There has been an increase in distressed properties of recent times. This is mainly due to increased interest rates, placing pressure on mortgage holders. Many have defaulted on their repayments and therefore need to sell. Often they are placed in a situation where they need to sell immediately.
This has prompted an increased interest in seeking out these types of properties to take advantage of the discounted value. However, there are risks involved and it can result in a poor property investment choice. The following analysis explores the pros and cons of investing in a distressed property.
What Is A Distressed Property
A distressed property is the term used when a property needs to be sold urgently. The seller is willing to accept a price that is lower than the market value in order to sell right away. For buyers, this may seem like a worthwhile investment and there are certainly many advantages. However, there are also potential issues which would need to be investigated to ensure that it is a profitable investment.
If a property needs to be sold immediately, then it is an important responsibility of the buyer to understand why it is being sold. If it is for reasons that affect the property directly, then the buyer should learn what the long term implications are since this may affect the value and the ability to sell in the future.
Why A Property May Be Considered “Distressed”
This type of property sale can occur due to a number of reasons, not only financial stress. It may be due to relationship failure and the property sale is part of the settlement. Divorce can be complicated and often it results in selling the property.
Damage to the property can render the property unserviceable and the owner is not in a position to immediately rebuild or renovate. Common examples of physical damage are natural disasters, fire, vandalism, flood or neglect.
In the case of a deceased estate, for the next of kin, the priority would be the sale and profitable aspect of the sale would be secondary. It is the course of action when selling is the only way to divide the assets among all the closest living relatives.
The owner may not be able to make the repayments on their mortgage and the property may be repossessed by the lender. This often happens when interest rates increase, the owner has a sudden unexpected expense or when the owner has been made redundant from their job.
Lower Property Price
Lower values make this an appealing investment opportunity for those looking to enter the real estate market. In fact there have been cases where the bank has repossessed the property, and they were subsequently sold for half of their value. Although, most of the time the discounted value would be just enough to attract buyers.
Although it is not always the case, there is the possibility that the sale will result in instant equity. This means there is a large different between the loan amount and the value of the property. Equity is required to buy another investment property and can be used as a deposit. This instant equity gained from the purchase can contribute to the buyer’s next property investment.
Due to the nature of the sale intent, a distressed property will almost always settle quickly. This is the main goal of the seller and the buyer benefits in terms of lessening the stress of negotiating and saving time on the entire process. Buying a property can typically take a few months. Speeding up this process is a significant advantage.
Issues With The Property
Distressed properties are often sold “as-is,” which means that the buyer assumes all responsibility for any repairs or issues with the property. This can be risky, as there may be hidden problems that only become apparent after the purchase.
Properties that are in poor condition can require significant repairs, which can be costly and time-consuming. Buyers may need to invest a significant amount of money in repairs and renovations before the property is liveable.
The property may be in a poor condition to the extent that they don’t meet the lender requirements, which can make it harder to obtain financing. It is advisable that to do your due diligence to ensure that the requirements of the lender are met.
Many borrowers are not aware that lenders check various aspects of the property including its condition in its decision whether to approve the buyer’s loan application.
Because distressed properties are often priced lower than comparable properties, there may be a lot of competition among buyers. This can lead to bidding wars and make it harder to secure the property. It’s not uncommon for multiple buyers to submit offers on a distressed property, which can result in bidding wars and ultimately drive up the price, effectively negating some of the advantages of buying a property of this status. To combat this, some engage a buyers agent to help with the negotiate the best price and secure the property purchase.
Although investing in a distressed property may seem solely advantageous, there are certainly some potential pitfalls that need to be addressed. The advantages are a discounted price, instant enquity and a quick settlement. The risks involve potential issues with the condition of the property, not meeting lender requirements and increased competition. Although property investment one of the most stable investments, it is not always guaranteed to be profitable. It is always important to do you due diligence and do the required research to ensure you have invested wisely.