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7 Areas of Distressed Real Estate

7 Areas of Distressed Real Estate

7 Areas of Distressed Real Estate

New investors love distressed properties. Why? They are what we refer to as undervalued deals. This becomes extremely attractive to investors because there is a huge area of opportunity to potentially increase your profit margin.

First and foremost, we need to understand what is considered a distressed property. A distressed property is usually neglected either physically, financially, or both. These are usually homes where the owner is unable to keep up with mortgage payments, upkeep, maintenance or repairs, and due to their inability to maintain the property, it could be facing the risk of going into foreclosure. Not all distressed properties are necessarily pre-foreclosures, but it is common. There are several ways the property gets into a problem situation and as investors we want to find the solution(s).

Now that we understand what distressed properties are, how do we find them?

Many novice investors want to find their deals on the MLS, online websites, or with a real estate agent. While you may find deals those ways, the best deals usually come where there is less competition. Hence, distressed properties. Most new investors don’t know how to find them or how to communicate with the owners in the event that they do find them, so it allows for less competition overall.  Let’s review 7 areas of distresses real estate:

1. Unmaintained properties

When it comes to the physical appearance of a distressed home, there’s one telltale sign to keep in mind, neglect. To find distressed properties for sale, we recommend segmenting your market by targeting specific neighborhoods. Once you have selected the targeted area, you want to look for neglect because neglect could be a sign of motivation. Examples of neglect may be:

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  • Tall or overgrown grass
  • Peeling paint or faded siding
  • Multiple notices placed on doors or windows
  • Hurricane shutters if you’re in the south and it’s not hurricane season
  • Holiday decorations if it’s not the holiday season
  • Indoor and outdoor lights not turned on at night
  • Broken windows, doors, or other obvious exterior repairs needed
  • Newspapers piled on the front porch

These examples can mean the owner is overwhelmed or has given up on maintaining the property either because they can’t afford to or have lost interest in doing so. This could be an indication that there is some motivation, and in that case, the owner may be willing to negotiate the price and sell the property at a discount and/or creatively.


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2. Tax Records

Delinquent taxes are public record. If they are delinquent, it could suggest that the homeowner, who is unable to pay their taxes, may also be unable to pay their mortgage. Which again, could indicate motivation. Delinquent taxes are often a motivation to sell.


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3. Past Due Mortgage Payments

If someone can’t pay their mortgage, they run the risk of being foreclosed on. When someone goes into foreclosure, they end up in a rough situation financially. Anytime they want to apply for a mortgage in the future, they must disclose they’ve had a foreclosure, their credit score drops, and they may look riskier to a lending institution, and their ability to borrow will decrease. Sometimes a seller would be willing to sell their property at a discount if it means they can avoid the foreclosure.


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4. Probate

The probate court is a great way for investors to help people, as well as find a good deal. Sometimes motivating factors can be life events or what we call “Terrible D’s,” such as a divorce or a death in the family. In the event that someone experiences a Terrible D, the properties have been left behind, possibly through an inheritance. It’s common that the person inheriting the property has no interest in the asset. They may prefer to get it off their plate and just take the money from it. This is where you, as an investor, come in and potentially negotiate that deal because again, the life event is motivation. Probate sales require a special process because they are sold through executors/attorneys.


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5. REO & Bank Owned Property Listings

REOs or what is known as Real estate-owned homes are properties owned by the bank. These are the properties that lenders have already repossessed. It’s important to note that a bank’s business scope is not real estate. It’s to lend money. Therefore, lenders want and need to get rid of non-performing assets that can negatively impact their camels score (a financial institution’s international rating system). Being able to communicate with the bank directly can sometimes result in a deal for you if you know how to find these banks and understand the language of money.


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6. Absentee Owners

Sometimes investors move out of state or invest out of state. Occasionally, a property owner who either invests out of state or moves out of state may not be the best property manager. He or she may struggle to maintain homes in areas they can’t keep an eye on—out of sight, out of mind mentality. This leads to distressed properties, which again, can indicate motivation. Mailing lists are usually the best way to find out of state owners.


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7. MLS

The MLS or Multiple Listing Service isn’t usually where we recommend investors find deals because they are usually the most competitive properties to deal with, and/or, they are listed at a retail price. As investors, we do not want to pay retail. However, if you come across a pre-foreclosure or short sale that has been listed for a while with no movement, it may be an indication of motivation to negotiate. To gain access to the MLS, you will have to have a real estate license or have someone on your team who does.

In conclusion, finding a deal is not easy and takes a lot of work. However, if you get creative and think outside the box of just going to retail websites, you may have a great opportunity to find a hidden treasure, like a distressed property.  Utilizing your Power Team members can also help open doors for investments. Check out the Power Teams content in the club to learn more about that.

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Takeaway

Big picture takeaway points

  1. There are a number of indicators of distressed real estate.
  2. Distressed properties are great for investors because they can be purchased at a discount.
  3. Knowing how to effectively communicate can greatly increase your chances of finding and purchasing distressed properties.

Reflection

Self-reflection questions to think more about the content

  1. Just after reading this article, can you think of properties you pass every day that may be distressed?
  2. What is my next step once I find a distressed property?
  3. Do I know how to approach and communicate with the bank on an REO property?

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