Distressed properties offer an excellent opportunity for real estate investors. They provide us with a chance to boost our profit margin by acquiring a fix-n-flip property — at a very low price.
When you find distressed properties for sale, the owner is often unable to perform routine maintenance and/or unable to make the mortgage payments. Sometimes they’re already months (or years) late and are just looking for a way out.
In this article, I’ll show you how to find distressed properties for sale in your area, as well as what to look for in potential sellers — scooping up properties before they even reach the market.
What Qualifies As A Distressed Property?
Properties fall into one of two distressed categories — either financial distress, or physical distress. With the later, the owner is simply unable to maintain the property. It could be the owner’s age, their geographical location, available time & money — whatever the reason, the property is declining and isn’t marketable as it is.
For financially distressed properties, also called pre-foreclosure, the owner isn’t able to make the payments any longer and the lender is breathing down their neck. They aren’t yet in foreclosure — they’re just in danger of it.
Locating a distressed property is like finding a golden goose-egg — the profit margins are wider, the acquisition costs are lower, and the motivation to sell is higher. For the fix-n-flip contractor or weekend warrior, distressed properties offer a very competitive entry into the market — but finding them can be a challenge. Let’s look at some of the more traditional methods of finding distressed properties for sale.
Tax records are publicly available and if you can locate a property with delinquent taxes, you may have found a motivated owner. If they aren’t able to pay their taxes, they could also have trouble making the mortgage payments.
If the owner is in financial straits, overdue taxes alone could be enough to talk them into a quick sale.
Delinquent Mortgage Payments
This is the next phase after failure to pay property taxes. Once an owner has hit this financial plateau, it’s only a matter of time.
If they’re only 1 or 2 payments behind, they could recover — everyone experiences temporary setbacks. But once they’re 3-4 payments behind, there’s a really good chance they’re headed towards foreclosure.
Just like taxes, delinquent mortgages are public record, so a quick trip down to the courthouse will get you a list of prospects to contact.
Hit The Road Jack!
Even though a homeowner is keeping up on their financial obligations, they may still want out from under their mortgage. The only way to find these properties — is to actually hit the pavement and go looking for them!
Designate a target area and print out a map. Drive down each street and look for properties:
- Faded or peeling paint
- Broken siding
- Non-functioning lights (take your drive at dusk)
- Overgrown weeds and neglected landscaping
- Mail piled up in the mailbox
- Broken exterior features like windows, screens and shingles
Be forewarned though that just because you find an ideal candidate, that doesn’t mean the owner wants to sell. They might just be lazy or have more important things to deal with and just aren’t concerned with the condition of the property.
Once you find a potential candidate, write down the address and put them into your real estate marketing funnel — you can drop them a post card or have a standard template letter that expresses your interest in the property. If you don’t get a response, follow-up a week later by dropping in to say “Hi” and see if they got your letter.
Working With Out-Of-State Property Owners
In my experience, several situations can lead to out-of-state property ownership — a sudden change in career demanding relocation, a death in the family resulting in change of ownership (probate), an investment gone wrong.
When a property is owned by someone out of state, it often gets neglected simply because it’s ‘out of sight, out of mind’.
You can probably track down the owner at the courthouse — for this to work, you’ll need an effective direct mail campaign that’s designed to introduce the owner to the idea of selling.
Don’t Forget The MLS
The MLS system might seem obvious but it’s often overlooked by investors. For one, you need a real estate license to access it (or know someone who does).
The reason the MLS is an effective tool for finding distressed properties for sale is because of the time information that’s available. If a property has hit the 90-day mark, there’s a good chance the seller is desperate — they aren’t getting offers.
This has to do with the cycle that responsible owners go through — they know they’re in danger of foreclosure and they’re trying to get out of it by placing the property on the market. The problem is, due to neglect, the property isn’t really marketable — but they aren’t willing or able to dump time and money into rectifying that situation.
Distressed properties offer a unique opportunity for fix-n-flips. You can acquire the property for a small fraction of what it’s ARV will be — which can mean huge profit margins.
These strategies require legwork — but that’s time well spent once you find a viable candidate and cinch the deal.