What Are Distressed Properties?

When you hear the term “distressed properties,” you might imagine a home or building in a state of complete disrepair. The phrase evokes an image of a property falling apart, but in reality, this term means something a bit different.

A distressed property refers to real estate property that’s almost in foreclosure or owned by the bank. So, distressed, in this case, refers to the financial situation, not the actual physical state of the property.

Distressed properties appeal to many potential real estate investors because they’re an excellent way to get a great deal on a property. However, there are some cons to purchasing one.

This guide from Hokanson Companies goes over important information on distressed properties, including what you need to know about the benefits and drawbacks.

Understanding Distressed Properties

Distressed properties allow potential buyers to get a discount. In the best-case scenario, the home is still in decent condition, although this isn’t always the case. Some commercial properties in foreclosure are in need of major renovations, but it really just depends. Generally speaking, there are two main reasons a commercial property might go up for distress sale.

Short sales: A short sale is conducted by the property owner to avoid foreclosure. If the owner feels they can’t get ahead on their payments and owe more than the property is worth. The buyer will sell the home for less than its worth, which results in a good deal for the buyer purchasing the distressed property.
REO Properties: REOs, or real estate-owned properties, are places that don’t sell when they go up for auction the first time. Buyers can often get a big discount as the lenders want to let go of the property and don’t want to be responsible for any necessary repairs.

What Is Foreclosure?

While mentioned briefly above, it’s still helpful to fully understand what foreclosure means. Foreclosure is when any mortgaged property, such as a home or business, is repossessed by the lender. A foreclosure occurs when the person responsible for the mortgage doesn’t keep up with payments. Most of the time, the lender is a bank.

While distressed properties are often residential, they can also be commercial. Commercial foreclosure functions similarly to residential home foreclosure.

What Are The Benefits And Risks Of Purchasing Distressed Properties?

The most apparent and primary benefit of buying a distressed property is the discounted price. However, there are some risks of purchasing distressed properties; these include:

You have to buy the property as-is: In most cases, you’ll purchase the distressed property at auction or in a short sale. This means you probably won’t get a chance to inspect the property, and you’ll have to take on any issues that it may come with.
You may encounter purchasing delays: Because you’re buying distressed property from the lender, they aren’t always in a hurry to complete the sale. This means the actual closing process can take months.
You may have to do significant repairs: If you want to rent out the property, it might need repairs to be occupiable. This can mean months or years of renovations, especially if you plan to do it yourself.

With these drawbacks in mind, let’s consider when buying a distressed priority makes sense.

Who Should Purchase Distressed Properties?

While distressed properties might not be the most logical choice for the business owner, they tend to make sense for many commercial real estate investors. Investors with experience flipping commercial properties can handle the risks of a distressed property, and it can be an excellent way to make a profit if you take the right approach.

How Do I Find Distressed Properties to Purchase?

If you’re interested in purchasing a distressed property, one excellent option is to reach out to Hokanson Companies for assistance. Call us today to learn more about our available commercial properties or to view our portfolio.