Buying a distressed property can save you a lot of money. Foreclosures and short sales are the most common types of distressed homes available. The term distressed makes them seem as if they are run down. They don’t have to be, though. In fact, they may be in great condition, giving you instant equity in the home.
How Does Instant Equity Work?
Usually, when a home sells as a foreclosure or short sale, you pay less than the home is worth. In these cases, the bank is just interested in making their money back that they lost on the loan. The bank will sell the home for around the amount owed. This may be significantly less than the value of the home. The difference between what you pay and the value of the home is your equity.
Some buyers turn around and sell the home right away. They make an instant profit on their investment because they can sell the home for more money. Others keep the home and do work to it. Their hope is that they will make even more on the sale of the home. Yet some buyers keep the property and rent it out.
What Type of Distressed Property Can You Buy?
Short sales are among the most common distressed properties. They are homes that the owner is upside down on the home. The owner wants to sell the home, but there isn’t enough value in the home to pay off the loan. Their lender agreed to accept the lower amount for the home. No seller can offer this agreement without getting lender approval first. In many cases, the home is in fine condition, it was just a casualty of a declining market.
Foreclosures are another common distressed property. In this case, the owner could not keep up with his mortgage payments. The home is no longer owned by the homeowner. The bank is the new owner. The bank now wants to get rid of the home. Oftentimes, these homes are in poor condition, but not always. Some homeowners take their frustration at losing their home out on it by causing damage or neglecting to take care of it.
Pre-foreclosure sales are less common, but still exist. Owners of these homes are 90-days past due on their mortgage. The bank has likely started foreclosure proceedings, but they have not gone completely through yet. Getting a good deal on this home is likely and there is usually less competition for the home since fewer people know about it.
Creating Equity in a Distressed Property
Even if you do not get instant equity in a distressed property purchase, it doesn’t mean you can’t make it. If you buy a home that needs extensive work, chances are the value will increase after your work is done. Before you start making changes, consult with a professional. Find out which renovations will give you the greatest return on your investment. Don’t make the mistake of assuming every renovation will give you a dollar for dollar return on your investment. Many changes don’t impact the value much at all.
Talk to an appraiser or real estate professional. Let them tell you what changes will help you earn the equity you want. Even though it might not be instant equity, you’ll receive it soon enough after the changes are made.
Buying a distressed property can result in quite a profit right away or shortly down the road. You’ll have to do your homework regarding the right properties to buy, though. Not every property will give you a great return on your investment. Research the home itself as well as the surrounding area so you know what to expect from the investment.