This ARTICLE On Investing In A Distressed Property: What You Need To Know Was PUBLISHED On July 2nd, 2020
Distressed properties refer to properties for which the owner is in default on the mortgage. Investing in distressed homes became very common in the late 2000s, with a third of home sales between 2008 and 2011 falling into this category according to Money magazine writer Lisa Gibbs. While there has been a significant decrease since, many people are still looking to invest in distressed homes, especially in places like Florida, although over 68 percent of houses in Colorado Springs was purchased by home flippers in the second quarter of 2017, reports worldpropertyjournal.com.
These properties can be a great deal as the bank wants to get them off their books, listing them for a low price. They’re sold “as-is” sometimes require extensive and expensive repairs; not to mention loads of time and paperwork. If you’re hoping to become one of the many to invest in a distressed property, there are some things you really need to know.
In this article, we will discuss and cover Investing In A Distressed Property: What You Need To Know.
Investing In A Distressed Property: The Unexpected Risks And Inevitable Bumps
Distressed properties come with some risks – possible foundation issues, septic problems, mold, and so on, along with some you may not think about. Zoning or bank issues, an unclean title, or even bad neighbors are just a few. These things can consume an incredible amount of your time, so if you aren’t ready to deal with them, you may not be ready for this kind of investment.
Investing In A Distressed Property: Consider All The Costs, Not Just That Low Market Price
That low market price can be very enticing, but as mentioned, distressed homes can come with many additional costs. Don’t make the mistake of simply buying the cheapest property on the market with the belief it’s going to make a great investment. You probably already assume that the home is discounted because of the work needed due to poor conditions, but you also need to consider the location and other factors. If it’s in a bad area, for example, it’s not going to command a good price or high rent no matter how beautifully you transform it.
It’s a necessity to budget and accounts for as many costs as you can, thinking about the age of the property, any special distress, how long it’s been sitting that way, and so on to avoid a money pit. Are you hoping to sell the property as soon as possible, or rent it out long-term? No matter what your goal is, knowing your numbers on the front end and understanding how you spend will affect your final return of investment.
If You Need A Mortgage, Get Pre-approved
If you aren’t a professional investor and this isn’t going to be a cash investment, real estate experts advise getting preapproved for a mortgage before making an offer. One of the reasons is that you’ll be competing with investors who typically pay in cash. If you want a bank to accept your bid, you’ll need to prove that you’re a good, reliable prospect. If the house comes with too much damage and needs extensive repairs, lenders may refuse to finance it. You might need to come up with extra cash or even take out a second loan, though there are alternative sources that may be more willing, such as credit unions and smaller regional banks.
While investing in a distressed property is not a quick-rich venture, if done right, it can be an excellent earning opportunity.
The Troubles You Face To Get Financing
There are two major obstructions to getting finance to invest in distressed properties. First. Most sellers won’t wait for you to get a loan, and secondly, financers don’t like lending for distressed properties. An investor with the financial means solves this issue by paying upfront in cash. Chances are you don’t have the economic backbone. Therefore you need a Private Lender to back you up.
Hard-Money Lenders charge high-interest rates but are more willing to finance the purchase. Use the personal line of credit tied to your home’s equity. Doing this can put your own credit or house at risk, but it’s a quick and easy way to get financing.
Prepare for Insurance And Tax Hurdles
According to Forbes, buying a new real estate property opens you up to a whole new set of legal and tax issues. The company backing your investment can take hold of your assets if something happens. Even worse, if you are not living in the house, you are bound to pay “dwelling insurance.” This insurance plan covers damage, whereas you will need another policy for liability.
If you obtain funds via a Limited Liability Company, your income and deduction will be processed with your tax return. Hire tax attorneys as they can help you with their Tax Code Knowledge. These attorneys can help you file for returns and can act as an intermediary with the IRs to accommodate you.
Real Estate Agents enjoy flexible payment options as the losses are deducted from their family income instead of only personal income. But to qualify as a capable agent, he needs to show proof of at least 720+ working hours. He must work at a senior level and fix or manage properties. Proving your credentials in front of Internal Review Service is the real challenge