How To Find Distressed Properties To Buy | Real Estate Skills

Finding a property to wholesale or invest in is a tricky task for those getting into real estate for the first time. The truth is, real estate investors are always trying to find new ways to obtain the best deal, whether it's their first house or one-hundredth investment property!

One of the most reliable and consistent methods to land great deals is by focusing your efforts on acquiring distressed properties.

No matter what type of distressed property you're going after, many investors aim to buy something that needs work, improve it, then rent or flip the house to turn a profit. 

According to research done by ATTOM Data Solutions, while the national house flipping rate dropped in 2020, the average gross profit increased to $73,766 profit per flip and has been hitting record highs since 2000!

While it does take time and resources to renovate and resell these kinds of properties, the return on investment (ROI) is high when done correctly. This is why distressed properties are so appealing to real estate wholesalers and investors alike.

So, let's dive in. We hope you enjoy How To Find Distressed Properties To Buy: The Ultimate Guide! Use this menu to jump to your section of choice:

• What Are Distressed Properties?
• How To Identify Distressed Properties
• What Are The Different Types Of Distressed Properties?
• 7 Ways To Find Distressed Properties For Sale
• How To Find Distressed Properties On MLS?
• What To Do Before Buying A Distressed Property?
• How To Buy Distressed Properties (9 Steps)
• How To Find Distressed Commercial Properties?
• What Are The Pros And Cons Of Buying Distressed Real Estate?

What Are Distressed Properties?

Generally speaking, distressed properties refer to land and improvements that have not been maintained in good condition by the owner. Most notably, this is relating to physical neglect of a property demonstrated by issues such as peeling paint, plumbing issues, and roof leaks.

Another aspect of property distress can be the financial circumstances of the owner.  Financial distress results when an owner is unable to manage the mortgage payments, property taxes, utilities, or other dues owed.

No matter the cause for a property to be distressed, the fact is, owners have an issue that must be solved. Often, they are willing to hand off their problem property to someone else in exchange for a price that is below market value.

If you are finding a distressed property to buy, you will undoubtedly come across owners who are scrambling to find a buyer, while other owners may not be in a rush to sell.

Regardless, having a strong sense of communication and constructing a deal they cannot pass up will lead astute investors closer towards increasing their wealth and gaining financial freedom.

How To Identify Distressed Properties

Distressed properties are not hard to distinguish as they stand out from other properties in the same neighborhood that are well-maintained. Focusing on the physical attributes, there are key features that can help you easily identify if a property is distressed or not. 

Below are the key indications of a distressed property: 

• Peeling paint 
• Overgrown grass 
• Notices on the front door
• Boarded up windows or doors
• Unkept lawns and landscaping 
• Mass amounts of uncollected mail
• Tarps or cardboard over the windows
• Caution tape on certain areas of the property

While these attributes of a distressed property are not hard to find, it’s best to confirm with the owner by skip tracing their contact information and getting in touch with them. 

What Are The Different Types Of Distressed Properties?

A distressed property is not confined to one definition. The reasons why a property becomes distressed varies from owner to owner. Let’s dive a little deeper into why the following are all inevitable circumstances that result in great deals coming up all the time.

Delinquent Taxes And Mortgage Payments 

When a homeowner fails to pay their property taxes or the amount owed from mortgage payments on time, penalties and fees arise. Most people prioritize these bills, so if a homeowner is delinquent on mortgage or taxes, they usually have underlying financial problems.

As the homeowner accumulates more debt, stress, and the foreclosure process begins, he or she will seek ways out of the troubling situation. Selling the property is often the best solution to avoid foreclosure or an eventual tax sale.

Read Also: Wholesaling Tax Delinquent Properties - The (Ultimate) Guide

Bankruptcy And Divorce Settlements

Both very different in terms of their meaning, distressed properties due to bankruptcy and divorce settlements stem from homeowners being unable to manage the cost of their home due to a difficult life event.

Especially for individuals who are divorced, it is hard for them to agree on how much one should pay and the property management aspect of it all. Rather than make life more difficult, divorced couples will choose to sell their home and divide the proceeds.

Probate Properties

When a property owner dies without a living trust, the real estate must pass through an expensive and time-consuming process called probate.

The beneficiaries who are entitled to those assets have the choice to keep, rent, or sell the property. The choice that most beneficiaries make is to list the house with a Realtor and sell it on the Multiple Listing Service (MLS).

REO Bank Owned Properties

REO properties, also known as Real Estate Owned or bank-owned properties, are homes that are reclaimed by a bank or mortgage lender. Instead of holding foreclosed homes, banks and mortgage lenders prefer to sell these properties as soon as possible.

Keeping a large list of real estate inventory results in losses for both banks and mortgage lenders because inventory goes hand in hand with no profits generated. This means they would rather sell these distressed properties and get them off of their balance sheets.

7 Ways To Find Distressed Properties For Sale

Now that we’ve gone over the different types of distressed properties, let’s go over the seven ways to find distressed properties for sale. Using more than one method will help increase your chances of obtaining real estate leads, although we recommend mastering one or two before spreading yourself too thin. 

Multiple Listing Service (MLS)

The Multiple Listing Service (MLS) is a local database of property listings and sales data maintained by licensed real estate brokers and agents within a given real estate market. There are more than 800 MLSs across the United States. 

According to the National Association of Realtors (NAR), “89% of sellers were assisted by a real estate agent when selling their home.” In other words, about 9 out of 10 properties that are sold are done so on the market through the MLS.

The MLS is one of the best ways to find homes for sale because you can easily get many distressed property leads without spending a dime in marketing. Real estate professionals can get access to the MLS by becoming a licensed real estate agent or an assistant to a real estate agent.

Related: Like to learn more about the MLS and how to land a deal within a matter of days? Click here to attend our Exclusive Free Training on How To Wholesale And Flip Houses From The MLS!

Driving For Dollars

One simple and traditional method to obtain distressed property leads is driving for dollars. The procedure for this is quite inexpensive, but it does take time to build a list of leads. 

Pick your desired neighborhood and drive, walk, or bike around looking for any sign of distressed homes (i.e. poor condition, estate sale, garage sale, etc). Once you find a property that looks distressed, jot down the address and perform the next necessary actions to reach out to the owners. 

Pro Tip: For help with this method, Try DealMachine FREE (The Driving For Dollars App) For 7 Days & Get 40 FREE Pieces of Mail To Send!

Zillow And Redfin

Online real estate database companies like Zillow and Redfin are great sources to find distressed properties. They are especially useful for real estate investors who are not licensed real estate brokers or agents. 

Let’s take a look at how you would find distressed properties through these two online real estate listing platforms.  

On Zillow, decide on a targeted neighborhood and keep your eye out for listings that are labeled as fixers, cash only sales, short sales, and properties showing signs of deferred maintenance in the photos.

Aside from aggregating MLS listings from around the country, Zillow also has a for sale by owner filter, which allows buyers to shop for houses listed directly by the property owner. 

Redfin has a neat feature that allows you to filter out all the listings in one area to only show you properties that are “Fixer-Uppers Only.” 

Enter your neighborhood of choice in the search bar, then click on “More Filters” on the right side of the page. Then, scroll down to check off “Fixer-Uppers Only”. 

Filtering out the listings to show “Fixer-Uppers Only” means it’s labeled as a distressed property. While not all investment opportunities will be filtered, it's a quick way for house flippers and investors to find potential deals in your favorite real estate market!

Property Tax Assessors

Finding out who’s delinquent on taxes is only one search button away. Using a search engine like Google, you can check with local tax assessors to see who hasn't paid their property taxes.

Since tax records are public information, anyone can research which properties are delinquent and even in pre-foreclosure or foreclosure status. Additionally, some tax assessors have their own website where they publicly post properties with tax delinquencies.

Distressed Property Leads

If you’d like to save the time of having to research and go out looking for distressed properties, an easy route is to buy a list of leads.

The kinds of distressed property lists you can buy are information on out of state owners (absentee owners), high equity homeowners, vacant property lists, and code violation lists. 

Another alternative is to buy a list of leads from real estate lead generation companies such as ListSource. With a distressed property list, you can skip trace the owner's contact information, then reach them through direct mail, cold calling, or other means.

Read Also: ListSource Review: Pros, Cons, Pricing, and More!

Pre-Foreclosure and Foreclosure Auctions

Some websites allow you to view properties that are currently in pre-foreclosure and are scheduled for auction. You can be the new owner of the property if you are able to outbid other home buyers. 

The following are some pre-foreclosure and foreclosure auction websites: 

• Foreclosure.com
• Xome.com
• Auction.com      

Another strategy is to gather a list of homes that are in pre-foreclosure on the auction site and using direct outreach to communicate and persuade the owner to sell the property to you.

Craigslist

While Craigslist may seem like an odd way to find distressed properties to buy, this method has worked for many real estate investors. Look at rental listings to see if the pictures and description match the characteristics of a distressed property. 

Call the landlord or property management company directly, since their phone number will be on the rental advertisement. Since they have an upcoming vacancy, the owner may be interested in selling their rental property.  

How To Find Distressed Properties On MLS?

Using the MLS is one of the most common and efficient ways of looking for distressed properties. When combing through the new listings, here are three things to look for when identifying properties in distress:

Property Photos

Every listing will have a photo of the property. As you scroll through the listings, there will be pictures that will obviously show that the property is in poor condition. 

If you come across listings with one photo or photos that are poorly taken, this is another sign that the property could potentially be in distress.

Listing Descriptions  

Read the listing description and agent remarks of the properties that are on the MLS. The description can give you a better idea of the condition of the house or if the owner is in any type of financial distress.

Phrases to look for in listing descriptions include: Seller is motivated, reviewing all offers, calling all investors, so much potential, and bring your imagination, property sold "as is," requires work. 

Keyword Search

Certain phrases like cash only, fixer, TLC, needs work, investors delight, handyman special, and bring your contractors are keywords to keep an eye out for as you go through the listings. The keywords in the description may be a hint that the property is distressed. You can conduct a keyword search in the MLS for any of these phrases, then look through the results. 

Read Also: Can You Wholesale MLS Properties?

What To Do Before Buying A Distressed Property? 

Purchasing a property is a decision that should not be taken lightly, especially if it's distressed. It’s important to note that a distressed property comes with a lot of risks that should carefully be evaluated before taking any steps towards buying the distressed property.  

Due to such high risks, you need to make sure to determine the after repair value (ARV) of the property, repairs budget, and your maximum allowable offer (MAO).

To lay the groundwork for calculating these key numbers, here are 5 steps to take before buying a distressed property: 

1. Get Pre-Approved For a Mortgage or Secure Enough Cash. 

Before you find a distressed property that you’d like to buy, secure your source of funding and determine your buying power. A lot of distressed properties sell quickly, especially the best investment opportunities. 

Take note that most distressed properties will only sell for cash since they don’t qualify for bank financing due to their poor condition.

2. Obtain A Proof of Funds. 

Have an official document from your bank or lender that shows you have the cash to close, the ability to borrow money, and/or that you have the necessary down payment. 

A proof of funds letter or bank statement will verify to the owner and real estate agent that you're able to fund the property purchase. It is often a requirement to include with your offer.

3. Inspection Contingency In Your Offer Contract.

As expected, a distressed house will likely need repairs externally and internally. Having an inspection contingency in the contract will allow you to inspect the home within the given time frame so you can determine what is the best step moving forward.

If the inspector happens to find something that you may not want to take responsibility for, the inspection contingency contract will protect you, the buyer, from being penalized if you choose to cancel the contract.

4. Conduct a Thorough Property Inspection. 

Make sure to hire a professional home inspector to see if they uncover any hidden damages to the property that will need to be repaired. 

5. Get a Quote From a General Contractor.

Hiring a general contractor will help you determine if the costs to repair the damages is worth investing in if the property were to be bought. 

While you do have to pay for their service, spending the money to have an estimate for repairs gives you an idea of how much is needed to be spent to have the property back in good condition. 

This will help in constructing the deal and give you a rough estimate of if the overall cost after repairs is something you’d feel comfortable choosing to do.

Watch this short video with 4 tips on investing in distressed properties:

How To Buy Distressed Properties (9 Steps) 

The steps to searching for distressed properties, communicating with homeowners, and having the skills to construct and finalize the deal may sound nerve-racking. Fortunately, we have developed a 9-Step Guide for you to successfully buy distressed properties.

The following is a step by step guide for How To Buy Distressed Properties: 

1. Explore and Secure Funding 

Will you be buying the property with cash, private money, or a hard money loan? Determining your funding source and purchasing power will dictate what you can afford to buy.

Get a proof of funds letter to show the seller or listing agent you are capable of performing on the offer you will submit. Otherwise, they will not take you seriously.

Remember that cash is king. While there is certain financing available for distressed properties, you may be able to close faster and get a better price on it by providing an all-cash offer.

2. Pick a Specific Location

Find the area in which you would like to purchase the distressed property. This will help you save time and target properties you'd actually want to purchase from, due to your own choice of neighborhood, city, zip code, etc. 

Once you determine your buying capabilities and budget, explore what your options are. For example, distressed property in a neighborhood with less crime and a high-quality school system will cost more than a neighborhood known for crime and low-rated schools.  

3. Type of Property

Decide on the type of properties you'd like to purchase if you prefer a specific one. The main types of residential properties are: 

• Single family
• Multifamily
• Condo
• Detached 
• Attached

4. Find Distressed Properties For Sale 

Refer back to the section "Seven Ways To Find Distressed Properties For Sale" and choose one or more of the methods that are listed. 

Make a list of distressed properties you find, then contact and negotiate with the property owners. If you choose to find houses on the MLS, you'll be working with the listing agent instead of the seller.

5. Contact The Owner or Listing Agent

Use a skip tracing service to dig up the contact information of an owner, then get in touch. If you're getting leads from the MLS, you'll contact the listing agent who is representing the seller.

Build rapport, demonstrate professionalism, and ask questions about the property, such as: What is the reason for the sale? What improvements or upgrades have been completed on the property? What mechanical or structural issues are present? When would the seller like to close? Would the seller consider a cash offer?

6. Make An Offer

As you propose your offer to the owner, be sure to include an inspection contingency in your offer contract. Calculate the after repair value (ARV), estimate your repairs budget, and determine what the property is worth as-is. From here, you can make an educated offer. 

7. Property Inspection

Complete your due diligence by inspecting the property.

A home inspector can help you identify any existing or potentially risky conditions that you might've missed when looking at the property yourself. 

Make sure your numbers are realistic and that the deal is still feasible after your findings.

8. Obtain A Contractor Quote 

Obtain three written general contractor bids on the property and make sure the quotes align with your initial estimates. If not, you may need to renegotiate.

9. Close On The Property 

Close the house and execute your business plan. Congratulations, you just purchased a distressed property!   

How To Find Distressed Commercial Properties?

With the current retail apocalypse due to the Coronavirus, now is a great time to look into purchasing distressed commercial properties. This is a big sector of real estate that is being impacted by Covid-19, and with businesses shutting down due to significant loss in revenue, owners are unable to financially stay afloat. 

This has a negative impact on landlords as they are dealing with the loss of rents and lease payment delinquencies. In some cases, the loss of income can be devastating and cause a landlord to sell. This is where a real estate investor comes in and offers to help.

Below are ways to find a distressed commercial property: 

• Commercial listing websites 
• Loopnet
• CoStar 
• The MLS
• Talk to local commercial real estate agents and brokers
• Drive for dollars  
• Cold call commercial property owners
• Send property owners yellow letters

What Are The Pros And Cons Of Buying Distressed Real Estate?

There will always be a risk in every decision you make. Even after weighing all the factors and consequences that could arise, buying a distressed property may be well worth the money. 

Pros Of Buying a Distressed Property

The main benefit of buying distressed real estate is that investors are able to buy properties below market value. Smart real estate investors look for better value as home prices continue to appreciate. 

You as an investor are not only getting a better deal and avoiding a higher price. You are also helping a distressed seller out of a difficult situation.

Additionally, an investor is able to create equity once the property is fixed up. So home buyers can get a better return on their real estate investment, without relying on market appreciation.

Cons Of Buying A Distressed Property  

The disadvantage of buying a distressed property is that it will likely be in poor condition and the cost of repairs may be high. It needs to be understood before going in and buying a distressed property that you are inheriting a problem.

More often than not, rehab budgets expand as more issues are discovered with the property -- even after the house has been purchased by the investor!

Fixing up a distressed property comes with having to spend a lot of money, time, effort, and energy to improve the property and fix all the problems that would allow you to receive the maximum price when sold.

There is also a responsibility and risk in managing not just physical repairs, but also the contractors working on the property.

Final Thoughts

Real estate investing comes with tremendous advantages and disadvantages. Taking all factors into consideration, especially with the current pandemic and economic turmoil, distressed properties are one of the most attractive investments available today.

With many individuals seeing a high return on investment, there’s no reason as to why you shouldn’t be looking into buying a distressed property.

As long as you follow this guide for obtaining distressed property leads, and conducting the appropriate due diligence, closing in on that next sweet deal will happen in no time.