
Here are three things you should know before diving into buying distressed real estate.
Thorough investigation
One of the golden rules when investing in any form of real estate is to do thorough research, and this rule becomes even more important when it comes to distressed properties.
Distressed properties may have been on the market for a while or may have had past issues that caused them to be distressed. In many cases, you may actually need to sell very quickly and have limited time to do your due diligence. It is important to take a closer look at the property's history, check the past ownership history, speak to your real estate agent about why the property is being sold, and gather as much information as you can.
It's equally important to check whether there are any outstanding issues, such as building code violations or property liens for other charges, such as unpaid council taxes. A thorough home inspection by a certified inspector will uncover any potential structural issues and tell you what repair work is needed.
Similarly, what got into the property itself could also be problematic and worth investigating: if the property has been involved in criminal activity, you may have to pay extra to have it remediated to proper hygiene standards.
Understanding your local area and suburb is equally important. Consider factors such as the local job market, rental vacancy rates, and general economic conditions. If your suburb has a high rental vacancy rate, it could be an indication that the local economy is struggling, which could affect property values. It could also be one of the reasons the property itself became distressed. If you are buying a property with the intent of reselling, it is important to research the selling prices of similar properties in the area and how long they took to sell.
Don't overlook other costs
Buying a distressed property often comes with the allure of a significantly lower purchase price, but don't let this cause you to overlook other associated costs. Despite the lower initial investment, distressed properties often require extensive repairs and renovations.
Drawing up a detailed budget and getting quotes from the right contractors before making an offer is essential to ensure you don't take on something you can't handle.
Another big factor to consider with distressed properties is that banks may not be prepared to lend to you at the level you expect. For example, if the property has no running water or a functioning kitchen or bathroom, they may not be prepared to lend. This is something you should find out about before making an offer and make sure you speak to a mortgage broker beforehand.
Payments may take longer than usual
Another important thing to understand when buying a distressed property is that the settlement process may be significantly longer than usual. This delay is often because the property is connected to legal or financial issues with the previous owner. For example, if the property is being sold as part of a bankruptcy proceeding, the sale may need court approval, which can be a lengthy process.
Legal or financial issues can also increase the risk of the sale falling through. It is therefore important to have a qualified solicitor or conveyancer thoroughly review all your paperwork. They can identify potential red flags and offer advice on how to deal with the complex issues that come with buying a distressed property.
Not all distressed properties are mortgagee sales so again it comes back to the fact that you need to gather as much information as possible and speak to the right professionals to get the best advice before making an offer.