Many first-time home buyers will opt straight for typical listings from a property manager or real estate agent, but few of them have heard (or understand) the concept of distressed properties. These are properties that are sold below market value for one or more of several possible reasons including repossession by the lender, or foreclosure. These properties are typically snapped up by real estate investors and house flippers who see opportunity, and they can be a wise investment opportunity, especially in our current climate.
Before buying however, prospective investors should be aware of the benefits and drawbacks of a distressed property. Armed with the right knowledge, a property with a notorious past can pave the way for a bright financial future. Here’s some things to consider.
TYPES OF DISTRESSED PROPERTY
Distressed properties are typically broken up into three distinct variations. The first is bank or real estate-owned properties which go through a sale or auction process, yet fail to sell. The owners of these properties typically wish to cut losses instead of investing necessary funds for maintenance and repairs; in which case they sell them off for a dramatic discount.
The second type of distressed property are short sales. Typically these are properties which are sold for a value less than the owner’s leftover mortgage costs. In this instance, the sale value goes towards the lender who will either cut losses on the difference and part ways with the buyer, or receive a deficiency judgment, which is a court order to pay back some or all of the outstanding funds depending on the ruling.
The third and final distressed property type is the foreclosure, which is the most recognizable. Homeowners who fail to pay mortgage payments on time will have their property reclaimed by the lender and sold via auction, foreclosure sale or other means.
THE BENEFITS OF A DISTRESSED PROPERTY
It’s important to recognize the inherent benefits that come from buying a distressed property. First and foremost is the reduced cost of buying a home, which is normally associated with a traditional sale. If the property is up to par and requires a particular degree of maintenance, the investor can save themselves an immense amount of money which could be worked back into renovation and repairs. This is especially handy for investors who want to modernize a home for the purposes of rental or flipping.
Those who are handy with tools and understand how to retrofit and repair a house could save themselves tens of thousands of dollars in contractor costs. All that’s required are materials and a bit of time on the part of the investor. This is great for those who are passionate about home renovation and consider it an opportunity to maximize profits while keeping costs down.
THE RISKS
Any venture is wrought with particular risks, and distressed properties carry a few. First and foremost is the amount of repairs required to get a house in working order. It’s fine to purchase a distressed property which requires a medium-sized commitment, but care should be taken to inspect and appraise a home to see exactly what’s required. Without proper care and research, the investor could be left with a proverbial money pit that ends up incurring far greater costs than buying a solid home on the traditional market. A leaky roof is one thing, but when coupled with broken weeping tiles, shoddy wiring and mold from water damage, the repair costs could become a nightmare.
Further, there are significant hurdles to buying a distressed property that include everything from settling the previous owner’s outstanding property taxes, to sheer wait time which can take up to a year in certain cases. It’s also wise to do some research on distressed properties to know exactly how the pricing game is played, lest the investor end up paying over the median market value. Once again, repair cost estimates should be tacked on to come up with a close dollar approximation so that an informed decision can be made.
So far, the Covid-19 pandemic hasn’t hit the GTA housing market as heavily as it has the condo market, and house sales are predicted to increase by 8% as we move forward. This is good news for investors. Nevertheless, some people have been hit hard by the pandemic (usually in the pocketbook), and this has translated into people not being able to pay their mortgages. Distressed properties could be a clever investment, provided you, the buyer are financially sound enough to jump in. It’s wild territory, but fruitful if the right decisions are made.
For more information on the GTA real estate market, and how Royal York Property Management can help you, please get in touch with us today!