Is buying distressed properties a good real estate investment?

Buying distressed properties has become incredibly expensive as house prices skyrocketed 16.9% in 2021, with some localities seeing even bigger increases. The effect is to exclude major owners and small investors while favoring institutional investors with better access to capital.

I live and invest in Atlanta, which has become ground zero for institutional investors buying single-family homes. According to a report from Atlanta Studies, “In the summer of 2021, large corporate investors purchased 17% of all single-family homes sold in Atlanta.” Miami and Tampa, Florida are both experiencing a similar phenomenon, while other US cities may see this type of activity increase soon.

Distressed properties are homes that are near or already foreclosed and buying them has always been a preferred method for real estate investors who are flipping homes. Many owners also use this method. The strategy is to buy distressed homes for as little money as possible, spend the money on renovations, and then either flip the house for a quick profit or rent out the property.

So should private investors still buy distressed properties amid rising house prices? If you can find a good deal, the answer is yes.

Source of images. Getty Images.

The foreclosure market

If we were saturated with foreclosures – and the prices to get them stayed low – it would be an easy decision. We would like to invest. But we are not saturated with seizures. It’s quite the opposite. Some analysts predicted more foreclosures this year after the moratorium on foreclosures was lifted in July 2021, and it has happened, but there is still not an abundance of foreclosures for investors to buy.

In January 2022, there were about 50% fewer foreclosures than in January 2020, according to SoFi. According to the same SoFi article, ATTOM Data Solutions expects foreclosures to remain below historic levels for 2022. Lenders have modified loans and homeowners are enjoying their home equity these days.

However, you can still get a deal if you can find a foreclosure to buy. According to Property Onion, you can find auctions selling foreclosed homes at discounts of 20% to 50%. Don’t panic buy, though. Do your regular due diligence, which includes inspecting the home to understand what repairs and renovations are likely to cost. Keep in mind that these are bloated times and service and materials will likely cost more now. Also, it makes sense to hire a real estate attorney who can perform a title search and provide legal advice.

Be ready to buy now

Start raising your funding now. If you’re waiting on the sidelines for a real estate crash to happen, you might be waiting forever. This market is not the same as the last time we saw this type of housing inflation — in the years leading up to the 2008 financial crisis. This time there is significant housing inflation nationwide as there were before, but that’s where the similarity ends.

This time there is a record supply of single-family homes. Last time there was an overabundance. This time the demand is strong. Last time out, all homeowners who sold short or were foreclosed couldn’t get a mortgage to buy when prices fell.

The current activity of corporate investors is another reason why the current real estate market is not conducive to a crash. In times of rising house prices, people are eventually shut out of the market (ie, they are if subprime mortgages aren’t an option). Being off-price normally reduces demand, which would generally lead to lower house prices.

But remember that banks and corporations can and do buy at these inflated prices. So, don’t expect any price drops to happen, at least not anytime soon. Instead, try to make a deal to get ownership of real estate for yourself, either to flip it or to keep and rent it out.

If you can get an undervalued, distressed property now, you might want to do it, even if it requires some work. Prices should continue to rise this year, so you’ll likely gain capital no matter what you do.