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The Pros and Cons of Distressed Real Estate

The Pros and Cons of Distressed Real Estate

Just because a property is cheap doesn’t mean it’s a good deal.

Let’s evaluate the advantages and disadvantages of dealing with distressed properties or what some will call “cheap” houses.

Understand, first, that the price of the property may be attractive, but you’ve got to know what you’re buying, the physical opportunity surrounding the property, as well as the financial. You must run your numbers before being able to tell if the distressed, cheap house is truly a deal.

While the low prices may be enticing, that could be an indicator that the property is in poor condition. You may find the price tag attractive, but what if the property is deplorable or has inhospitable conditions? You may create more time or work for yourself, and it may cost you more money. If you think the price of education is expensive, wait until you get the bill for ignorance. If you go into this blindly, you may think there are just some minor repairs on the surface, but what if you must purchase appliances? Make major plumbing repairs? What if you find mold? Outdated electric? Foundation issues? Unexpected repairs can cost you a lot of money for renovations and even then, there is no guarantee you’ll sell the property. Not to mention, if the property is priced so cheap, there could be increased competition. It’s always good to know multiple exit and entrance strategies in the event that there is increased competition and/or difficulty selling the property afterwards.

While the low price of distressed properties catches your interest, that isn’t always the only advantage to purchasing. It’s common that the property is not only cheap, but also listed below market value which means you may be getting a leg up the day you buy. There is also a huge area of opportunity to maximize your profits if you can fix and flip the house, especially if it’s in an area with high profit potential. If you find that it is a distressed property, that may mean it is bank owned which could mean a greater opportunity to get it financed since the lenders don’t want to keep nonperforming assets on their books.

No deal is the same, but if you take into consideration the pros and cons of each deal at hand, you may be able to minimize your risk and your mistakes.

Areas of Review

Big picture takeaway points

Big picture takeaway points

  1. Cheap does not always mean it’s a deal. What if the property is deplorable or has inhospitable conditions? You may create more time or work for yourself, and it may cost you more money.
  2. If a distressed property is bank owned, this could mean a greater opportunity to get it financed since the lenders don’t want to keep nonperforming assets on their books.
  3. The pro to distressed properties, if you have done your research, is to utilize the fix and flip strategy. When done correctly you stand to have a great return on your investment.

Reflection

Self-reflection questions to think more about the content

  1. Do I have a power team started? Contractors? Research what the details are to fix and flip a distressed property.
  2. Have I investigated the average cost of repairs and contractors in my market? You may save some money on the lower cost of the property. But how much in repairs will you spend to get it to be sellable?
  3. Do I have software to run my numbers? It is key to know how to calculate property value to know if it is a deal or not.

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