The term Distressed Properties can refer to many different things. People normally think of a distressed property as one that has fallen into disrepair. This can be something as minor as needing some deferred maintenance such as paint and landscaping or it can be major such as water damage or foundation or roof problems.
Evaluating the condition of the property is only one of your concerns, however. You need to dig into the reason for the condition. Was the owner just unable to take care of the routine maintenance and let things fall into disrepair? How long has the condition existed? Has further damage been caused by the original lack of care?
Sometimes the condition is due to the homeowner simply abandoning the property or the property falling into bankruptcy. In these cases, often you find a situation where the home received NO care or attention for a period of time. You could be faced with minor situations such as overgrown and unkept foliage or you could be looking at major structural problems, mold, and a host of challenges from water damage due to frozen and broken water pipes.
These properties can present very good deals, but don’t go into them blindly. If you do not have a firm foundation in construction, reconstruction, costs, time considerations, etc., be sure you have some reliable contractors that will give you a truthful and complete diagnosis of the situation. There are times that you do not have the benefit of being able to see everything – things within walls could present major costs. Sometimes it is not possible to get utilities turned on in these homes before you purchase them. If in doubt about what all is involved, plan on the worst-case scenario.
Depending upon the condition of the property, you may have to pay cash for it. Financing a distressed property can be extremely challenging since no lender wants to get a property back – especially one that is not fit to be resold. You may try a local covnentional lender or a hard money lender.
Regardless of how you obtain the property, you need to be able to cover not only your purchase expenditure, but also cover the cost of fixing the property up to desired standards including any unknowns that you find along the way. The longer this takes, the longer your money is tied up.
Your exit strategy is extremely important here also. Even after you get the property in good condition, you need to find your renter or buyer. Don’t estimate the cost of time, especially if some of these funds are borrowed funds.
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