When you know how to find distressed properties for sale, you can potentially earn substantial returns. However, it requires a real estate investor who understands the ins and outs of turning these houses into profitable investments.

The quickest way to gain access to a vast inventory of distressed property leads is to create a free account with New Western.

You can also continue reading to discover how to find distressed houses on your own in this in-depth guide.

Identifying Distressed Homes

To begin with, what exactly is a “distressed home”?

Real estate investors frequently use the term “distressed property” to refer to a property that is facing financial, legal, or physical distress. This could be because the owner can’t pay the mortgage payments or property taxes, which kick off the foreclosure process, or it could be because of a divorce or probate.

In the eyes of the mortgage lender, a house is in distress if the owner is over 30 days overdue on their mortgage. Additionally, if the homeowner doesn’t make any more mortgage payments for ninety days, the loan is now known as a “non-curable loan.”

A non-curable loan means that the bank will keep track of it as a non-performing loan. Until the borrower pays it off entirely or the bank sells it to raise capital, the loan will be listed as non-performing on the bank’s records.

There are notable distinctions between properties that are financially and physically distressed. One example is when the owner of a property is having money problems but the property itself is in good shape. This is the kind of scenario where investors could score a great deal on a (potentially) high-performing property.

Whatever the reason for the property’s distress, the result is usually a highly motivated seller.

Financially Distressed Properties

In real estate, there is only one kind of problem: lack of money. And when a house needs extensive repairs that a homeowner can’t afford, it becomes distressed. Essentially, it’s not the physical property that’s in distress; it’s the finances tied to the property.

For example, if a homeowner is 30 days or more behind on their monthly mortgage payments, we can say that they are having money problems. When money is tight, the first indicator of financial strain is when important bills like mortgages or property taxes go unpaid. When this happens, a public records search will show if the property has a lien on it (we’ll talk more about this later). This is often done through the county court records office.

There is another, more difficult way to tell if someone is having money problems. Check the loan-to-value ratio of a property to see if the risk of not paying back the debt is higher than the market value of the property.

When the value of a property declines to the point that debt exceeds the house’s worth, homeowners may question whether making mortgage payments is still worthwhile. Although the distressed property owners could refinance, if the house doesn’t have much value, they would have to put up more money, which they might not have on hand or need to spend on something else.

Physically Distressed Properties

Often times, you can spot a distressed property simply by the way it looks. Some physical signs of distress include the following:

Boarded-up windows
Overgrown trees, bushes, and weeds
Roof covered in moss and/or missing shingles
Broken windows
Uncollected mail or newspapers
Numerous code violations on door
Overgrown grass
Lights are off at night
Overall, poor condition

Property that hasn’t been maintained for a long time can be in bad shape, even if there are no obvious signs of damage. If the fixtures and appliances in a property are outdated and in need of replacement, they may also qualify as distressed properties.

It will be simpler to rent the house at market rates because of these antiquated features. Unfortunately, some homeowners can’t afford to update the property to meet market standards, thus keeping the property in distress.

Properties can also be labeled as distressed if unsafe substances are found anywhere on the property. For instance, asbestos could be found in an older home that no one knew about when it was being fixed up. Also, getting rid of asbestos can be pricey, and the homeowner might not be able to afford it.

Land that was previously utilized for “toxic” purposes, such as dry cleaners or gas stations, is another example. Again, it may need costly repairs before it can start generating a profit.

Distressed Properties Due to Personal Issues

Property loss occurs when homeowners put other concerns before basic maintenance. If the owner doesn’t take care of the property’s upkeep, its market value can go down. For example, the owner may fall behind on repairs because they’re going through a tough time, be it a serious illness, divorce, or bankruptcy. If the repairs get so bad that they don’t have the means to repair them, homeowners look for a way out.

Then there are some property owners who own numerous rental properties and they never raise the rent. Their rental properties became “distressed” because they failed to increase the rent to keep up with the current market. Therefore, what once was a profitable investment becomes a money pit because the operation costs exceed the income. This sometimes happens with “legacy rental properties,” where the previous owner failed to make necessary improvements to bring them up to date with market trends and demands.

Modern utilities, furnishings, and amenities may not always be practical; thus, it may be required to update a well-maintained building. Distressed houses often attract experienced investors who can identify the potential and devise a strategy to turn a profit.

Why Invest in Distressed Properties?

Investors can find great deals on distressed residential properties by buying them for less than their true market value. After fixing up the property, renting it out or selling it, the investor may make a lot of money, and everyone benefits from this scenario: the investor can turn a profit, and the struggling property owner can straighten out their finances and avoid going through the whole foreclosure process.

When investing in anything, it’s good to know the pros and cons of buying a distressed property.

Benefits of Buying a Distressed Property

1. Low Purchase Price

For investors, one of the best things about distressed properties is that they can be bought for less than comparable ones that aren’t in distress. In this case, the prices are usually lower because banks and other financial institutions want to get rid of the homes quickly to get their money back. These lower prices can mean bigger profits for buyers who can fix up the property, sell it, or rent it out and make money.

2. Fewer Competitors

There is usually less competition when dealing in distressed property investments compared to other types of real estate. Many buyers are afraid to get into the distressed property market because of the potential risks and difficulties that could come with it. Therefore, people who are ready to deal with these issues will usually find more chances and less competition when looking for and buying homes.

3. Value-added potential

There is often a chance for investors to make money on distressed homes by fixing them up, renovating them, or turning them into something else. As a result, the property may become more valuable, and investors may be able to make money from selling it for a higher price or rental income after fixes are made. It’s also possible for distressed deals to have a higher return on investment than more standard real estate investments because they can be fixed up and made more valuable.

Drawbacks of Buying a Distressed Property

1. Unknown Condition of the Property

The fact that you don’t know how bad the property is, is one of the biggest risks of buying in distressed properties. It’s not unusual to come across a few promising distressed property opportunities, but realize they’re in bad shape because they haven’t been taken care of or have been vandalized. This can mean that you have to pay a lot of money for repairs and upgrades, which can cut into your profit margin if you don’t properly estimate and budget those costs when you buy the property.

2. Legal and/or Financial Complications

Having a distressed property can cause a lot of legal and financial troubles, like liens, ownership problems, and unpaid taxes. There are problems that might make the buying process take longer and cost more. In some cases, these problems might even stop you from buying the property. Before making an investment, careful due diligence must be done in order to find and fix any potential complications like title issues that could hold up the sale.

3. Unstable Market

Sometimes changes in the economy can have a bigger effect on the market for distressed properties on the normal market. As a result, investors may have to deal with higher risk when it comes to property values and rental demand. To be successful when dealing in distressed properties, you need to carefully study the market in your area and be ready for possible changes in market conditions.

4. Fewer Financing Options

Financing the purchase of a distressed property as a real estate investor can be a complex process with several potential hurdles. Here are some of the key challenges you may face:

1. Property Condition: Distressed properties often have significant physical issues that may deter traditional lenders. Problems like structural damage, code violations, or extensive repairs needed can make securing a mortgage more difficult.
2. Appraisal Issues: The appraisal process for distressed properties can be problematic. Appraisers may have difficulty finding comparable properties, leading to lower valuations. A lower appraisal can affect the loan-to-value (LTV) ratio and result in a smaller loan amount.
3. Lender Restrictions: Many traditional lenders are hesitant to finance distressed properties due to the higher risk involved. They may have stricter lending criteria, requiring higher down payments, better credit scores, or additional documentation.
4. Higher Interest Rates: If you do find a lender willing to finance a distressed property, be prepared for higher interest rates. Lenders often charge more to offset the increased risk.
5. Funding Speed: Distressed properties, especially those in foreclosure or short sale, often require quick closings. Traditional mortgage processes can be slow, putting investors at a disadvantage compared to cash buyers or those with access to quicker funding.
6. Complex Negotiations: Dealing with distressed properties often involves complex negotiations with sellers, banks, or other lien holders. This can add time and complexity to the financing process.

Title Issues: Distressed properties can come with title problems such as liens, unpaid taxes, or disputes that need to be resolved before financing can be secured.

How to Find Distressed Homes for Sale

As the real estate market gets more competitive and pricey, distressed property deals are one of the few times you can get a good deal. Motivated sellers of these properties, like homeowners who are on the brink of foreclosure or creditors trying to sell bank-owned properties, have strong reasons to make a deal.

This means you’ll have a better chance of getting a better deal at a lower purchase price.. Subsequently, it can be hard to find these sought-after homes, which is the problem. The level of competition you face may be high, depending on how you go about finding profitable deals. There may also be other savvy investors who want to find a good investment place where they can make a lot of money.

For the best real estate deals, you need to be patient and keep looking. To help you get ahead of other seasoned investors, here are seven tried-and-true ways to find distressed property investment opportunities.

MLS (Multiple Listing Service)

You can find abandoned properties in a number of places, such as the multiple listing service (MLS) in the neighborhood you want to buy in. Ask your real estate agent to look for homes that have been on the market longer than normal, listings that have expired, or homes that have been put on the market already.

The Multiple Listing Service has a lot of pre – foreclosure and short-sale homes for sale. MLS data is the source of information for many property listing websites, such as Realtor.com, Homes.com, and Zillow, if you would like to conduct a preliminary search on your own before hiring a local real estate agent.

Driving for Dollars

Driving for dollars means going around a neighborhood looking for houses that look like they haven’t been taken care of. If you see a house that looks like it hasn’t been well taken care of in a while, you can contact the owners and ask if they’re interested in selling their home. While this can be more time-intensive, you’re essentially curating your own exclusive list of properties with investment potential.

As a driver, there are two ways to make money:

You do everything by yourself. You are in charge of keeping track of your progress and possible leads. You can do this by writing information about properties by hand or by using Google Maps to show your route. It’s possible to do, but it will take a lot of work. Besides, the only cost you’ll have is gas.
Getting the Drive for Dollars app. For a monthly fee, you can keep track of this kind of information with DealMachine or PropStream. If you’re interested, you can try out both apps for free. They can also use in-house direct mail campaigns and look up information about sites and their owners.

Before you start driving for dollars, you need to make a list of the things you want to focus on. Look into it and find good places to buy a house, like a target neighborhoods or cities close by that are known for their high-end shopping.

Online Databases for Distressed Properties

Finding undesirable houses has never been easier than in the modern digital era, thanks to the internet. The following are some of the most well-known online listing sites:

Another good way to find a home that is having problems is to go straight to the source. Financial institutions had to foreclose on so many homes when the real estate market tanked in 2008 and 2009 that they had to set up REO departments.

The Bank of America REO, Bank Owned Homes, Wells Fargo’s REO websites, local credit unions, and community banks are fantastic places to start looking for distressed property investing opportunities.

Of course, you can’t forget government websites like:

Property Tax Assessors

One early indicator that a property may go into hardship is when a homeowner neglects to pay the taxes on the property on time. Local tax assessors’ websites are often good places to find, download, and look over the tax records of homes whose property taxes have not been paid.

By typing “(county name) tax assessor” into Google, you can find these websites. It should take you to the county’s tax inspector from the search results. Additionally, public records and vital statistics for your area can be found online via a directory.

Internet Marketing

You can save time and effort by organizing your online marketing so that foreclosed homes come to you instead of you having to look for them.

You will need to put together a website that provides an overview of your business, your services, and how you can assist financially distressed sellers. Your contact information should be easy to find and include more than one way to get in touch with you.

As an example, you can use social media as part of your marketing plan, but you might want to spend more money on paid ads on Google and Facebook to get better results. That’s not all—if you buy ad space on these sites, you can reach people in the neighborhoods of your choice.

Once your website is up and running, keep adding to and changing the information on it. For instance, if you want to reach people in different neighborhoods, it can be very beneficial to make landing pages that are specific to those areas.

If the thought of setting up and maintaining this method makes you feel stressed, you might want to think about working with a marketing team to help flesh out all of your online advertising options.

Keep in mind that if you’re not experienced in digital marketing and advertising, this can be an expensive and ineffective way to acquire an investment property. Real estate acquisition is a very competitive market with accompanying high prices for views and clicks. If you don’t know how to set up and manage an effective campaign, you’re more likely to spend a lot of money without a lot of results. If you’ve never done this before, you’d be better served to hire and/or learn from someone who does digital marketing campaigns professionally.

Auctions

Property auctions are used to sell homes that have already been placed under probate or that have been foreclosed by the mortgage company. Most of the time, local governments advertise these sales on their websites, in the newspaper, and occasionally even by other financing companies.

If you’ve never been to a real estate auction before, the best way to get ready is to watch one in your area. Auctions usually have their own rules and move quickly, and buyers need to be able to decide quickly. You’ll be more assured while making your bids if you know how the events will play out. In addition, you might need to present a certified check for a specific amount in order to be accepted as a serious bidder.

Purchasing distressed assets at auction can be a risky investment because additional information is often needed. Before purchasing the house “as is,” you won’t have much, if any, time to get the typical round of property inspections, assessments or even to visit the property in person.

You’ll also need to put down a sizable earnest money deposit in addition to paying cash for the house. Plus, it’s a great way to network and meet other real estate investors, even if you don’t win any bids or anything else you put in.

Real Estate Agents and Wholesalers

Working with a real estate agent who works with short sales, foreclosures, and home flips can be very helpful when you’re looking for chances to spend. Many times, real estate agents are the first to know when a house is for sale, especially if it hits the MLS. They also usually know their markets inside and out.

Alternatively, you may choose to collaborate with real estate wholesalers. They often have a list of investors they call when they come across a property they get under contract and need a buyer. Finding financially distressed homes, estimating repair costs and the properties’ ARV (after repair value), and then offering them to real estate investors is something they do extremely well. For a fee, the wholesaler ultimately sells the purchase contract to an investor who is interested in buying these types of properties. The difference between the price the wholesaler has under contract with the seller and the price at which they sell the contract to the end buyer is the wholesaler’s fee. This fee compensates the wholesaler for their effort in finding the deal and facilitating the transaction. For example, if a wholesaler has a property under contract for $100,000 and finds a buyer willing to purchase it for $110,000, the wholesaler’s fee would be $10,000. So connecting with various wholesalers and getting on their contact list is a great way to have others do the finding for you. Just keep in mind that it comes with a bit of a cost.

A great thing to do is to contact these agents and wholesalers and Purchasing a home at a lower price could end up resulting in a fast return on investment, even after improvements are finished. Make sure the property is a good fit for your investing strategy by doing your homework.

Direct Marketing

Direct marketing means calling people out of the blue or sending them mail offering to buy their distressed or abandoned homes. Your goal with direct marketing is to create a list of hundreds, if not thousands, of distressed properties. If you have a longer mailing list, there is a greater possibility that you will receive a response.

These other strategies, like driving for dollars, going through tax and mortgage delinquencies, or even asking a real estate agent to take outdated listings off the MLS, can be used with direct marketing.

The hard part comes after making the list: sending a carefully thought-out message that’s going to make the homeowner want to sell their house.

Always remember to show the owner empathy. They’re probably going through a tough time, so try not to come across as cold or aggressive. Helping someone out of a jam usually results in better terms and a lower price for you. Avoid taking advantage of people; instead, try to find a solution that works for everyone, and make sure your offer makes that clear.

Direct marketing can be an effective strategy for finding distressed properties as an experienced real estate investor, but it can come with several cons:

High Costs: Direct marketing, such as sending out mailers or online ads, can be expensive. The cost of printing, postage, and digital advertising can add up quickly, especially if the campaign doesn’t yield immediate results.
Time-Consuming: Creating and managing a direct marketing campaign requires significant time and effort. This includes designing marketing materials, building a targeted list, and following up with potential leads.
Low Response Rates: Direct marketing campaigns often have low response rates. Many recipients may ignore the messages or consider them junk mail, leading to a small number of actual leads.
Regulatory Compliance: There are regulations governing direct marketing practices, such as the CAN-SPAM Act for email marketing and the Do Not Call Registry for phone calls. Failing to comply with these regulations can result in legal issues and fines.
Targeting Challenges: Identifying and targeting distressed property owners can be challenging. It requires access to accurate and up-to-date data, which can be difficult to obtain and verify.

Considering these potential downsides, it’s important for real estate investors to carefully plan and execute their direct marketing strategies, balancing the potential benefits with the inherent challenges. If you are just beginning in these marketing efforts, there is the real possibility of wasted time and money.

Probate

As part of the legal process after someone dies, probate leads are real estate sites that become available for sale. When someone dies, their property, including real estate, goes through a formal process to settle any debts and give the property to beneficiaries.

A lot of the time, these assets may not have clear heirs, or the heirs may decide not to keep or take care of them. Because of this, the courts or receivers often try to sell these homes quickly and for a lot less than they are worth on the market. It is important to keep in mind that probate homes are usually sold “as-is,” meaning that the executors do not tell the buyer about any problems that might exist. This means that people who want to buy probate properties need to be ready to take on the risks and understand the complicated probate processes.

Working together with lawyers and estate managers is another good way to find probate properties. The best way to get in touch with prospective heirs and executors is to network with local probate attorneys. You can accomplish this by attending conferences, networking events, or just contacting nearby law firms. They are more likely to refer customers to you if you establish yourself as an expert in your field and work with them to achieve this goal.

Networking

A key part of finding potential distressed homes is making connections with real estate professionals and using those connections to your advantage. It’s easier to find distressed properties in your market if you know people in the business. These connections can give you access to deals that aren’t advertised on the market and that you might miss otherwise.

Connecting with other investors, property managers, agents, and brokers in the real estate industry is an important part of building a solid network. Through industry events, real estate investing groups, and various internet platforms, you can build a network of contacts that can help you learn more about the business and give you access to special opportunities.

Networking is more than just passing around business cards; it’s an investment in connections that can give you unique insights, leads that aren’t on the market, and an edge when you’re looking for fixer-uppers. For any investor looking to succeed in today’s competitive market, networking is essential. The more connections you have in the industry, the more opportunities you’ll have for finding distressed properties with real potential.

Try joining local real estate groups to establish these valuable connections. It for sure beats doing cold calls.

Final Thoughts on Finding Distressed Homes for Sale

Investing in distressed properties that require work and are offered below market value has the potential to be a lucrative venture. The TLC part of this strategy comes with some risk, but if you have a strong team and a good plan, the result could be very profitable.

Whether you’re learning how to find distressed properties for sale or if you’re trying to surround yourself with like-minded, successful investors, New Western and its many Facebook groups are great places to satisfy all your real estate investing needs.

How to Find Distressed Properties

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