The Pros And Cons Of Buying Distressed Property
No doubt about it, real estate bargains abound these days – but there's more to cutting the best deal on a distressed home than meets the eye. With one-third of all home sales coming from the distressed property market, it's time to get smart about getting the best deals. (For more, check out The Pitfalls Of Buying A Foreclosure House.)
TUTORIAL: Buying A Home
According to the National Association of Realtors, "all cash sales," known in the industry as "distress" sales, comprised about 30% of all U.S. home sales in October, 2010. That's up slightly from the 29% number the NAR recorded in October, 2010.
On top of that, RealtyTrac reports there is no shortage of distressed homes to choose from these days. The real estate analytical firm says there are just under 1.4 million foreclosed homes in the U.S. through December 7, 2011. The average selling price for those homes came in at just over $180,000, RealtyTrac adds. The firm adds that one in every 579 U.S. housing units held a foreclosure filing during the quarter.
That scenario may not be getting better soon. "U.S. foreclosure activity has been mired down since October of last year, when the robo-signing controversy sparked a flurry of investigations into lender foreclosure procedures and paperwork," notes James Saccacio, chief executive officer of RealtyTrac, in a statement. "While foreclosure activity in September and the third quarter continued to register well below levels from a year ago, there is evidence that this temporary downward trend is about to change direction, with foreclosure activity slowly beginning to ramp back up." (To learn more, read Why You Should Wait To Buy A House.)
So, that could mean more buying opportunities for distressed properties. But that does mean you should take a bite out of the apple? Maybe and maybe not, as the following pros and cons illustrate.
- Low Prices
Prices are cheap, as the RealtyTrac data shows. Sellers, including homeowners about to be foreclosed upon, and banks and lenders who already own foreclosed homes, are anxious to get rid of the property. When you're dealing with a highly motivated seller, that usually means bargain basement prices.
- Low Interest Rates
Right now, the average 30-year fixed mortgage rate is around 4.0%. Historically, you're not going to get a better interest rate, and that low rate will keep the price of your monthly mortgage on that distressed property even lower.
- Buy Low, Sell High
There are no guarantees in the real estate business, but distressed properties, like any commodity, have some investment value. Economists say that home prices are starting to creep back up again, and after a few years, the value of your distressed piece of real estate is bound to rise in value.
- Onerous Paperwork
Buying a foreclosed or distressed property can take longer than a conventional property purchase. That's because many distressed properties are owned by the lenders, who are spread too thin to give the property your undivided attention (they may be looking for a better deal, too, or the property has a second mortgage attached with a different lender). So you'll need the patience of a saint to get your dream home via distress sale.
- Location, Location, Location
Unfortunately, most distressed properties are in low-income neighborhoods, and that can negatively impact the value of your home.
- High Maintenance
Some foreclosed properties may have been abandoned by the previous owner, or not kept up, maintenance-wise. When you dip your ties into the distressed property market, keep your eyes wide open. Always factor in the money you may have to plow into the property to make it livable.
The Bottom Line
If you have some extra cash, and have a handyman's penchant for fixing the odd broken sink or crumbling front walk, buying a distressed property can be a good investment. Just know what you're getting yourself into, and have some patience when you spot a great piece of real estate. If you play the game right, you'll have a good home – and a good investment – on your hands. (For more on real estate, check out Key Reasons To Invest In Real Estate.)