This article is written by Archana Mohanty, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
Table of Contents
What is a distressed asset?
With the increasing business of real estate and the scope of investment, everyone tries to get the most of it and to utilise the resource in the best possible manner by investing in the right assets. When it comes to distressed assets being a complicated investment process, some investors still appreciate such investment in an effective manner.
Distressed assets basically get listed for sale below the market value, becoming the centre of profit for various investors. Widely talking about such types of assets we can define it as a failure by the buyer in making the mortgage payment which in turn makes the lender reclaim the amount. So the sale of distressed gets initiated by the lender. The listing comes from the person who financed the purchase rather than the owner summarising distress assets, a property, a property whose owner fails to keep up with the mortgage payment or tax bills or both.
Pros and cons in the investment
There are comparative pros and cons in buying such distressed assets which attracts the investors and some scares them.
Benefits of the purchase
Accordingly, before any investment, two main factors that come into platter is high return over investment which becomes more efficient when buying the asset becomes more impactful with low market value.
Where investment requires a basic return, distressed assets make sure a fine return compared to their buying price which is below the market price as mentioned above. On the other hand, they are not a financial burden compared to other financial assets. After making the necessary upgrades these assets can become valuable commodities.
The basic advantage again is a good negotiation before the sale. It attracts the real estate investors as they get the assets in the best way possible. It can be noted that such easy and fast investment attracts beginners who try to step their foot in real estate investment.
Summarizing the benefits we can say that distress assets come in a price lower than average capital value with huge returns.
Risk in the purchase
On the other hand, there are several risks along with these assets. Such as high competition, high maintenance cost and risk over return. As we already have discussed, availability of such distressed assets comes rarely when the lender reclaims over the mortgage, concerning the high return it becomes a point of competition among real estate investment.
Process of buying distressed assets
Buying distressed assets comes totally handy for newly investors in real estate investment, but the process occurs differently than buying other traditional assets.
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Finding distressed property for sale
Mashvisor’s real estate investment software offers an easy and effective solution for those looking for investment properties for sale in the US housing market. Using the Mashvisor Property Marketplace, you can quickly search for a variety of distressed properties for sale that meet your criteria.
The advantage of using this tool is that it allows you to analyze distressed properties on the platform so that you can make wiser investment decisions. Using our investment property calculator, you can get pre-calculated data on the expected rate of return on a rental property. Additionally, you can use Mashboad to find distressed property owners. You can access property owner data such as email addresses and phone numbers and connect with them.
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Concerning an experience real estate agent
If the investor is new to such investment they must hire some real estate agent who can help them analyze the investment value and future assessment. Investing in distressed assets being a controversial step requires guidance from an experienced field for better returning scope.
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Choosing a real estate market to invest in
An investor should never compromise on choosing the location where a distressed asset for sale is located. The location plays a crucial part in determining the potential profit.
Therefore, even before you begin shopping around for distressed property for sale, you should research the neighbourhoods. You’ll want to focus on up and coming neighbourhoods that will come under the convenience of the investor’s budget.
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Determining the ownership of the property
Ownership of a personal property
Personal property ownership is almost as easy to search for as real estate. First, search for any liens secured by the personal property that you are buying. The next place to check is the tax records. Nearly every state taxes personal property and you can also check to see who has paid the taxes on the equipment you are buying.
Ownership of business entity
To determine the ownership of a business entity, first search the lien and tax records just like you would for personal property. Then, a detailed analysis must be performed of the records of the entity. Next, you must determine the applicable secretary of state’s office for all corporate filings made by the entity.
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Calculating the sale price
You can get a distressed property at a very cheap price below average price. Negotiating can be a bigger option available with purchasing the asset considering its availability and the financial burden.
Deciding a budget for such assets always comes handy which prevents falling in foreclosure. Repairs and investment being included in that budget of buying distressed assets must be calculated properly before going for such investment. The investor must prevent from making any bigger purchase before the investment. Also they must review credit reports as it will help them qualify the process of getting better loans.
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Due diligence
It’s not always pleasant to invest in distressed assets, as the return is not always profitable if proper investment tools were not made. So before investing the investor must make proper due diligence in order to have a good return and unpleasant surprises.
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Finalizing the investment
After analysing all the above factors, doing proper due diligence and making proper negotiation investors must decide a distress asset with potential profit. Then he must make the offer which should be below the offer of the seller so that a better comparison must take place. A good realtor will help you write a competitive offer and negotiate the best deal.
Conclusion
Cheap investment sale being a dream for real estate investors, distress assets provides a wider scheme along with high investment. But the upgrade requires work for the high return the investment comes at a stake. Real estate investment strategies play a great rule for those who are willing to work for it. We can conclude this as potential investment.
Basically, the investor needs to focus on some major factors before purchasing a distress asset. Those are verifying the debt associated, the proper ownership and last but not the list the actual value of the asset.
Verifying debt makes sure the further obligation which comes along with the asset which can become a financial burden in future for the investors buying such distressed assets. In order to check the potentiality of the asset and to ascertain the budget of investment a proper debt calculation must be done beforehand. The main concern before doing such is to make sure that the owner is telling the truth about the amount of the debt, number of the debt associated with the property being sold.
The investor must make sure that the party he is dealing with is the real owner of such property in order to avoid falling into any fraud or foreclose. In the case of real estate business it is easy to find the real owner of assets. The country in which property is located maintains a list where the owner files a record of their ownership. Also, when acquiring real property, you nearly always engage a title company to insure a title, and title companies will not do that unless they perform their own search.
Then finally investors must ensure actual value for the assets.
Considering all essential factors carefully, investors must go for the purchase. In case of such controversial investment every step must be taken into account keeping an eye over the concept of potential benefit. The debt, buying price and all the crucial factors are key for determining whether the investment is worthwhile or not.
References
- https://www.mashvisor.com/
- Buying Distressed Properties: 3 Pros and 3 Cons
- How to Do Your Real Estate Diligence When Buying an Investment Property
- https://www.grayreed.com/
- Mashvisor Property Marketplace
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