Every home buyer wants a deal, but when the price of a piece of real estate gets too low, there’s a reason. That’s when it’s time to stop, take a breath and let that tingling Spidey sense go to work.
There’s a good chance you’re standing on top of a short sale implemented by an owner desperate to avoid foreclosure. That doesn’t mean you should automatically walk away - just realize you’re advancing into a minefield and should take care before signing on the dotted line.
Consider the following pros and cons of buying a distressed property to prevent getting burned:
The Pros
The best evidence in favor of buying a distressed property is obvious - the price. It’s what got your nose twitching in the first place.
The reason it’s so low, however, is the owner has neither the money nor time to put into the house to fetch a higher price.
If he or she is not desperate yet, they’re two steps away. Whether you’re looking to live in the place or fix it up to rent out, you sit in the proverbial catbird seat on the deal as long as you retain the power to walk away. Unless the place was built on a dioxin dump or constructed from lead and asbestos, there’s a good chance you could plow some money into it and sell it for a profit.
The Cons
You have basically one reason in favor of buying a distressed property. Every other reason warns you against it.
This is not to say you should walk away from the idea, but be sure you calculate everything that could go wrong. If you find yourself at a creative deficit, watch the 1986 movie, “The Money Pit,” starring Tom Hanks. A distressed property’s condition might be worse than you realize at first glance. Thus, the reason it is called “distressed.” Unless you’re qualified to do the work yourself, you’ll pay (perhaps a lot) for contractors and materials to bring it up to snuff. Electrical and plumbing issues can run into serious money.
Other downsides to a short sale are there’s little chance the homeowner will foot any of the rehab bills, and it’s possible you won’t be able to have an inspector give it the once over before you buy. You literally could be purchasing a property almost sight unseen.
A final drawback is trying to get a lender’s approval for the purchase. It isn’t unusual for this kind of real estate to not meet minimum lending guidelines.
The Bottom Line
If this is your first experience with buying a distressed property, tread carefully. People can and do successfully this kind of transaction every day, but the ones who manage it successfully have a team of reliable contractors in place to do the work and trusted real estate and legal minds to close the deal. Educate yourself on the potential pitfalls, don’t get in a hurry, and you might be just the buyer to turn a money pit around.
Neal Johnson is a CMCA, CRB, CNE and GRI-certified, licensed real estate broker at Network Real Estate, which has exclusively served a high volume of property sales and purchases in the greater Wilmington area for more than 30 years. With three offices at College Road, historic downtown Wilmington and Pleasure Island, Network’s brokers are widespread and well-versed in this marketplace, making Network a preferred real estate company for first-time homebuyers and beyond.
