On a recent flight to Chicago to support some old college friends who were renewing their vows, I found myself discussing some of the best strategies for finding motivated sellers of distressed property with the guy sitting next to me. Robert, or Bobby for short, was young, smart as a whip, and new to real estate investing. He was also hesitant to hop on board with the idea that investing in distressed real estate was a good business strategy for building his portfolio and, potentially, increasing his overall returns—particularly now. Of course, I agreed that there were challenges to buying, renovating, and reselling these homes. But, I disagreed that the obstacles weren’t worth facing or working hard to overcome. Let me tell you, just as I told Bobby, the reasons why.
Five Solid Reasons to Invest in Distressed Real Estate
Bobby, and many real estate investors like him, have valid concerns when it comes to investing in distressed real estate. These properties can require a lot more patience, savvy, and work to acquire, rehab, and bring back to the market to resell than your average fixer-upper home on the market. The reason is that, by definition, distressed houses are often more than just a little run down and so they typically need more than just a new coat of paint and better curb appeal. Distressed real estate is often in exceptionally poor condition due to neglect, abuse, or even abandonment as a result of the homeowner’s financial troubles and requires a good amount of know-how to turn them around profitably.
Still, despite the obvious risks of investing in distressed properties, there are good reasons why these homes can make potentially great deals. Otherwise, real estate investors like me wouldn’t spend their time and money on them. So, before you dismiss distressed real estate entirely, let’s look at the top five reasons why you might not want to:
- Low purchase price. Distressed homeowners are often desperate to get out from under a house that’s become a burden and banks are equally eager to get them off the books. As a result, distressed real estate is usually priced pretty low. In fact, these houses tend to be listed for significantly less than market value in order to move these properties quickly. This often creates a lot of competition, which can drive the purchase price right back up. So, don’t get caught up in a bidding frenzy that might drag your profit margin down.
- High potential profit margin. Provided you’re able to purchase a distressed home for a price that’s significantly below the after repair value—and keep your rehab costs in check—you could have a better-than-average chance at seeing potentially high returns. That said, you must have a real estate analysis and valuation tool on hand to run all of your numbers so that you don’t make miscalculations that drive your ROI into the ground.
- Broader financing options. You will have broader financing options when you buy distressed real estate since hard money loans are usually made available to investors. So, you can compare interest rates, closing costs, and loan payments between lenders and choose the one that leaves more cash in your pocket. And, since getting the most loan for your money should be a part of your business plan for flipping houses, buying, rehabbing, and selling more distressed homes with competitive financing could be, too.
- Increased property values. When you take the worst house on a street and invest in rehabbing the home to resell at a higher price point later, you help to increase property values throughout the neighborhood. Not only will the neighbors thank you, but your future investments will, too—especially if you buy in an up-and-coming area where opportunities are appreciating as much as the value of the homes themselves.
- More opportunities. The last thing you want to do is squander any opportunity to buy the kind of deals that could build your portfolio and benefit your bottom line. By investing in distressed real estate, you increase your chances of realizing a successful career—as long as you know where to look.
Of course, finding good reasons to make acquiring distressed properties the main focus of your real estate investment strategy is only the beginning. To successfully build your business, you’re going to need a supply of good leads and a great deal of support. Without one or the other, overcoming the challenges that all real estate investors face, like buying a distressed house for a price that yields decent returns, can be difficult. But, it can be easy to get the best of both worlds.
How to Overcome the Challenges of Distressed Real Estate Investing Now
There was a time when my investing strategy was all over the place and the result was that my career just limped along. When I narrowed my focus on investing in distressed real estate, however, I finally made good at getting on the right track—and, seeing better returns. That’s why I continue to target these properties in my investing strategy today. But, what made my career great is having ongoing access to qualified off-market leads and the support of a team that helps to keep all of my investment decisions sound.
In short, being an independently owned and operated HomeVestors® franchisee is what has really made the difference. The marketing tools and resources that drive motivated sellers my way, my seasoned Development Agent and my regional network of franchisees who answer any questions that come up are how I’ve overcome challenges I might otherwise face and fail at. So, I’m never without access to deals or the means to successfully close on them. That was reason enough for me to join HomeVestors years ago, and it was reason enough for Bobby to join today.
Grow your real estate investing career now by calling HomeVestors about joining the team.
Each franchise office is independently owned and operated.
HomeVestors of America® is the nation’s only real estate investing franchise, providing business opportunities to real estate and investment professionals across the nation.