There is no question that purchasing distressed property can be an excellent investment. For the most part, risks are manageable and can be greatly reduced with careful planning, research and patience. However, it can be disastrous for anyone who doesn’t fully understand what it takes to turn a profit in this sector of the real estate market – we have all seen the property shows following the efforts of novice flippers, and we have seen how things can go very badly for folks who jump in without getting the advice of experts in distressed property like the Welfont Group. Here are just some of the things to keep in mind if you think that purchasing a distressed property might be a good option for you.
Do You Have Cash?
One of the great advantages of purchasing distressed property is that it typically can be had at a great price – and if you have enough cash to make the purchase you can benefit in several ways from this.
First, sellers will likely be motivated to close the deal quickly and your ability to make a cash offer makes it more attractive to sellers who might otherwise have to wait for financing to be confirmed. If other purchasers are also interested in the property, having cash on hand gives you a clear advantage.
Second, even though interest rates are currently quite low, they could increase at any time. If you need to take financing in order to make the purchase, you may find that increasing interest rates take a growing bite out of your investment and negate the initially great purchase price, especially if you will be keeping the property for a number of years.
Third, you may find that you cannot secure financing for an especially distressed property – remember that banks will require some guarantee against their investment, and a property in very bad shape may make a mortgage impossible or very expensive.
For all of these reasons, the ideal purchaser of a distressed property will have sufficient cash to complete the deal.
Do You Have Patience?
Distressed properties require time – time to close, time to renovate, and time to accrue value.
These properties may be sold by owners who are looking for a quick resolution, but often they are in foreclosure or contested in some way. There may be long timelines involved in dealing paperwork, legal issues, evictions, competing claims, and so on.
Distressed properties generally require significant renovations in order to be livable. Not only does this take a considerable financial investment, but it can also take a considerable amount of time. Depending on the extent of the work that is required, not only do you need to find contractors but you will also need to apply for permits and other permissions. Any number of situations can arise that extend these timelines even longer.
In some cases, you may find a distressed property in a neighborhood that has generally higher property values, but typically a distressed property will be located in a more run-down neighborhood. In this case, it may be years, perhaps many years, before the investment that you put into purchasing and renovating a distressed property is matched by increased market values in the area.
For these reasons, the ideal purchaser of a distressed property will not be under pressure to quickly take possession of the property, nor to quickly “flip it.”
If you have cash and patience, a distressed property may be exactly right for you – be sure to get expert advice before taking the plunge to be sure that you fully understand the process.