Distressed Property; Is it a Positive Investment?

There are many investments that are made in real estate, most of which are expected to allow the price of the property to go up. With the housing market down and foreclosure on the rise, it is tempting to jump and start buying and selling distressed properties. It is very tempting, specially with all of the infomercials about the riches to be made if you buy their 36 cd and 14 book “guarantee to riches with distressed properties”. Don’t get me wrong, I love real estate investing.

I believe that right now is a good time to invest in real estate and to make money if you are well prepared for it. I think that it would be foolish for some to think that now might be a good time to invest in distressed properties, because they expect to find low hanging fruits that just anybody can pluck. I think it would be foolish to think that all distressed properties are made equal. That type of thinking is what gets the inexperienced hurt in real estate investing. So educate yourself about the different forms of real estate investing and which one is the best suited for you. There are plenty of books and websites that can teach you the basics, but beware of those that charge thousands of dollars for a “Get Rich Quick Real Estate Plan” (The ones getting rich are them, while you find out that a little bit of information – which usually you find free on sites like this one or on the internet and a lot of cheerleading is a costly combination.) I have found that people on this site are very cooperative and willing to share information.

If you decide that the rehab business or “fix and flip” is your way to invest in real estate, then take a moment and study the property before you start. The first thing that should come to your mind is if a property is distressed, it means that it has not had the care and attention needed by the previous owners. Most likely, the home is part of a foreclosure, abandoned home, or other problem and may have not been lived in for a specified amount of time. Any distressed property will need a lot of attention given to it if you decide to invest in the property. Before looking at this type of property, you will want to make sure that it will be worth your investment. While a distressed property will usually go down thousands of dollars because of the quality, it may not be cheaper. It will be expected that you put a specific amount of work and money into the home in order to repair it and get it back up to being part of the market. In other words, you need to develop an investment budget for the project.

Here are a couple of mistakes that should be avoided:

1. Buying “low-priced” foreclosure homes – determine the amount of repairs needed and the total cost to bring that property back to the market. Just because the property is “low priced” doesn’t guarantee you success.
2. Buying over-priced properties – to make money in real estate requires that you buy propreties substantially under value, which will allow you to resell them at a much higher price. Therefore, if you buy properties that are only marginally under market value, you will have a hard time selling the properties at a price that will allow you to make a profit. Keep in mind that in addition to the acquisition price and the repairs, you need to budget for other costs such as legal fees, interest, broker commissions, taxes, operating costs, and room for the “unforseen expenses”.
3. Buying properties that need too much work for your experience – this is an assessment that must be made before you purchase the property. Sometimes the amount of work needed on a property is such that could make the deal unprofitable or simply the amount of experience needed to make the flip profitable is beyond your capacity. If the deal is so sweet that you must buy it and with the necessary experience the deal could be profitable, then joint-venture with someone that has the experience necessary for the repairs needed on the property.
4. Not performing a title seach – never underestimate the need for a title search, specially when dealing with distressed properties, usually there are dead bodies in the closet. Remember that you will inherit all legal issues and liens associated with the propety when you buy it.
5. Not sticking to a schedule – you need to make sure that all your construction stays on schedule to avoid costly charges, thus reducing your profit margin.
6. Betting only on the short-term appreciation of the property – in todays market, you shouldn’t count on short-term appreciation (speculation) driving your gains.
While a distressed property can be a positive investment, it will need to fit your goals and your lifestyle in order to be an effective investment. As long as you have assessed your financial stability and goals and are able to put in the extra money, time and work, you can take a distressed property and turn it into what you want. The choice is yours. Be sure to make it a good one!

Pedro Gonzalez is a real estate investor and consultant. Visit http://www.paradiserealty.biz and join our exclusive group of real estate investor by completing our investor profile.

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Comment by Tara Taylor on March 20, 2009 at 1:46pm
I have to agree with your take on real estate 'gurus' and their courses. They're usually over-priced and the same info can usually be found free on the internet. We learned the hard way, spending thousands on Trump and others who make it sound so easy--just pay $5000 for our course and you'll be rich in no time! Then you pay $5k and attend their seminar and you're told just spend $3k more and all your problems with be answered! Now we don't have those thousands that could've been used as a down payment, advertising, rehabbing, etc. Buying property with 'no money down' is possible but only in a small minority of cases and next to impossible in a competitive market.

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