Updated: Sep 16, 2021
What do you expect when you purchase a distressed property? Do you expect to spend more, or are you looking more at the possibility of spending less?
When you purchase distressed properties, expenses are highly dependent on the property itself --- the condition, structural damage, closing process, etc. You can expect to spend less as distressed properties are known to be cheaper in value. However, the risk of spending more is inevitably high especially, if the property is not in good shape; it went through severe fire damage, water damage, etc. Chances are, instead of spending a reasonable amount of investment, you end up losing more.
There are two most common problems encountered as you invest in distressed properties: Property Condition and Purchase Problems. Let's talk about each point in detail.
Two Main Issues When Purchasing Distressed Properties
Condition of the Property
Well, obviously, given that foreclosed properties are mostly abandoned by owners because they can't afford their mortgage payments anymore, these houses are maintained poorly. Additionally, if these properties sit unoccupied for some time, outright vandalism and criminal activities are likely to happen.
However, apart from the damages caused by the above-mentioned factors, natural damages due to fire, water, etc., are inevitable. Let's talk about some of the common issues relevant to property conditions.
Personally, in my experience as a developer, working with a distressed property with fire damage is laborious. We have to take out every piece of the drywall. We have to take the studs out. Such experience will basically get you an additional workload as you have to take everything out. Don't miss the amount of damage the fire caused. It will definitely add up on your renovation costs especially if you realized that the property, indeed experienced total fire damage.
Stagnant water from leaks to excessive flooding can cause molds, water stains, etc. Since the property has been unoccupied for months or so, electricity is off. Thus, pumps in the basement are not working. Likewise, a steady drip for quite some time will cause damages on the appliances, HVAC problems, wiring issues, or worst, flood. You have to go through all possible crawl spaces from the basement to roofing.
Electrical and Natural Gas Problems
These issues, despite being uncommon among other issues could result in serious property damage. Broken wirings and gas leaks can be relatively minor. However, if left unsolved, damage repair can get expensive.
A house, if left abandoned for months or longer could result from minimal to major structural issues. These damages are highly noticeable given that the property isn't been properly maintained for quite some time. These damages include but are not limited to uneven floors, wall cracks, exterior/interior bricks damage, gaps on ceilings, etc. Worst-case scenarios would be walls pulling away from the house and/or bowed walls. Foundation problems like these could cost too much so, get your finances ready.
Apart from the physical property damage, you can never do away with issues during the purchase process. The reality of it is that there are some distressed properties with documentation issues. It can either be: lost paperwork or, they can't find the seller/owner, thus, resulting in closing delays.
As some of the distressed properties are left abandoned due to financial issues of the homeowners, some of the paperwork will be missing. For example, there are no seller disclosures. Since the property has been unoccupied for a long time, the banks do not have enough information on the existing property issues. No written reports on physical damage or records of property issues were filed. Additionally, there is no clear title. Therefore, such issues on documentation could slow down the closing process.
Here's the reality with real estate, money is what makes the world go round, and if you do not have a single penny in your pocket, you can't get yourself a property. Yes, you have an option to purchase one. You can either go for a mortgage loan or use your hard-earned money. You can have all the paperwork ready. You already have a clear title. But you fail on having the ability to pay for all the expenses. This, therefore, explains everything.
The bottom line is, getting physically and financially ready when investing in distressed properties matters. You can't just pick a property from a pool of listings; you have to dig deeper. You don't just consider the selling price. You have to look into how much renovation will cost you. Remember, you are buying the property because you want to save and perhaps, earn a living (as an investor); therefore, do your research, ask the experts (if you are a first-timer), and join some real estate investment group and training.
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