How To & Education | Commercial Real Estate
Distressed properties offer real estate investors unique opportunities to transact with homes sold for lower than market value.
The affordability of a distressed property attracts many inventors to this property class. Still, it's crucial to thoroughly understand the types of distressed properties to avoid and overcome obstacles that are inherent to these types of listings.
When you're aware of the challenges with distressed properties — and best practices to mitigate and solve issues — you'll be able to maximize the return of your distressed property investments.
Why we're writing this
At PropertyRadar, we help investors, realtors, mortgage professionals, and home + property service professionals all scale their businesses. Doing so often means helping them discover new distressed opportunities, and then connecting with the home and property owners.
Over that time we've learned the importance of identifying types of distress, the red flags and nuances, the unseen benefits, etc.
However, being able to identify distressed properties is just one piece of the puzzle - it takes a consistent, strategic marketing approach to help solve a property owner's problem and make a profit while doing it.
While finding distressed properties sounds easy, those with experience know it's not as easy as it sounds. It takes developing and refining several strategies to stay persistently successful.
In this complete guide, we'll explain how to spot distressed properties, types of distress, the benefits of distressed investing, marketing to distressed property owners, and much more.
What we'll cover:
- What is a distressed property?
- Big Picture: things to consider about distressed real estate investing
- The Complete Guide to Distressed Properties
- How to leverage PropertyRadar to find and connect with distressed properties
What is a distressed property?
A distressed property is real estate property that has been neglected in some form by the current homeowner.
A distressed property refers to real property in which the property, structure, or owner is experiencing issues that are likely to indicate that the property can be acquired below market value.
In these cases, the homeowner has become unable to keep up with the different responsibilities required to maintain the home.
Distress can stem from financial issues, such as missed mortgage payments, or physical problems, such as an unmaintained structure or land plot.
The truth is, distress can take many forms and is very often incredibly difficult and challenging for people in distress to find help. As an investor, you have the in-depth real estate expertise to solve these complex problems and help people out of distress.
Many people may think that real estate investors who shop for distressed properties are taking advantage of people in distress.
However, that is not the case. The reality is distressed property homeowners can be in terrible situations. Often, their problems are complex and require in-depth real estate expertise to help solve.
Before diving into our Complete Guide, let's look at some things to consider when pursuing a distressed real estate investing strategy.
Big Picture: things to consider about distressed real estate investing
Distressed properties show some form of hardship for the owner
Whether it's dilapidation, an unkempt yard, or homes that appear vacant, it's important to remember that, more often than not, signs of distress indicate some form of hardship.
Investors who acquire distressed properties can often help get someone out of an otherwise terrible situation.
While investors can acquire homes quickly for below market value, both sides win by relieving a property owner of the burden of owning distressed property.
Think about it similar to attorneys providing their services during times of hardship, or perhaps a bank loaning to help people pay off their debts.
At the end of the day, there's a value exchange where each side benefits as a result of the transaction.
Distressed property investors can help alleviate significant burdens property owners face
When a real estate investor approaches a distressed property owner, they mustn't position themselves as someone looking to take advantage of someone in a tough spot.
Instead, they should see it as someone trying to help people access the resources they need to improve their circumstances.
This perspective shines a new light on the process of finding and pursuing distressed property listings. In many cases, you may be reaching out with a vital source of assistance that can help a stressed homeowner rewrite their story.
Now that we've covered some things to consider about distressed properties let's move on to actionable strategies to help you succeed in your investment strategies.
The Complete Guide to Distressed Properties
Understanding the types of distress
Many different life situations cause properties to fall into distress.
From debt-related causes, such as state and federal tax liens, or life events, like divorce, illness, or loss of employment, many situations result in property distress over time.
Here are some of the different categories of distressed properties:
Category #1: Properties whose owners are delinquent on their tax responsibilities or have a state or federal tax lien placed on the property.
Category #2: Properties whose owners have not been able to pay their mortgage bills, which are approaching or are already in the foreclosure process.
Category #3: Properties that are sold due to legal probate situations.
Category #4: Homes owned by state and local government authorities.
Category #5: Homes involved in legal settlements surrounding the homeowner, such as divorce cases or bankruptcy claims.
Within those five categories, the specific types of distress include (but are not limited to):
- Preforeclosure*
- Foreclosure*
- Bank Owned*
- Delinquent Taxes*
- Vacant*
- Vacant Landlords*
- Death of Joint Tenant*
- Mechanics Liens*
- HOA Liens*
- Flood Risk*
- Owner Age*
- Absentee*
- Bankruptcy
- Divorce
- Tax Liens
- Probate
- Code Enforcement
- Fire Damage
- Boarded
- Problem Tenant
- Hoarder
- Blighted
- Damaged
* Included in PropertyRadar’s Search Criteria
These situations can bring significant financial or emotional hardships. Often, they result in distressed homeowners missing monthly mortgage payments, neglecting their property, or other factors contributing to property distress.
Opportunities that come from investing in distressed properties
Considering the hardships that lead to property distress, let's now look at some of the investment opportunities coming from distressed properties.
Opportunities for Real Estate Investors
Investors can often find distressed properties with motivated sellers
Owners of distressed properties are often eager to sell. Their eagerness gives real estate investors the chance to work with motivated sellers who are more likely to be open to negotiations.
Distress home sales offer real estate investors the opportunity to access properties sold at lower-than-market prices.
Even if the home is not physically distressed, investors can often purchase the listing for a highly affordable price.
These low prices can be especially beneficial to investors shopping for distressed properties in a market where the average selling price of homes is exceptionally high.
Investors can avoid costs associated with traditional property acquisition
During these times, distressed properties offer an outlet for purchasing new properties without having to pay the upcharge rates of traditional listings that are not distressed.
You still gain the property without paying the higher cost.
Due to the low financial investment required to purchase a distressed property, these types of listings can be a great chance for new real estate investors to begin building their property portfolios.
Even for seasoned investors, the low upfront investment cost of purchasing a distressed property can increase the long-term ROI capability of the asset.
Opportunities for Residential and Commercial Brokerages
Similarly, the urgency often associated with selling a distressed property can give residential and commercial real estate brokerages an opportunity to win a new listing (and, move it relatively fast depending on the situation.)
If done correctly, the investment to find and connect with distressed property owners can be much less expensive than paying for pre-qualified seller leads through a service like Zillow or LoopNet.
While it may be a bit more work, you’re able to connect with far more prospects than using traditional, reactionary methods.
Opportunities for Home and Property Service Companies
Given the complexities that come with distressed properties, there’s no shortage of opportunities for different types of home and property service companies to lend their expertise.
For instance, attorneys can help with certain issues, contractors may be able to resolve code enforcement, etc.
5 Benefits of Buying Distressed Properties
Benefit #1: Access to homes that are priced lower than the current market average.
Benefit #2: Opportunities to fix up and flip the property and generate income from the sale.
Benefit #3: The chance to make repairs or update the property and lease it to renters, securing long-term rental income.
Benefit #4: Comparatively high-profit margins due to the lower overhead costs of purchasing the listing.
Benefit #5: You may be able to purchase a property in a better area than you would typically be able to afford, helping you to secure ownership without overpaying.
Challenges or problems that come with investing in distressed properties
While distressed properties do offer many benefits, mainly revolving around the low cost of these assets, there are challenges that real estate investors need to consider.
Some common problems that investors face when purchasing a distressed property are foundation issues, title issues, foreclosure issues, and code enforcement issues.
Code enforcement issues are complex and can have severe ramifications
Real estate investors need to know how code enforcement can impact homeowners. Code issues can be horrible for property owners.
The house can get bulldozed if a homeowner does not have the resources available to bring the property up to code.
However, something this extreme rarely happens with newer homes, which are more likely to have a lien placed on the property. Nevertheless, the lien can prompt a forced sale, which transfers ownership to a new homeowner.
To solve this problem, a real estate investor must collaborate with local city authorities to meet the code requirements and bring the property back up to par.
Since governing bodies manage distressed property sales differently than purchasing and selling a traditional single-family home, you may encounter pitfalls and unexpected issues.
Often, sellers of distressed properties cannot invest in the listing process by staging the home or conducting pre-sale repairs.
The as-is nature of distressed sales can come with unforeseen consequences
Commonly, owners will sell distressed homes and distressed land plots as-is.
In many cases, a distressed home may require renovations and repairs. You will also likely need to run inspections to identify any hidden issues you may not have been aware of when you made the purchase.
When purchasing distressed homes, there may be increased competition between other local investors who are also interested in the distressed listing.
It's especially true if you are pursuing a distressed property that has been posted on the market for sale.
However, you can identify and secure a distressed property that has not yet been listed on the market. In that case, you can get the upper hand over competing investors and avoid harsh competition.
6 Challenges of buying distressed properties
Challenge #1: You may discover unknown issues with the property's structure, inviting increased costs to repair and renovate.
Challenge #2: When shopping distressed properties listed on the market, there may be increased competition between homebuyers and real estate investors.
Challenge #3: As in any real estate investment, there is no guarantee that the investment will be recouped.
Challenge #4: Finding the owner or heirs of distressed properties is often challenging.
Challenge #5: Ensuring compliance with the complex web of laws designed to protect owners in distress.
Challenge #6: A lack of standard processes and contracts for some types of distress makes each deal unique and can often be time-consuming.
How to overcome challenges that come with property distress
While distressed properties do invite unique issues, it's possible to solve the problems by creating a business infrastructure that equips you to navigate distressed property deals.
We recommend building a solid network of contractors, home inspection officers, and home repair professionals.
Working with experts can help you deal with any foundational issues that may arise post-purchase of distressed homes.
It's also important to network with local professionals specializing in things like Title Matters and evictions.
This can help you solve potential title, foreclosure, and code issues that may come along with the distressed property purchase.
How to find distressed properties
Taking into account everything we've covered so far, here are three strategies and resources you can leverage to find distressed properties in your area:
Strategy #1: Driving for Dollars
Driving For Dollars is a direct marketing tactic where real estate investors drive neighborhoods and scope out specific properties, including off-market, distressed, and vacant properties, to discover new opportunities and turn them into deals.
Strategy #2: Actual Sources
Local Auctions - Real estate auctions are a great place to quickly and efficiently find serious deals.
County Tax Records - County Tax Records can show you if a property’s taxes are delinquent, which may be a sign of a property owner facing distress.
Court Records - When you're ready to find out if the homeowners have delinquent mortgage payments, you can find this information in county court records
Code Enforcement - Homeowners who are financially underwater often can’t keep up with the financial burden of maintaining their property. These properties are often subject to code violations.
Strategy #3: Services that compile data
There are services in the marketplace that aggregate data from public sources (listed in Strategy #2) so you don’t have to. These include:
- List Brokers
- Websites selling distressed properties and leads
- Multiple Listing Services (MLS)
When evaluating compiled data, it’s important to ensure your provider has:
- Multiple types of distress built-in
- The ability to import local data no one resells
- Capability to stack lists with each other and hundreds of other criteria
- Monitoring and alerts
- Automations
- Integrations
- Detailed data on each item
- Robust due diligence tools
How to market to distressed property owners
Given the sensitive nature that comes along with property owners having to sell distressed properties, it's important to always adhere to the Good Neighbor Marketing Pledge:
Marketing is always 100% legal and legitimate
Marketing must always be legal, honest, and transparent. Recipients of your marketing should be able to identify you and your business quickly.
Targeting is what you do, not what you communicate
If someone asks, answer generically by letting them know you're a business that operates in the local community. In particular, you thought they might be interested in your product or service.
Be smart and private with customer information
Marketing materials must never include details about your customers that they might believe to be personal and private.
Great marketing has empathy for your customers
Having empathy is being understanding and sensitive to the feelings, thoughts, and experiences of your customer and how they will perceive your marketing outreach.
Honor all opt-out requests.
You must honor any recipient's request to opt-out and no longer receive marketing from you.
Marketing channels to connect with prospects
With the Good Neighbor Marketing Pledge in mind, let’s review some of the channels you can use to connect with your distressed prospects:
Email: introducing yourself, your company, or your service over email is the first step in connecting with distressed property owners.
Calling / Texting: once you’ve made contact with distressed property owners, following up with calls and texts is a great way to build rapport with anyone who’s opted into receiving phone communication.
Direct Mail: any form of a physical piece of marketing or promotional material sent through the mail.You can connect with distressed owners with postcards, letters, brochures, etc.
Door Knocking: Door knocking is a direct approach you can use once you’ve identified a distressed property in the area. You can approach the property and talk to owners and neighbors and learn more about the property and the property owners.
Online Ads: Search and Social Media ads are a great way to spread awareness. A huge benefit is the ability to control how much or how little you spend per day.
How to leverage PropertyRadar to find and connect with distressed properties
Real estate investors can streamline the process of finding unlisted distressed properties and distressed properties for sale by leveraging PropertyRadar's leading public records database.
With PropertyRadar, you're able to:
✅ Create dynamic Quick Lists that automatically generate a complete list of properties meeting specific criteria in a set geographic location.
✅ Review property details that are up-to-date and accurate, giving you more insight into the condition of the property and its level of distress.
✅ Review owner details to learn more about the circumstances surrounding the homeowner of the distressed property.
✅ Review a complete list of comparables based on specific criteria.
✅ Review Title History to learn more about the history of the home.
