Advantages and Disadvantages of Distressed Properties

Many of the homes for sale today - as many as half in some markets - fall under the category of "distressed properties."

These are homes that have either gone through foreclosure or are being marketed as "short sales." In a short sale, the homeowner can't afford to maintain the mortgage, but the lender - rather than foreclosing - agrees to the sale of the property for less than the balance of the loan.

These types of sales have different dynamics than traditional sales - with more paperwork, often a longer transaction process and, in some cases, more frustration. For these reasons, many buyers shy away from foreclosures or short sales.

However, if you understand the potential pitfalls of purchasing a distressed property - and work with an agent who has a thorough knowledge of this market - you can get a great home at a great price.

Is a distressed property investing for you? Here are pros and cons of buying one.
Advantages of Buying a Distressed Property
First, you'll be dealing with a highly motivated seller – either a bank in the case of a foreclosure, or in a short sale, sellers who are in financial trouble and very interested in getting out of a mortgage they can no longer afford.

These types of sales take much of the emotion out of the process. You won't be insulting anybody, for instance, if you make an offer that's lower than the asking price. (That's not to say that the low offer will necessarily be accepted, of course.)

Lenders are extremely interested in getting these homes sold and off the liability side of their balance sheets. Many foreclosed properties can be purchased for only a percentage of what they would have commanded five years ago.

If you're looking at a short sale, you're not likely to get quite as good a deal as on a foreclosure. But there are definite advantages to purchasing one of these homes. For one thing, since the homeowners want to get the home sold quickly, they are likely to keep it well-maintained and in good move-in condition.
Disadvantages of Purchasing a Distressed Property
If you're looking for a "steal," you're probably not going to find it. The market is heating up, with more and more buyers jumping into the market. If you're purchasing a home to live in, you'll often be competing not only against buyers similar to yourself, but against investors. More competition inevitably leads to higher prices.

The transaction process for short sales or foreclosures often takes longer than for traditional transactions. It's sometimes not clear which lending institution actually owns a mortgage loan, and it can take time to get it all sorted out – especially if there's a second mortgage involved, which is often the case.

Some foreclosed properties are also in rough condition. Many have sat idle for a long time with minimal or no maintenance. The departing owners may have sold off fixtures, or damaged the property. So in this case you will need to find help to determine the costs to repair.