How to Find Distressed Properties: 9 Proven Strategies

Foreclosure activity in the U.S. is on the rise, with overall foreclosure activity increasing 16% from last month, according to a recent report by ATTOM Data Solutions. States with the greatest monthly increase in foreclosure starts include Utah, North Carolina, Michigan, and Georgia.

Distressed properties can be very attractive to real estate investors, but you need to know what to look for and where. In this article, we’ll explain how to spot a property in distress before the competition does, and explain how to find and qualify distressed property deals.

What Makes a Property Distressed?

A distressed property is real estate that the owner has been unable to maintain or pay the mortgage on. Distressed homes may be in a pre-foreclosure status, currently in the process of being foreclosed on, owned by a bank or government agency, or simply be property in bad condition. 

Property can also become distressed if renovations are halted in mid-stream due to lack of financing, or if a deal unexpectedly falls through and an owner needs to sell fast.

Distressed properties generally fall into one or more of the following categories:

• Short sale with the risk of falling into foreclosure
• Already in the foreclosure process
• Bank owned or REO (real estate owned) property
• Have unpaid property tax liens
• Badly in need of repairs, updating, or renovation

Signs a Property May Be Distressed

Before you start looking for distressed property, it’s important to know what to look for. Some of the key indicators a property may be distressed include:

Although home prices are rising in most real estate markets in the U.S. that doesn’t mean prices won’t occasionally correct. People who purchase at the top of the market are oftentimes the ones that are most eager to sell when housing prices enter a normal down cycle. 

Buyers who paid too much for their home could be struggling to stay above water and may be more than eager to sell.

The sales price can also be used to estimate the current mortgage payment the property owner has to make on the house. In hot real estate markets where prices are rapidly rising, buyers sometimes put as little as possible down, resulting in high monthly mortgage payments. 

If the economy begins to slow some owners may be unable to make ends meet, creating a pre-foreclosure or short sale opportunity for a well-capitalized investor.

First impressions matter, especially when you’re looking for signs a property is distressed. According to Realtor.com, telltale signs of a distressed property include:

• Homes where the lights are not turned on at night.
• Properties with yards overgrown with weeds, broken windows, and faded paint.
• Uncollected newspapers or junk mail.
• Notices posted on doors and windows.
• Homes that stand out from other properties on the block due to a general state of neglect.

Sometimes property becomes distressed due to reasons beyond the owner’s control. Life-altering events such as a job loss, divorce, or death can happen to anyone. In situations like these, people may be emotionally or financially unable to handle the burden of owning a home. 

Although there may be deals to be found, investors should make sure to appear empathetic. Buyers who appear too eager to profit at the seller’s expense may find even the most reasonable offers rejected.

How to Find Distressed Properties: 9 Strategies

Now that you know what they look like, the next step is to find distressed properties. The best ways to find homes in distress include:

1. Driving for Dollars

Although doing an old-fashioned drive-by may not be the most efficient, it can be the most effective. That’s because you may spot potential distressed properties driving around that other investors miss simply because they aren’t willing to put in the time and effort. 

If you’re a remote real estate investor, ask a member of your local real estate team to hit the pavement and look for details, making sure to compensate them for their time and trouble.

2. Real Estate Wholesalers

Wholesales are experts at finding real estate priced below market, putting the distressed property under contract, and then looking for an investor just like you to assign the contract to. They’ve already scoured the market looking for the best deals and convinced the owner to sell. 

All you need to do is conduct your due diligence and make sure the numbers pencil out before taking over the contract. You’ll pay a real estate wholesaler a small assignment fee, which can be a small price to pay for a great real estate wholesale deal.

3. MLS

Your local multiple listing service is another good resource for finding distressed properties. Ask your real estate agent to look for properties with more days on market than average, homes that have been listed for sale multiple times, or listings that have expired. 

Oftentimes short sale and pre-foreclosure homes are listed on the MLS. Property listing websites such as Zillow, Homes.com, and Realtor.com also pull data from the MLS if you prefer to conduct an initial search first before getting a local real estate agent involved.

4. Distressed Property Websites

According to recent research by Kiplinger, the 15 best foreclosure sites for finding distressed properties include:

• Equator.com offers free listings of foreclosure and short sale homes.
• HomePath.com lists thousands of foreclosure homes being sold by Fannie Mae.
• HomeSteps.com lists homes in foreclosure that Freddie Mac is selling to investors or homebuyers.
• Wells Fargo REO Properties requires you to contact the listing agent directly.
• CitiMortgage and Bank of America also list properties in foreclosure owned by the bank.
• RealtyTrac provides proprietary information such as pre-foreclosure addresses and owner information for a fee of $49.95 per month.
• Foreclosure.com is another website for finding distressed properties online for $39.80 per month.
• Government sites for foreclosure listings include HUD.gov, HomeSales.gov, FHA Single Family Real Estate Owned Properties, and USDA-RD/FSA Properties for single-family homes, multifamily homes, farms, and ranches.

5. County Tax Records

Property tax records are public information on many county assessor websites across the country. Generally speaking, if a homeowner can’t pay their taxes the property may soon become distressed. Unpaid property taxes are also an indication that the property owner may be delinquent on their mortgage as well. 

6. Court Records

To find homeowners who are behind on the mortgage you can research the local county court records. The public records section of the county recorder’s office lists notices issued to a homeowner and publicly recorded before and during the foreclosure process, including Notice of Default, Lis Pendens, and Notice of Sale.

7. Property Auctions

REO property is often sold at auction if a lender forecloses on a home and is unable to sell it directly. Property auctions are advertised in your local paper, and on real estate auction websites such as Auction.com, RealtyBid.com, and Tranzon.com.

8. Probate

Probate courts deal with the assets and debts of a person who has died. The job of a probate judge is to ensure that creditors of the deceased are paid and any remaining assets - such as real estate - are properly distributed or sold.

If the property is distressed and requires a lot of work, the heirs may be willing to sell it to a real estate investor at a very fair price. Good resources for probate leads include the probate records at the local county courthouse or city hall, US Probate Leads, and Successors Data.

9. Networking with Lawyers

Lawyers who specialize in the areas of real estate foreclosures, probate, or family law can also be a great source for finding distressed properties. While it takes time to build a relationship with an attorney, it may be well worth your effort.

Networking with lawyers can give you the inside track to find distressed homes coming available due to events such as a financial crisis or divorce.

Pros and Cons of Buying Distressed Properties

Distressed properties can be found anywhere along the risk-reward spectrum. 

Some distressed deals may be relatively low risk and easy to fix, such as a rental property occupied by a non-paying renter owned by a landlord who doesn’t know how to evict. On the opposite end of the spectrum, a distressed property may have deteriorated so much that the cost of doing repairs is more than the current market value.

Now let’s look at the pros and cons of buying distressed properties. Keep in mind that many experienced real estate investors have put together a team of experts that know how to turn a disadvantage into a winning opportunity:

Pros

• Prices are usually below market.
• Good opportunity for instant equity. 
• Entry-level property in a neighborhood that might otherwise be unaffordable.
• May be easier to finance when buying an REO directly from the bank.
• Potential for oversized profits when buying the right distressed property in the right place at the right time.
• Low price combined with built-in equity creates more exit strategies, including a long-term hold or fixing and flipping.

Cons

• Hidden repairs can increase the true cost of buying a distressed property.
• Competition for short sales and REO property in some markets can drive prices up.
• Buying distressed property can require large amounts of cash if you want to do a deal fast.
• Title insurance may be difficult to obtain when buying foreclosed property at auction or directly from a bank.
• No guarantee a distressed property can be sold for more than what you paid.

How to Qualify Distressed Property Deals

Once you’ve located a distressed property, you’ll want to make sure it’s worth investing in. As some investors have learned the hard way, just because a property is distressed doesn’t mean it’s a good investment.

Follow these 5 steps to analyze and qualify a potential distressed property investment:

1. Review property details such as square footage, number of bedrooms and bathrooms, and neighborhood details. You can use the free rental property analyzer in this article to forecast the potential return of a property. Simply enter some information to view projected key return on investment (ROI) metrics, including cash flow, cash-on-cash return, net operating income, and cap rate.
2. Research owner details by searching the county assessor records, then look for the owner’s social media profile for indications their home may soon become distressed due to financial problems or other life-altering events.
3. Run recent comparables to learn what the home is currently worth, then use the county assessor’s website to estimate the current outstanding mortgage balance and monthly payment the owner has to make. If the owner has very little equity or is upside down with negative equity, they may be more than willing to sell to a real estate investor who can take the property off of their hands at a fair price.

4. Ask your local escrow officer to run a title report on every distressed home you’re considering investing in. Title issues such as a lien or judgment can be time-consuming and expensive to resolve after you own the property.
5. Check Zillow or the MLS to see when the last sale was and whether the home was recently listed for sale. Doing this will give you an idea of what price the owners were expecting and how to overcome any potential objections to your offer.

Final Thoughts on Finding Distressed Properties

Finding a distressed property is more complicated and time-consuming than investing in a turnkey rental property, but for some real estate investors it may be worth the extra effort. 

While distressed property isn’t right for every investor, it can be a good source for deals when you know where to look and what to look for.