Distressed properties are fast becoming an investor’s dream, but are they profitable? According to many real estate experts, the answer is a resounding “Yes”! — as long as you know the secrets to success.
Expert deals on distressed properties, including foreclosures and REO houses, could very well be the next real estate hot market. However, they warn that this type of real estate investment will not create wealth overnight. Instead, investing in fixer-ups is primarily for the investor who prefers slow and steady growth for their portfolios or those who remodel homes.
To be successful in this field, it is important to locate properties in an area that is affordable enough to cover the mortgage payment from rental income. This income can be obtained through the use of the property in the short or long term.
Look for properties in family communities if you are interested in renting to individuals for the long term. If you prefer to work with short-term renters, look for houses that can be used as vacation rentals. The right home in the perfect vacation destination can potentially generate a greater return than a long-term home rental. Only you can decide if you prefer short-term or long-term tenants.
Engage in due diligence before investing in distressed real estate. Get quotes for repair work and renovations. Find out if the property has unpaid taxes or liens from creditors. The most important thing is to make sure you can afford the mortgage payment if you can’t rent the property.
Investing in foreclosed properties can carry more risk than investing in bank-owned properties. Every once in a while, investors are lucky enough to discover a home that requires little repair. For the most part, foreclosures require considerable work to get the house back into serviceable condition.
To purchase a foreclosed property, investors must make an offer on the property through an auction. At the time of the offering, investors should be prepared to pay the balance owed on the mortgage note, along with any attached outstanding debts. There may be cases where the investor is forced to evict the previous owner. If you don’t want to deal with these kinds of issues, you might want to consider investing in REO properties.
When the property is returned to the bank, it becomes real estate. The mortgage is removed and the bank negotiates with the creditors to remove the liens. They will also handle the eviction. Banks aren’t known for ‘giving the bank away’, so you can bet they’ll cut a tough deal to get you the best price.
Usually two or more counter offers are needed before an agreement can be reached. Also, many banks require minimum offers of ninety-five cents on the dollar. If the mortgage note is for $100k, investors must offer at least $95k. In reality, you’ll probably end up paying $97k or more to seal the deal.
A more profitable way to invest in REO properties is to buy from private investors who buy bank portfolios in bulk. Buying in bulk allows the investor to purchase properties below market value. They then pass on a large percentage of their savings to you, creating a win-win for all parties involved.
It is reasonable to buy an REO property from a private investor and have 25 to 30 percent instant equity. Even if you invest 10 to 15 percent in repairs and renovations, you’ll still earn a profit in your portfolio. To triple or quadruple your investment, experts recommend holding onto these properties for a decade or more before selling.
There is money to be made investing in distressed property, but it is generally not easy or fast. If you take the time to make informed decisions, investing in foreclosures and REO homes can eventually make you very wealthy.
