Buying Distressed Assets: Should You Acquire the Property or Its Debt?
Acquiring a Troubled Property Takes Persistence and Patience. Here’s Where to Start.
A distressed asset, particularly distressed property is one that a lender is selling under foreclosure. It happens when the homeowner is unable to pay the EMI for four months or more. Moreover, a property under distress fetches a lower amount than the current market price.
Distressed properties are categorized as Real properties that include a plot of land or an immovable property built on it plus any value addition to the property like fixtures and improvements. Fixtures, though, are grey in their treatment as different states have different laws of classifying fixtures – some consider them as real property while some group it under personal property. It is prudent to check local state and federal laws in case you want to buy or sell such a distressed asset.
Should you invest in distressed property?
Truth be told, buying a distressed property at an attractive location for far less than the market price is a tempting offer for both investors and the general public. Investors often choose to sell off the property at the market price for a handsome profit.
This strategy comes with its pearls of wisdom- more often than not, such properties are sold in a condition where renovations and improvements are a must, as an investor, it is crucial to take that into account this extra expenditure and judge whether the property is worth it; more so in a case where distressed properties are a high-competition game and run the risk of reduced profit margins with the heat of competitive pricing.
Not only the repair and maintenance cost, if you get hold of the property at an auction, you’re also responsible for evicting the occupants and dealing with tax liens, something which can be a dampener once the initial euphoria settles.
Here’s how investors can profit from distressed property trade?
Once you’ve found yourself a distressed property, whether at an auction or through tax records, bank listings, or plain investigating around. The next course of action is to follow a set of customs that will help you steer clear of any pecuniary mishaps while you buy the property.
- Scrutiny of the Property: A thorough round-up of the actual property and its location to understand the type of neighborhood, the type of properties around, prevailing property prices, etc. Location recce is only half the job done, it is crucial to do an intensive property investigation to estimate the amount and types of repairs needed. If a property happens to fall in a neighborhood with other distressed properties then the possibility of fetching a high-margin profitable sale is bleak and should be considered before buying.
- Determining the value of the distressed property: It is critical to determine the property’s correct value at the early stage of consideration. But how do you ensure that the value ascertained is accurate and not ballooned up, only to deflate later? One way to discover the value is to compare it with recent trade figures in the market; this estimate will give you a ballpark sum. Another way is to get a professional property valuer on board, this won’t come cheap, but you can be sure of appropriate valuation and may save you from future fiascos.
- Get Professional Property Inspectors: Even though you may think that you have done a satisfactory property probe, it is advisable to get a property inspector to conduct in-depth fact-finding. This way, as an investor, you can be assured that you know not just about the cosmetic issues but also significant structural decline. As a regular investor, you can’t afford to ignore the red signs, even in the case of a professional hire. It doesn’t hurt to take a second opinion from another professional property inspector to be convinced of your investment and its returns.
- Stage of Foreclosure: It helps to understand at what level the property lies within the foreclosure procedure. Suppose the property is up for sale during the course of foreclosure while the occupants are still attached to the property. As an investor, in that case, you’ll have to bear these additional expenses of eviction, repair, and lien removal, if any. That’s why get a property that has already been foreclosed.
What’s the closing verdict on Distressed Property.
Needless to say, such acquisitions are not for the faint-hearted; one needs to have a sizeable risk appetite and an eye for negotiation to be able to flip the property at a profit eventually. Of course, one must also account for the extensive due diligence of the property and the long-term and short-term market temperaments, policy changes, ongoing tax climate, etc.
In the end, you’ll either swear by these properties or keep a mile-long distance, depending on your experience or those of other real estate investors around you. While it may seem complicated and riddled with many between-the-lines clauses but keeping an eye out and doing your research well can land you with a great deal.