6 Types of Distressed Properties for a Successful Fix and Flip
Investing in distressed properties offers real estate investors a prime opportunity to generate substantial profits, especially in fix and flip. However, not all distressed properties are created equal. Choosing the right kind of property is crucial to a successful fix and flip project.
In this article, let’s take a look at the types of distressed properties that offer the best potential for returns when working with hard money loans.
1. Foreclosures
Foreclosed properties are among the most common distressed assets. These homes are typically repossessed by the bank when the previous owners default on their mortgage. Since lenders are not in the business of holding onto real estate, they are often willing to sell at a discount, creating an opportunity for investors to purchase below market value.
Why they’re great for flips:
Discounted pricing: These homes are often listed below market value to encourage quick sales.
Motivated sellers: Lenders are usually eager to offload foreclosed properties quickly, which can lead to favorable negotiations.
What to watch for: While many foreclosures are ripe for flipping, some may require extensive repairs, so conducting thorough inspections is essential.
2. Short Sales
Short sales occur when a homeowner sells their property for less than what they owe on the mortgage, often in an effort to avoid foreclosure. While these properties can take time to close due to lender involvement, they often come at a discounted price.
Why they’re great for flips:
Negotiable pricing: Sellers are often motivated to negotiate to avoid the foreclosure process.
Moderate repair needs: Short sales may require fewer extensive repairs compared to foreclosures, depending on how well the property was maintained.
What to watch for: The short sale approval process can be time-consuming, and not all deals close as expected. Investors need patience and due diligence when pursuing these properties.
3. Real Estate Owned (REO) Properties
REO properties are homes that didn’t sell at auction after foreclosure and have reverted to the lender or bank. These properties are typically vacant, and banks often want to offload them quickly, offering investors a chance to acquire them at a discount.
Why they’re great for flips:
Clear title: Since the lender now owns the property, any liens or unpaid taxes are typically resolved before sale.
Fast closings: Banks are often motivated to sell REO properties quickly, which means faster turnaround for the investor.
What to watch for: REO properties may have been neglected, especially if they have been vacant for an extended period. Be prepared for a range of potential repairs, including structural issues.
4. Vacant or Abandoned Properties
Vacant or abandoned homes are often in distressed condition but can offer significant upside for investors who are willing to put in the work. These homes can be found in foreclosure, REO, or as a direct sale from absentee owners.
Why they’re great for flips:
Undervalued assets: These properties are often priced lower due to their abandoned status.
Opportunity for transformation: Investors can often dramatically increase the value of these homes by making major improvements.
What to watch for: Abandoned homes may have been left unmaintained for long periods, leading to substantial repair needs. Investors should account for potential issues like water damage, vandalism, or pest infestations.
5. Distressed Estate Sales
When homeowners pass away, their heirs may choose to sell the property through an estate sale. These homes are often sold quickly and as-is, making them an appealing option for fix-and-flip investors.
Why they’re great for flips:
Motivated sellers: Heirs may be eager to liquidate the property quickly, often resulting in below-market prices.
Well-maintained homes: In some cases, estate sale homes are in better condition than foreclosures or abandoned properties, requiring fewer repairs.
What to watch for: Investors should be aware of potential legal hurdles with estate sales, such as probate, which can delay the sale process.
6. Tax Liens and Tax Deeds
Properties sold due to unpaid property taxes offer another opportunity for fix-and-flip investors. Tax lien or tax deed sales allow investors to acquire properties at auction, often at a fraction of their true value.
Why they’re great for flips:
Deep discounts: These properties are often available at significantly reduced prices, leaving room for profit margins after repairs.
Unique auction opportunities: Some investors specialize in acquiring properties through tax deed auctions, providing an alternative path to distressed property acquisition.
What to watch for: It’s important to conduct thorough research before purchasing tax lien or tax deed properties, as they may have hidden costs or legal complications, such as unresolved liens or ownership disputes.
How Hard Money Loans Can Help You Capitalize on Distressed Properties
Investors who specialize in fix-and-flip projects often need fast, flexible financing to close deals quickly and begin renovations. This is where hard money loans come into play. These loans focus on the value of the property itself, rather than the borrower’s financial history, making them ideal for distressed property purchases.
Speedy access to funds: Hard money lenders, like Longleaf Lending, can often provide funding in a matter of days, allowing you to act quickly in competitive markets.
Flexible terms: With hard money loans, you can often negotiate terms tailored to the specific needs of your project, whether you’re flipping a foreclosure, short sale, or abandoned property.
Focus on the property's value: Unlike traditional loans, hard money lenders prioritize the after-repair value (ARV) of the property, making distressed properties with high potential attractive for financing.
Distressed properties, when carefully selected and financed, can yield high returns for savvy real estate investors. Whether you’re buying a foreclosure at auction or snapping up a short sale, using the right financial tools—like hard money loans—can accelerate your path to success.
