DISTRESSED PROPERTIES, IS IT REALLY A GOOD INVESTMENT?
Many would-be savvy investors have looked at distressed properties (more commonly known as a “foreclosure home”) as a lucrative investment. On the surface, it seems like a no-brainer; most distressed property sells for about 85% of the homes total value. Unfortunately, that 15% is offset by a myriad of hidden costs and factors. If you are prepared, you can mitigate these unforeseen hiccups and find the real diamonds in the rough.
At first blush, your distressed property may seem like a steal, but chances are you will need to invest significant capital in repairing the property; and frequently you will not know the extent of that investment until you have already purchased the property. The disclosures the bank provides are rarely as comprehensive as they would be in a traditional transaction, but this can be mitigated in many instances if you shell out some dough for a home inspection first. As a general rule of thumb, though it may be a bit cold-hearted, if someone can’t afford the mortgage on the place they presumably want to live in, they probably can’t afford basic maintenance either.
Another issue is that you probably aren’t the only “savvy” investor looking to pick up distressed homes on the cheap; thus, a bidding war is likely to ensue. As a matter of common sense, many builders look at distressed properties as a great purchase – they don’t need to deal with the cost of repairs, because they intend to tear the property down and build something newer and more expensive anyways. Additionally, most builders have more money to throw at the property because they intend to create something more valuable (if the property is selling for $800k, and the builder believes the new property could sell for $1.6M, they have an awful lot of wiggle room before it becomes a bad investment. Thus, it is important to know when to walk away; trust us, there will be more distressed properties.
Yet another issue that may turn a good investment into a bad one is the fact that you have virtually no leverage when it comes to negotiating with the bank. Generally, if you submit an offer the seller might counter and then negotiations start (what if we reduce commission, waive closing costs, include beneficial clauses for the seller, etc.,). The bank’s sole concern is recouping their costs on the underlying loan (which is clearly a loss, because they had to foreclose on the home – i.e., they didn’t get all their money back).
Finally, the real hidden cost; property taxes. Your property taxes are based on the value of your home (we hope you already knew that). After you have purchased the distressed property, made repairs, and possibly even made improvements, your new home will likely be more valuable (if it’s not, you’re doing a terrible job at making your house livable). As such, the property taxes will be higher than they were when you purchased the property.
At the Chernov Team we understand that knowledge is power. Since money is also power, knowledge about the nuances of purchasing distressed properties (presumably for the purpose of flipping) is powerful knowledge indeed. At the Chernov Team we know that whoever comes to the table most prepared leaves with the most, and the Chernov Team always leaves the table with the most.