How to Buy Distressed Property

Home for Sale

I have spent decades perfecting the purchase of distressed properties as both an Investor and a Real Estate Broker. Part of my Scottish nature is to be “Frugal” (not the term my friends use…LOL) and that shows when I am buying a property, either commercial or residential, for myself or a Client.

My Father always said:

You make your money when you buy and not when you sell

I have found that to be true.

Real Estate Pitfalls

As I work with my clients I always try and educate them on the possible pit falls of buying an REO: a Real Estate Owned Property.

Yes, the prices can be attractive and lenders are anxious to unload them as quickly as possible. But are they always a good deal?

REOs have one thing going for them: The Titles Are Clear.

Lenders go to great lengths to make sure the property has a lien free title.

Vacant Properties

Most REOs are properties that have been shut down and unoccupied for a considerable period of time.

Here in Florida this means the utilities have been turned off. The vacant house is open to: Black Mold, Insects, Vermin and more.

There can be problems in in places you cannot see such as: Walls, Ceilings, AC Duct Work, Plumbing Pipes and Water heaters (corrosion, rust, calcium buildup).

It also means that the mechanicals have not been run for quite awhile. This can be a major issue once the power is turned on.

Check the Attic

Always go into the attic if possible.

It is easy to repair a ceiling or wall with paint that has had damage in the past but it is harder to hide the stains on the wood in the attic. This is also good way to see if there is any insulation and if so what kind. Many inspections are only done based on what is obvious to the eye from the obvious perspective of what shows on the interior.

Attics allows you to see what might be a hidden problem from leaks to bad wiring and critters.

Take Photos

Take photos of every thing that looks the least little bit wrong.

It helps you understand what maybe required in future repairs and we use those photos with our offers to try and get the best price from the Seller. Most Sellers of REO properties have never seen the property, and are unaware of what the condition is.

Only a few Real Estate Brokers are also Licensed Contractors like me, and qualified to understand what could be a real issue in the future.

Fuse Boxes

One of the most common misses is with the Fuse Box. Most of the older homes have been underpowered for today’s electronic uses. Upgrading to a reasonable 200 to 400 amp box can be expensive and may be required. Just like making sure the roof has a minimum of 10 years life left in it.

Financing

Your buyers will need financing. Banks and insurers want a minimum to approve a sale and most buyers are not prepared to invest that money.

You can use that as a sales plus and add the cost into the price.

Be prepared to know what the “Finished” house can sell for in that market and neighborhood.

We always judge property by the “Square Foot” sale, not the total price. That allows us to understand how much we can afford to put into the property and still expect to sell it.

When we make an offer to a Lender who owns the property we insist that the Selling Agent supply our offer with all attachments. A few who want to be both Buyers and Sellers agents will refuse to help you buy the property. However, most lenders will provide your contract and package to the Seller.

Checklist for Home Sellers

  1. Provide good color photos of the damage.
    • Show why the property needs to be sold quickly.
  2. Provide proof of funds or a pre-approval letter from a lender
    • Show that you are able to back up your offer quickly, and not have to await an approval
  3. Do not try to Low Ball the price too much.
    • Be reasonable or they will just ignore your offer.
    • Explain how you came to that number. (i.e The market is $XX per foot in very good condition, We need to invest $XX to bring it up to standards. It requires the following to meet 2010 Building Codes XXXXX.)
  4. Offer it on an “AS IS” contract form.
    • Make your case and they will listen. Increase your chances of having your bid accepted.
Remember: It usually costs more to fix property than you budget.

Please contact me for more information.

Ronald McDonald, Licensed Realtor, Certified General Contractor, ASPE, EPA Certified.