Key Takeaways:
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- Distressed properties, neglected or abandoned due to financial struggles, provide investment opportunities for buyers to acquire, renovate, and profit from renting or selling.
- Categories such as Foreclosure, REO, Short Sales, Auctions, Bankruptcy Sales, Tax Lien Sales, Probate Sales, and Divorce Sales represent diverse scenarios leading to property distress.
- Investing in distressed properties offers benefits like lower purchase prices, potential equity gains from renovations, reduced competition (possibly), and negotiation flexibility, making them appealing to investors seeking substantial returns.
Everyone’s out looking for the next big real estate score—and one of the best ways for investors to get a great deal is to find distressed properties from a motivated seller.
Of course, you’re not the only one trying to score a good deal on real estate. Hundreds of other real estate investors typically flood distressed sellers with letters, emails, phone calls, texts, and even social media messages, all trying to scoop up properties at a discount. So, you’ll have to step up your game or find other ways to score the distressed properties to invest in.
What Is A Distressed Property?
A distressed property is a property that is not maintained or relinquished by the owner, often because they cannot repay the mortgage or taxes associated with the property. Distressed properties are either in the process of being foreclosed or already foreclosed because of bad debt. The definition also applies to properties owned by government agencies or banks or tax liens acquired because of non-payment of taxes.
While foreclosure or a short sale (when a property is sold for less than the outstanding) is far from a pleasant experience for the property owner, investors might be interested in distressed properties to rent or repair before selling at a profit.
Types Of Distressed Properties
For aspiring investors, here are some of the more common types of distressed properties:
| Type of Distressed Property | Description |
| Foreclosure | A legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan. |
| Real Estate Owned (REO) | Properties that have gone through the foreclosure process and are now owned by the lender, typically a bank. These properties are often considered distressed because the bank aims to sell them quickly to recover the unpaid loan amount. |
| Short Sale | A sale of real estate in which the net proceeds from selling the property will fall short of the debts secured by liens against the property. The property owner cannot afford to repay the full amount, and the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. |
| Auction | Properties that are sold in public auctions due to various reasons, including foreclosure, tax liens, or bankruptcy. Auction properties can be distressed due to the urgent nature of the sale and the potential for below-market-value prices. |
| Bankruptcy Sales | Properties being sold as part of a bankruptcy proceeding. To pay off creditors, owners who declare bankruptcy may need to liquidate assets, including real estate. |
| Tax Lien Sales | Properties that have tax liens placed against them for unpaid property taxes. Local governments may sell these liens to investors who can foreclose on the property if unpaid taxes remain. |
| Probate Sales | Real estate that is sold to settle the estate of a deceased person. These properties can be considered distressed because the heirs may be motivated to sell quickly to distribute the estate’s assets. |
Why Buy Distressed Property?
Calling distressed real estate “a bit of a fixer-upper” is often a gross understatement, as these residential or commercial properties will take time and resources to get into shape. However, savvy investors know looking into distressed property deals can result in significant profits. But the benefits don’t end at the bottom line.
Here are other advantages of finding distressed properties for sale:
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- Lower purchase price
- Potentially less competition from buyers
- Opportunities for creative financing
- Potential for quick equity gain through repairs and renovations
- Availability in a variety of locations
- Possibility to acquire larger properties for a given budget
- Flexibility in negotiation based on what the owners of distressed properties need
- Use for mortgage and collateral
Cons of Buying Distressed Properties
Finding distressed property and turning it into profitable real estate will not always be easy and can come with its own unique set of headaches, including:
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- High Renovation Costs
- Uncertain Property Condition
- Legal and Title Issues
- Financing Challenges
- Market Volatility
- Limited Financing Options
- Time-Consuming Acquisition Process
- Negative Community Impact
- Hidden Liabilities
- Emotional and Ethical Considerations
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10 Ways to Find Distressed Properties
If you are considering buying distressed properties, there are several methods to help improve your chances of finding one as an investor. These tips also help potential homebuyers get a good deal for a lower price.
1. Look for Physical Distress
There’s hardly any better indicator than physical issues that a piece of real estate has become distressed. Indeed, many distressed properties are not maintained and are often neglected. Peeling paint, broken or unattended elements, and unkempt lawns are some common signs.
“You need to carefully evaluate the condition of the property you are purchasing to make sure you put together an accurate budget of repairs required for the property,” said Bill Samuel, the owner of real estate development company Blue Ladder Development from the Chicago area that specializes in refurbishing distressed properties “Most distressed properties have some maintenance that has been neglected and will require you to invest some money into fixing the property.”
Knowing How To Find Distressed Properties
The best way to look for distressed properties for sale is to keep an eye out. Signs of a distressed property include:
| Aspect | Signs of Distress |
| Physical Condition | Neglected maintenance (paint, repairs, etc) |
| Visible damages like broken windows or doors | |
| Overgrown landscaping | |
| Unsecured entrances | |
| Signs of vandalism |
2. Online Resources
There are several online resources for finding distressed properties. In fact, this is how most investors find and buy foreclosures. Some of the best places to find distressed properties online include:
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- Foreclosure.com
- Propstream
- Ownerly
- HUDForeclosed.com
- Auction.com
- Realtytrac.com
- HomeSteps.com
You can also try online auctions of properties through investing websites such as Loopnet.com or find spot properties specifically among regular listings on platforms such as Ownerly and others.
Foreclosure Rates Per State In December 2023
Buyers looking into potentially distressed properties might have a good chance if they look at the places where foreclosures are happening more. Here’s a quick list of the top 5:
| Rank | State | Foreclosure Rate | Total Housing Units | Foreclosures Filed | Most Foreclosures Per Housing Unit (Counties) |
| 5 | Delaware | 1 in every 2,967 | 445,104 | 150 | Kent, New Castle, Sussex |
| 4 | Ohio | 1 in every 2,819 | 5,232,733 | 1,856 | Knox, Muskingum, Cuyahoga, Guernsey, Fayette |
| 3 | New Jersey | 1 in every 2,775 | 3,738,342 | 1,347 | Cumberland, Gloucester, Warren, Sussex, Atlantic |
| 2 | Connecticut | 1 in every 2,660 | 1,527,039 | 574 | New Haven, Litchfield, Hartford, Fairfield, Windham |
| 1 | Maryland | 1 in every 2,570 | 2,516,341 | 979 | (Counties not fully listed, includes an independent city) |
3. REO or Bank-Owned Properties
When a borrower is unable to repay the loan, the ownership of the property falls back to the money lender or the bank. In these scenarios, banks often put up such properties for sale to reduce the liabilities on their balance sheets. Information about real-estate-owned (REO) properties can be found at banks and financier-owned websites such as Bank of America or Wells Fargo.
4. Seized or Underutilized Government Properties
You can find government properties seized by government agencies or available for sale on account of being unused. Now, to find underutilized properties, you may use dedicated portals, including the ones by the US Department of Agriculture, the US General Services Administration, or mortgage lenders such as VRM.
5. Delinquent Tax Records
Identifying property owners with high tax liabilities can be a good way to find distressed properties. Delinquent tax disclosures are part of the public record where you can find properties with pending tax liabilities (which may or may not be property-related) using state or county-specific online directories—such as this one by the state of Wisconsin—or search the entire country’s data in one single place using aggregator platforms such as Netronline.
6. Court Records
Some court records are available in the public domain and can provide information on properties due for foreclosure. This information can be sourced through default or foreclosure notices served to delinquent homeowners that can be found online or at your local courthouses.
7. Reaching Out Personally
Aside from looking at physical signs, you can contact people to know if a property is distressed. While online listings and auctions can help you find an investment-worthy distressed property, keeping in touch with local real estate agents who can share potential options for distressed properties is one of the best ways to find great deals. This takes the pressure off of you, especially if you don’t want to undertake the cumbersome job of finding and evaluating a distressed property.
Other Potential Sources
Other than real estate agents, contacting attorneys dealing with foreclosures and settlements within a divorce or family might be a great alternative way to find distressed properties. Lawyers who deal with probate cases—when a person with debt or assets dies—can often guide you to finding distressed properties, especially when the owner does not want to invest time and money into mending a distressed property. Even if you find a probate property for sale through your contacts, you will need a lawyer for the proceedings.
Certain websites, such as Successorsdata.com and USprobateleads.com, specialize in guiding you through investing in probate properties.
Contacting distressed property owners directly is an option, but it’s a tricky process that requires a delicate approach. Some might be open to discussion, especially if they sell their properties actively. However, some owners might not be as welcoming, which could ruin your chances of a good deal.
Furthermore, there are some ethical implications here, so weighing every situation before jumping the gun is best.
8. Surf Around the Block
Walking or driving around your target neighborhood scouring for properties in your area can be a time-consuming but effective method to spot available distressed properties. This good old-fashioned method, known as “driving for dollars,” is what full-time real estate investors often do when looking for properties they can flip or help sell at a commission.
You can often reach out to the owner of a property when you see “For sale” signs on or around it. If you’re lucky, you will run into an owner eager to sell their house to avoid foreclosure. One of the biggest motivators in cases like these is the desire to avoid being barred from getting loans and mortgages for several years when a property is foreclosed.
9. Search for City Code Violations
Public records around city code violations can be the goose that lays the golden egg. While reviewing city violation records for each country and district individually can be challenging, the result can be rewarding if you are persistent enough.
Distressed properties can be easily identified through repeated violations, indicating that the homeowner may not pay adequate attention to the property.
10. Contact Out-of-State Owners
Maintaining a property remotely can be extremely challenging for anyone who has moved out of a particular city or state. As a result, the property may deteriorate, even without an impending foreclosure. If you are a real estate agent, you might get a good deal by facilitating the sale of a property whose owners do not live nearby and cannot regularly visit for inspections and periodic maintenance.
How to Close on a Distressed Property
When you find a distressed property that interests you enough to invest in, keep a few things in mind to ensure you make money instead of losing it. First, you must ensure you act promptly, especially if you need to apply for a mortgage for payment. Distressed properties may involve roadblocks from a legal or city code’s purview.
Secondly, getting an inspection before committing to distressed property is imperative. Besides apparent signs of the property being neglected and abandoned, more concerning issues might cost you much more than you had previously anticipated.
“Always get a property inspection done before purchase,” said Rick Wallace, founder and CEO of LLC Dojo, which specializes in incorporating limited liability companies (LLCs). “Don’t go too downmarket as these properties are difficult to manage. Avoid properties with Section 8 tenancies, and always invest via an LLC. This corporate structure protects your assets if you are sued for any reason relating to the investment property.
Additional Tips
It is also recommended that you make a straight-up offer for a full upfront payment if you can afford to. This will give you higher leverage if others want to buy a specific property. You might move higher in the seller’s priority list and cut a better deal because you cut out their waiting period.
“A final suggestion is to not get too greedy in terms of rate of return,” said Wallace. “ [I]f it looks too good to be true on projected figures, it probably is, and real returns will be eroded by maintenance, vacancy and damages.”
Making this calculation as accurate as possible is key. “You will also need to make sure that you know how much the property will be worth after you complete the repairs (ARV = After Repair Value) so that you can determine if the property is listed for a good price or not,” said Samuel.
Sale of Regular vs. Foreclosed Properties
In case of a foreclosure, properties are often sold through banks in an auction, and there is always a chance of being outbid or bidding to pay more than you wanted. It can be difficult to strike a good deal without an expert who works with distressed properties.
Consider Buying Distressed Real Estate For Investor Growth
Distressed properties can offer plenty of returns if you make the right decision at the right time. But it is equally important to note when and at what value to buy a distressed home. There are several ways to spot the right deal, but you must act swiftly yet cautiously.
Always have a legal and financial aide by your side, and use various tools to determine the correct value for any distressed property you want to buy. Lastly, be prepared to deal with unforeseen circumstances or late resale if you want the correct value from selling a distressed property.♦
How have you bought distressed properties in the past?
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I’ve searched for distressed homes in many ways but got a few fresh ideas here. Thanks.
Glad to hear it was helpful Alexander!
Two years ago, before the pandemic hit PA, I used to drive for dollars in the neighborhood and adjacent towns. I managed to bring back my negative cashflows back to life by doing online side hustles. Thanks to my partner who knows a lot about doing our business online.
Glad to hear it Garrick!
Thank you for this topic. Am I right that it’s almost impossible to get a mortgage from bank to buy such kind of property? In my experience it was not easy even with the normal house.
It is harder to get conventional loans for fixer-uppers. But portfolio lenders and hard money lenders do this all day every day, it’s not hard to get loans from them for distressed properties.
Untapping all the potential of distressed homes should be the top priority for all real estate investors
Definitely one of the most valuable skills investors can master!
Great resources!
Glad you found them helpful Jerry!
Always do your due diligence on buying distress properties. You’ll never know how massive the repair cost will be.
Amen Eric!