Selling Distressed Property
When a property is said to be in distress, it usually indicates that the current owner is experiencing financial problems. They may be unable to keep up with property taxes, repair and maintenance costs, or monthly mortgage payments.
More often than not, it can be all of the above as a financial setback (job loss, divorce, health emergency, or in worst case scenarios, death) sets off a domino effect that can set a homeowner up for ruin.
If you're reading this, then it means you're being proactive about the state of financial distress you found yourself in. And so, we put together this guide to help you sell your distressed property, allowing you to walk out of the financial mess as unscathed as possible.
What Are Considered Distressed Properties?
Generally, if your property falls into one of these categories, they are considered distressed:
Properties in Disrepair
If you haven't kept up with maintenance for a long time, problems likely would have grown to a point way beyond your control, resulting in a distressed home--in the most literal sense. Dealing with this would require significant expense, and you might decide that selling the distressed property is easier.
Sometimes, unfinished properties due to the homeowner running out of funds in the middle of construction are considered distressed properties also.
Foreclosures
Homeowners whose financial situations have gotten so bad can have their homes repossessed by their lending institution. These homes are said to be in foreclosure and will soon be scheduled for auction.
If you're in such a pickle, don't wait to act until it's too late! Sell your property as soon as possible to avoid having a foreclosure on your record, which can impede your ability to secure loans in the future.
Short Sales
Sometimes property owners fall extremely behind on their monthly mortgage payments that selling a distressed property short is the only way to avoid foreclosure.
In short sales, distressed houses are sold for less than their mortgage balance. You walk away with no money from the sale, as all proceeds will go to your lender, who also forgives the remaining balance.
In spite of this, a short sale is still more palatable than a foreclosure for both the lender and the borrower, as the foreclosure process can drag on for years and can cost a lot of money.
Real Estate Owned (REO) Properties
Foreclosed properties are placed on the auction block once the process is completed. However, not every foreclosure sale is successful, and if the distressed real estate fails to sell, the bank or lender assumes ownership.
Lenders are usually keen to offload these distressed homes as they are on the hook for the upkeep and property taxes without receiving revenue in return.
Tips and Things to Consider in Selling a Distressed Property
Call for a Home Inspection
Before listing your distressed property on the open market, it would be a great idea to arrange an inspection. Aside from possibly obvious issues, a full property inspection (costing around $300) will uncover hidden problems such as those in your foundation, plumbing, mechanical, and electrical systems, roof, and other areas that you don't usually see.
In case of major structural damage, you can have it looked at by experts, then decide whether you'll fix it yourself. Repairs can be costly, so if you don't have the money, you can just sell your distressed property as is.
On the other hand, if the inspection report turns up nothing, it could be a great marketing tool! A large percentage of home buyers aren't enamored with the idea of doing repairs or renovations on a house they just bought.
Furthermore, since your house is essentially in the best condition, even if it's considered a distressed property because of your inability to meet financial obligations, the home value isn't affected as much--value which you'll have to find out next.
Find Out How Much Your Property Is Worth
Knowing the fair market value of your house keeps you from accepting lowball offers or setting your asking price too high that buyers are turned off even before they set eyes on your property.
Look at Comparable Properties
You can go around the neighborhood and look at recently sold similar properties with roughly the same features, size, and condition, so you can estimate the value of your house. Alternatively, you can conduct research online and check out online listings in your area.
Use an Online Valuation Tool
To supplement your research, you can use automated valuation tools online. You feed information regarding your house, then the tool scours available public records and runs an algorithm that provides you with an estimated value.
Hire a Professional Appraiser
The first two methods of getting your home's market value requires a significant chunk of your time and effort. If you wish to skip that and can spare around $250, you can hire an appraiser to give you a professional estimate of how much your home is worth.
Repairs Aren’t Completely off the Table
If you're selling your distressed home in an effort to cure your financial woes, your house is likely in good condition.
Regardless, a little TLC can't hurt:
- Pack personal items and stow them in the garage or your basement prior to showings.
- Replace broken light bulbs, old switches, and leaky faucets.
- Peel off old wallpapers.
- Get rid of that shabby carpeting to uncover that sought-after hardwood flooring.
- Give your exterior a power wash to remove grime and dust buildup and boost your curb appeal.
- Trim your lawn so potential buyers driving by would be enticed to check out your property.
Doing the above cost next to nothing, but it can have high returns. You may be selling distressed property, but it sure doesn't have to look like it!
Decide Who You Want to Sell To
If you're still on the fence about fixing up your distressed property prior to the sale, it helps to first decide what type of buyer you're looking for.
End Users
End users, or owner-occupants, typically look for a good deal, so they try to find distressed properties, especially in a seller's market where demand outpaces supply, resulting in skyrocketing asking prices.
Owner-occupants can either be traditional buyers reliant on financing, or cash buyers.
However, if you're facing foreclosure, financed buyers aren't the best fit for your situation as they would need to apply and wait for loan approval, leaving you in the hole, with mortgage payments continually piling up. Besides, if your distressed property is in disrepair, buyers won't qualify for conventional loans unless you shell out money upfront to bring your property up to standard.
Your best bet then, is to sell to cash home buyers who can close the real estate deal fast, and fund the repairs if needed.
Real Estate Investors
Real estate investors specifically seek out distressed properties which they can purchase for below market value, do some renovations and upgrades, and sell for a profit down the line. They can look beyond its appearance, and have no problem buying distressed properties as is.
What's great about investors is they are usually cash buyers. They can be house flippers, buy and hold investors, or "we buy houses" companies, with a team of professionals and a substantial war chest to take care of needed repairs.
Be Generous With Your Disclosures
List down all known property issues--here's where the pre-listing inspection report might come in handy. Doing so protects you from being embroiled in legal hot water later on.
Even if you live in a caveat emptor state where you're only legally obligated to disclose certain conditions such as the presence of lead paint, asbestos, or mold, being generous with your information pays great dividends. Buyers appreciate it when they deal with an honest seller.
If repairs have been performed in the past, be sure to include those as well. It would also be helpful if you had kept all the paperwork relating to previous repairs, such as those that indicate who did the repairs and when.
Ask For Proof of Funds From Your Buyer
Save yourself from future headaches. The chances of a distressed property qualifying for a mortgage are next to none, so you'd most likely be selling to a cash buyer. You don't want to end up dealing with a bogus one, do you?
If foreclosure is looming on the horizon, you wouldn't want delays. Don't hesitate to ask for proof of funds right away, so you won't have to worry about a distressed sale falling through.
How to Sell a Distressed Property
The method you choose in selling your distressed house ultimately boils down to what you want to accomplish on the sale: sell for top dollar, or sell really quickly?
“I Want to Sell for the Highest Possible Price.”
Benefits of Selling Distressed Property With a Real Estate Agent
They Are in Charge of the Home Sale Process.
When you choose to work with a real estate agent, they will take care of everything from planning and executing a marketing strategy, staging your home for an open house, negotiating with the buyer, and handling all paperwork related to the sale.
They Are Great Negotiators and Superior Salespeople.
Being professionals, they have a developed system for effective selling, along with insights on current real estate trends which you can benefit from.
Drawbacks of Selling Distressed Property With a Real Estate Agent
Having someone to do the heavy lifting on your behalf is good and all, but of course, it comes at a cost.
You Have to Spend Upfront for Repairs.
For real estate agents to effectively market your property, they will be recommending upgrades or renovations. And if you're aiming to sell for top dollar, you'd do well to follow their advice.
You Have to Pay Commissions and Closing Costs.
Going the traditional route with real estate agents means you have to share a slice of the pie with them. Commissions and closing costs comprise around 6% and 3% of the sales price respectively.
“I Want to Sell Fast.”
If you are in a pinch because of financial responsibilities that you are unable to fulfill, then selling to a cash buyer is your way out.
Advantages When You Sell a Distressed Property to a Cash Buyer
They Close Fast.
An investors' priority in purchasing distressed properties is to make money. Therefore, it is also in their best interest to close the deal fast so the purchase would generate income for them sooner rather than later.
They Are a Sure Buyer.
Once they hand you their offer and you accept, barring any act of God event, your distressed property is as good as sold.
A cash buyer doesn't depend on banks or lenders, so no waiting around for approvals, eliminating the uncertainty and sparing you the stress and worry about the deal not coming into fruition.
They Buy Distressed Homes as Is.
No need to arrange inspections, repairs, and cleanups. Sometimes, the more rundown the property, the more attractive it is for a house flipper.
Real estate investors have been in the business long enough to have seen it all, so you can just pack your stuff in a moving van, hand over the keys, and start your new life somewhere else with money on hand.
No Need to Pay Commissions.
When you sell your distressed property to a cash buyer, there won't be intermediaries involved. This means you get exactly what's on offer, no need to deduct agent's fees, closing costs, or other extra costs associated with distressed sales.
If there are liens levied against your property, such as to unpaid taxes, the cash buyer will take care of that as well.
Disadvantages When You Sell a Distressed Property to a Cash Buyer
Nothing in life ever comes for free, so there are inevitable tradeoffs you have to make such as...
Their Offers Are Lower Than the Fair Market Value.
Real estate investors operate on the so-called 70 percent rule in real estate. This means that for a property to be an attractive investment prospect, they need to be able to get it for a maximum of 70% After Repair Value (ARV), net of repairs.
To illustrate, say a distressed property has an ARV of $150,000 with repairs costing $50,000. For the purchase to be viable, an investor would have a maximum offer of $70,000.
They Have to Be Compensated for Repairs.
They will factor in repair costs in their offer, so although you skip the hassle of arranging repairs and vetting contractors, you're still paying for it.
Where to Find a Cash Buyer
You can find this type of buyer by sifting through public records and auctions. Network with your county clerk or investor-friendly realtors and offer up your property. The key here is being proactive.
Closing Thoughts: Selling Distressed Properties
If you find yourself in a financial bind, know that all hope is not lost.
There are plenty of options open to you in selling your distressed property fast, and here at House Buyer Network, we can help connect you immediately with a cash buyer who can throw you a much-needed financial lifeline in 24 hours.
Fill in our form below to get started!
Got questions? Don't hesitate to call us at (855) 835-2544.
