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Buying Distressed Properties

[Mar 26, 2010.]


When does it make sense to buy a distressed property? Some media reports glamorize the idea of buying foreclosures for "pennies on the dollar." Can you really find a home at bargain-basement prices or is there more to it? Use the following tips to decide if buying a distressed property -- and getting a mortgage to do so -- is the way to go.

Nearly half of all home purchases (48.1%) in February involved distressed properties, according to the Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions. Distressed properties purchased included homes in preforeclosure and in the foreclosure process.

Short Sale Properties

The main types of distressed properties are short sales, which occur when mortgage lenders agree to accept a lower payoff amount that what's actually owed on a home mortgage. Short sales can help a homeowner avoid foreclosure, while allowing you to get a property below market value. However, many mortgage lenders have been slow to move on short sales, so enter this type of transaction with a lot of patience.

"Short sales now account for the No. 1 category of distressed property, Thomas Popik, research director for Campbell Surveys, said in a statement. "Losses on short sales are typically lower than for REO, and both lenders and the government are pushing programs to facilitate short sales. But as more and more people default or simply want to walk away from their properties, mortgage servicers are having trouble expeditiously processing these complicated transactions."

Mortgage Lenders as Property Owners

Real Estate Owned (REO) homes have already gone through the foreclosure process and are now owned by mortgage lenders. There are damaged REOs and move-in ready REOs. Because mortgage lenders don't want to be in the business of owning and maintaining real estate, you can usually buy an REO below market value.

In many cases the bank that owns an REO property is willing to give you a mortgage to buy it. However, that doesn't mean you still shouldn't shop around to compare several mortgage quotes. It usually takes less time to buy an REO property than a short sale.

Beyond Mortgage Expenses

While you can definitely find distressed properties being sold way below market value, that doesn't mean you won't have other related expenses. Distressed homes often have damage from angry homeowners or simply from being neglected. 

When shopping around for a home mortgage don't just look at how much your down payment and monthly payments are going to be. Figure out how much you expect to spend for any repairs and upgrades that need to be done and where that money is going to come from.


About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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