In today’s real estate market, not only can a buyer take advantage of interest rates at 50 year lows, but in some cases they then can save thousands of dollars off of market value by purchasing a distressed property. A distressed property can be defined as, among other things, a foreclosure, a short sale, a bank owned home (REO), an estate sale, or a bankruptcy sale. Whether it be for a primary residence, an investment property, or a second home, distressed properties have become a hot search trend for today’s savvy home buyer.

Here are six questions that buyers in any market should be asking before they make an offer on a distressed property for sale.

Is now a good time to buy a distressed property?

Because market conditions are local (differ not only town to town but neighborhood to neighborhood), this is an important question for a buyer to ask. Sometimes it’s not the right time to buy a distressed property in a particular area.

What’s the first step buyers need to take?

As with any home purchase, your first step should be get yourself pre-approved for a mortgage. Remember that if this is a second home or investment property, the lender will not only (typically) be charging you a higher than normal interest rate but will also require a larger down payment.

How can you tell a bad distressed property from a good one?

Certainly there are great deals in many markets for both investors and buyers looking for a primary residence. Buying a distress sale isn’t always easy nor is it black and white. Buyers need to be wary of unpaid liens, including mortgage debt, taxes, construction loans, home equity lines of credit, and possibly a second or third mortgage. Any or all of these financial obligations could become your responsibility when you purchase a distressed property. Unless the property goes through a foreclosure auction and becomes a bank-owned REO, the outstanding foreclosure liens and fees could be simply transferred to the new owner—you. Don’t fall into the same financial trap as the previous owner. This is one of the many reasons that having the guidance of a real estate professional is so important.

If I’m a qualifying borrower, can I appeal to banks for better loan terms?

Because lenders are flooded with defaulting mortgages (especially in some of the harder hit real estate markets) you will often times see REO properties offering BELOW MARKET FINANCING to qualified buyers. Just like any mortgage your interest rate and downpayment will be determined based on your credit score and debt to income ratios. The benefit here is that you don’t have to buy this rate down with points, meaning this doesn’t cost anything in fees, and it gives you the ability to spend more for a home.

What are the costs of buying a distressed property?

It takes money to make money. The best opportunities are for buyers with cash. If you are planning to rent out the property or even resell it for a quick profit, make sure to consider the carrying costs, including sales commissions, marketing costs, vacancies, taxes, insurance, and maintenance costs. Once you’ve calculated all the expenses, add on another 10 percent to 15 percent. If you don’t build in a “surprise fund,” you might be the next foreclosure statistic.

How does choice of neighborhood affect your investments?

Buyers looking for a good investment should generally avoid neighborhoods overrun with foreclosures and/or short sales, particularly newer subdivisions in overbuilt areas. Investors will be tempted to buy foreclosures in these areas because they offer the steepest discounts—but they also carry the most risk of further depreciation. Look in well established neighborhoods with good schools and transportation. If you’re in a market where prices are still falling, be sure to factor falling prices into any offer that you submit on a distressed property.

These are just a few questions and a few brief answers that can be helpful when purchasing a distressed property. It is EXTREMELY important to seek the guidance, knowledge, and experience of your Realtor (The Mahool Nance Team) in order to best navigate ANY purchase transaction but especially one involving a distressed property. Going about this process on your own could result in costly mistakes. Trust your agent!

As always, if you or anyone that you know is in the market to buy or sell real estate, please have them contact us or pass along their contact information so that we can offer our services!

WE APPRECIATE YOUR SUPPORT!

Source: James J. Saccacio is chief executive officer of RealtyTrac, a Web site that tracks properties in foreclosure.

www.CharlotteRealEstateNC.com