Prospective homebuyers are always looking for a bargain price but, typically, when a property can be snapped up for a low price there’s a reason.
Most often, a house with a drastically reduced price will be on the market as a short sale because the owners are hoping to avoid a foreclosure or because the property has already undergone foreclosure.
While the price may be enticing, it’s important to understand what you are buying. First and foremost, a foreclosure or a short sale will nearly always be sold “as-is,” meaning that the owners, whether they are a bank or the residents, won’t be fixing anything before the sale.
Advantages of Buying a Distressed Property
The main reason to buy a distressed property is the price. In most cases, a foreclosure or short sale will be priced below market value because the sellers are in a hurry to complete a sale and because they don’t want to spend the money to repair a property in order to bring a higher price.
If you are eager to become a homeowner or want to invest in real estate, a foreclosure can be a good place to start, provided you know what you are doing. A REALTOR® experienced in distressed properties can guide you to make sure you purchase a home that will eventually increase in value.
When mortgage rates are low, you can take advantage of inexpensive financing to buy a bargain and then sell it later for a profit.
Disadvantages of Buying a Distressed Property
The main risk in purchasing a foreclosure is the reason the property is set at a low price: the condition.
If you are purchasing a house that is in bad shape, you will need to set aside funds to hire contractors or to pay for materials to improve it. Some foreclosures are in OK shape, but others lack appliances, have damaged walls, and may need extensive electrical or plumbing repairs. You may or may not be able to have an informational home inspection on a distressed property, but even if you do, it will be up to you to finance any repairs.
You should also be aware that not all distressed properties can meet the requirements of a lender, given the property’s condition. You will need an appraisal, and for many loan products the lender will need to assess whether the property can be lived in and has value.
Tips for Buying Distressed Property
If you have experience fixing up homes or a network of trustworthy contractors you can hire, buying a distressed property in bad condition may still be a good deal. If not, you may want to work with a REALTOR® and a home inspector who can give you a good sense of what it will cost to bring the home into good condition.
Many investors purchase distressed homes with cash, so it’s best to be prepared for potential competition from cash buyers. If you don’t have the cash yourself, you can work with a lender to secure a strong loan prequalification. To be an even stronger bidder, you may want to increase the size of your down payment or your earnest money deposit.
In some cases, a distressed property will require complex paperwork before you can take possession of the property, so be prepared to be patient.
Most important, educate yourself and work with professionals who can recognize the value in different properties so that you don’t find yourself owning a distressed property that requires too much work or sits in a location that negatively affects its long-term value.