Basics About Finding and Purchasing Distressed Properties

The real estate industry can prove to be a gold mine. It is fraught with opportunities for the discerning and quick to act. There are basically four types of distressed properties. Each has its pros and cons that every aspiring real estate entrepreneur should know:

–          Foreclosure auctions. When the bank or lender forecloses on a piece of real estate because of the borrower’s failure to pay, the lenders can hold a public auction to recover the amount they lent. The lender will also join in the bidding, bidding either at the loan amount or lower (but will attempt to secure a deficiency judgment against the individual who guaranteed the loan, making him personally responsible for paying the balance of the loan amount that is not covered by the sale).

• Pros: With auctions, potential investors have the opportunity to bid below the market price and generate a profit when they sell the property at or above market price.
• Cons: Foreclosure auctions are not for beginners. Investors should be ready to pay after winning the auction. Also, interested buyers do not usually get the access to inspect the property.

–          Short sale. Also called a pre-foreclosure, this is the lender’s way of giving the borrower a way out when the amount of their mortgage loan is bigger than the current worth of the house. This is for situations when the real estate property values of an area have plummeted considerably and the owners are seriously considering selling the property to avoid foreclosure.

• Pros: The selling price in a short sale is generally less than or equal to the amount due on the loan. It may even be just equal to what the lender stands to lose if the property forecloses. Short sales allow potential investors to inspect the property. In general, the condition of properties involved in a short sale is better than with bank-owned property. In most cases, the owner is still living in the home. Since it will be in his best interest to get as much for the property, the property will less likely be vandalized.
• Cons: Short sales may take longer to complete, since the mortgage lender has to give their approval of the short sale. The lenders may not act as quickly as an investor would like, since the lender will still need to weigh whether they will be able to get more with a foreclosure auction than a short sale. To prevent longer waiting times, check to see whether the short sale already has the approval of the lender.

–          Real-estate owned properties. If the lender itself has won the highest bid in the auction, it becomes the owner of the property. Depending on the bank, the buyer may be allowed a short inspection period and to view the exterior of the property. It is up to the buyer to determine whether the property is worth investing in, given the probable cost of repairing the property.

• Pros: With REOs, the property’s title is usually owned by the bank, free and clear. It should not be difficult to close the sale within a normal escrow period or transfer the title to the buyer. Also, the lender covers the outstanding liens, taxes and agent’s commissions. The property will usually be vacant, so there is no issue about evicting current occupants.
• Cons: With REO purchases, the buyer is expected to pay upfront. Even when inspections are allowed, the property may have been foreclosed for quite a while and will tend to be in disrepair. As such, the property is sold on an as-is basis.

–          Note purchases. This involves the purchase of the promissory note and not of the property. When a borrower defaults on his mortgage payments, he may be asked to provide a promissory note. This is a legal document that sets the terms for the repayment of the money loaned. This includes how much the borrower will pay, the due dates and amortization schedule and the interest rate applied.

• Pros:  This allows an investor in invest in real estate without the complications of having the property fixed or finding a tenant or buyer. Purchasing notes provide higher yields than banks but with less risk compared to the stock market.
• Cons: The purchase involves a lien, rather than the right to posses the piece of real estate. There still is the possibility that the mortgage borrower will default on the payment. The note buyer then will need to foreclose on the property.

Investing in real estate requires plenty of research work and due diligence, as well as the readiness to come up with the cash. This is where hard money loans can help. Also called bridge loans, a borrower with an approved application can get access to funds he can use to invest in real estate.

Better Than Loans offers fast loan funding for foreclosure auctions and other types of purchases of distressed property.