Will buying distressed property work for you?

You’ve seen the shows on TV — buy distressed property for a song, fix it up, sell it, and make a fortune. But what you see on “reality” TV isn’t likely to be nearly as quick or easy in real life.

In real estate transactions, “distressed” is the term used to describe any property whose owner is in default on the mortgage payments. Distressed properties include homes in “foreclosure” and those available for “short sale.”

Foreclosure

Foreclosure is a lengthy process in which a homeowner’s rights to a property are forfeited due to his or her failure to pay the mortgage. If the owner cannot pay off outstanding debt or sell the property for an amount agreed upon by the mortgage holder, the property then goes to a foreclosure auction. If the property does not sell at auction, it becomes the property of the lending institution.

bank owned property

Foreclosure guidelines vary from state to state, but the process begins when a borrower fails to make mortgage payments for several months. To officially indicate the borrower has defaulted on his or her contractual obligation, the lender must record a Notice of Default with the county recorder’s office. Once the Notice of Default is recorded, the borrower enters a grace period, which lasts anywhere from 30 to 120 days. During the grace period, the owner in default has the option to pay the outstanding debt and continue ownership or work out some other arrangement with the lender, such as a short sale. If the default is not remedied, a foreclosure auction (sometimes called a Trustee Sale) occurs. If the home does not sell at the auction, the home becomes the property of the lender.

Short sale

short sale calculator

Short sale refers to the process of selling a home for less than what the current owner owes the mortgage company and other creditors who have a lien on the home. In other words, the sale will be for an amount “short” of what is actually owed. For this type of real estate deal to close, everyone who is owed money must agree to take less than they are owed. Because multiple people and institutions are involved, a short sale is a complex transaction that moves much more slowly than other real estate transactions and often falls through.

Although they are difficult, a short sale can be a good deal for a buyer. A short sale can also help the seller avoid having a foreclosure on his or her credit report. Although both a short sale and a foreclosure negatively affect a seller’s credit score, damage can be minimized if the homeowner can persuade the lender to report the debt to credit bureaus as “paid in full.”

Is buying distressed property for you?

Distressed homes are often sold for a significantly lower price than properties in good standing, which can make them a good deal. But be prepared for a few issues.

  • Distressed homes are sold “as-is” and may need extensive repairs, either because the owner has not been able to afford necessary maintenance or because they have stripped the property of valuables, such as appliances, light fixtures, and in some cases, even moldings and flooring.
  • Buying a distressed property is often further complicated because you will be competing with large investment groups who can pay cash for the properties. A cash sale is a quicker and easier transaction than a financed deal, so cash sales are typically accepted over those requiring financing.
  • To further complicate foreclosure and short sale transactions, if a house is too damaged, many lending institutions may refuse to finance the purchase.

Because distressed properties have a lot of unique issues, not all real estate agents are able to help with these transactions. Even if you find an experienced agent who can help you, there is no guarantee that the transaction will close.

“One short sale I worked on took over a year to close,” says Scott Kline, a real estate agent with more than 30 years of experience. “Another short sale fell through after 10 months of delays. Be prepared to spend a lot of time and energy knowing that you may end up with nothing to show for it.”
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