Buying a distressed property can be a good way to secure yourself a better deal, however, these types of properties are often going to come with a few strings attached that you need to be aware of.
Typically distressed properties are homes that are in some form of disrepair. However, the owner can also be distressed in other ways due to a relationship breakdown of their financial situation. Because the vendors are motivated, this can mean that asking prices and expectations are lower, however, just because something is cheap, doesn’t mean it’s a bargain.
Here, we'll explore three things you need to be aware of before diving headfirst into purchasing a distressed property.
One of the golden rules of investing in any form of real estate is to conduct a comprehensive research. This rule is even more crucial when it comes to distressed properties.
Distressed properties might have often been on the market for a while or might have had prior issues that have caused them to be distressed. In many cases they might actually need to be sold very quickly, leaving limited time to do your due diligence. It's vital to dig into the property's history, review past ownership history and also talk to the agent about why the property is being sold and gather all the information that you can.
It's equally important to check for any outstanding issues like building code violations or liens on the property for other costs such as unpaid council rates. A thorough home inspection by a certified inspector can also shed light on potential structural problems and give you an idea of what repair work might be needed.
Similarly what has gone in the property itself can also be problematic and it’s worth investigating. If the property was involved in criminal activity, then you might need to pay additional costs to get that repaired to the proper health standards.
Understanding the local area or suburb is equally important. Consider factors like the local job market, rental vacancy rates and general economic conditions. If the suburb has a high rental vacancy rate, it might indicate a struggling local economy, which can impact property values. It could also be one of the reasons the property itself became distressed. If you’re purchasing the property with the idea of flipping it, then it’s important to look at comparable sales in the area and see what they are selling for and how long they took to sell.
Don’t overlook other costs
Buying a distressed property often comes with the appeal of a significantly lower purchase price. However, don't let this blind you to the other costs involved. Even though the initial investment might be cheaper, distressed properties often require significant repairs or renovations.
Doing a detailed budget and getting quotes from the right trades, before making an offer is essential to ensuring you’re not taking on something that you can’t handle.
The other major factor to consider with a distressed property is that a bank might not be prepared to lend on it to the level you might expect. For example, if a property doesn’t have running water or a functional kitchen or bathroom, then they might not be prepared to lend to you. This is something to look into prior to making an offer and be sure to speak to a mortgage broker about it beforehand.
Settlement can take longer than usual
Another important aspect to understand when buying a distressed property is that the settlement process can take significantly longer than usual. This delay is often due to the property being tied up with legal or financial issues from the previous owner. For instance, if the property is being sold as part of a bankruptcy proceeding, the sale might need to be approved by the court, which can be a lengthy process.
Legal or financial issues can also increase the risk of the sale falling through. Therefore, it's vital to have a qualified solicitor or conveyancer review all documentation thoroughly. They can identify potential red flags and provide advice on how to navigate the complexities involved in buying a distressed property.
Not all distressed properties are mortgagee sales, so this again comes back to the fact that you should gather as much information as possible prior to making an offer and consult with the right experts to give you the best advice you can.