If you are looking to learn more about investing in foreclosures, bank owned properties and short sales, then you will need to understand the difference between investing in distressed real estate and investing in residential real estate. To really answer this question, we need to define exactly what a distressed property is and what makes it different than a regular fixer-upper.

To put it simply, your average fixer-upper is a property that could use some subtle and relatively inexpensive changes and improvements that will help an investor quickly increase the value of the property and meet their ROI. These improvements include minor things such as a quality paint job, upgrading the flooring, changing out windows or even removing a wall to create a better flow pattern in the house.

A distressed property, on the other hand, comes with its own set of unique issues that will likely hit your pocketbook quite fiercely. These properties could suffer from neglect and are in poor condition, or they could simply be at risk of foreclosure due to non-payment of mortgage and/or taxes. Distressed properties typically need significantly more work and money than your average fixer-upper. The issues needing repair and attention could be as the result of fire or water damage, foundation issues, or even from years of neglect and vacancy.

Another significant difference is that investors have to pay cash to purchase distressed properties (mortgages are not available). Distressed properties usually fetch a price that is much below its market value, but this fact is often enough to scare even experienced renovation investors away from a deal.

Here are 4 “Must-Know”s Before Taking on a Distressed Property

1. Low Market Price and Low Cost are Quite Different

One mistake that new investors make fairly often is to purchase the cheapest properties on the market in an effort to lower their overall costs. This may seem logical on the surface, but this investment strategy can go wrong pretty quickly. First, you can assume the property is discounted due to the condition and amount of work needed. A low price tag does not always mean the property isnít as valuable, it probably means that they come with risks that other properties do not.

A thorough budget analysis should be done with potential problems budgeted and accounted for if you are considering investing in a distressed property. Unfortunately, even the best laid plans can encounter surprises with these types of properties, so be sure to add a Miscellaneous entry in your budget to account for this.

2. The Only Thing to Expect is the Unexpected

Investing in distressed real estate can be a little unpredictable. Distressed properties can be great investments, but they need more than a fresh coat of paint, a few new shrubs and new flooring. Once you begin to overhaul your new property, you could run into issues with asbestos or septic system failure. You may need to redo the roof, rewire the entire electric, update old plumbing, rebuild the foundation, deal with infestations or even hire a team for mold removal. Major repair costs could be hidden due to age of the structure, how long it was neglected, and the exact problems that need to be addressed.

You may encounter other unforeseen complications with zoning and property lines, taxes and liens or even issues with existing neighbors. Hidden costs like the extra time, effort, energy and resources required on distressed properties as opposed to traditional investment properties can increase your hidden costs and makes what looks like a guaranteed money maker turn into a guaranteed money pit.

You will need to devote a lot of time and energy on the budget, timeline, contractors, deliveries, permits, to name a few. You will also need to make yourself available to make quick decisions on important issues and to ensure that everyone stays on budget and on schedule.

There will be issues! Be prepared to deal with them or donít bother with this type of property in the first place!

3.     Location! Location! Location!

Regardless of the price or the amount of work required, the location of your property is still an important factor in determining how quickly you will see a return on your investment.

Whether you are a buy and hold investor or a flipper, ultimately, the location of your property will determine the price you can charge renters or buyers. A cheap property in a bad area is still going to garner a low rent no matter how nice you make it look.

4. It Is a Flipper’s World

Highly distressed properties are typically reserved for “flippers” since they are looking at the short term and do not have to predict market fluctuations like “buy and hold” investors do. Flippers have a shorter window between buying and selling and generally know what they are going to get out of a property.  

Experienced flippers know how to handle the unexpected issues with distressed real estate and are better able to estimate their ROI. A buy and hold investor will likely need the property to hit a very particular value to be profitable.

Whether you want to learn more about investing in foreclosures, bank-owned properties and short sales, New Wealth Advisors Club can teach you how to be a successful Real Estate Investor. Click here to get started.