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 locales experiencing even higher increases. The effect is pricing primary homeowners and small-time investors out 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 summer of 2021, large corporate investors bought 17% of all single-family homes that were sold in Atlanta.” Miami and Tampa, Florida, are both experiencing a similar phenomenon, while other cities across America might see this type of activity increasing soon.

Distressed properties are homes close to or already in foreclosure and buying them has traditionally been a preferred method for real estate investors who flip houses. Many landlords use this method as well. The strategy is to buy distressed homes for as little money as possible, spend some money for renovations, and then either flip the house for a fast profit or hold the property to rent.

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

Image source. Getty Images.

The foreclosure market

If we were saturated with foreclosures — and prices to obtain them remained low — this would be an easy decision. We’d want to invest. But we’re not saturated with foreclosures. It’s just the opposite. Some analysts predicted more foreclosures this year after the foreclosure moratorium was lifted in July 2021, and that has happened, still, there is no abundance of foreclosures for investors to buy.

In January 2022, there were about 50% fewer foreclosures than there were in January 2020, according to SoFi. According to the same SoFi post, ATTOM Data Solutions expects foreclosures to stay below historical levels for 2022. Lenders have been modifying loans and homeowners are enjoying newfound home equity these days.

However, you could still get a deal if you can find a foreclosure to buy. According to Property Onion, you could find auctions selling foreclosed homes at 20% to 50% discounts. Don’t panic buy, though. Do your regular due diligence, which includes inspecting the home to get an understanding of what the repairs and renovations are likely to cost. Keep in mind these are inflated times, and service and materials are likely to 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 getting your financing together now. If you’re waiting on the sidelines for a housing crash to happen, you might be waiting indefinitely. This market isn’t the same as the last time we saw this type of house inflation — in the years leading up to the financial crisis of 2008. This time around, there is major nationwide housing inflation as there was before, but that’s where the similarity ends.

This time, there’s a record-low supply of single-family homes. Last time, there was a glut of them. This time, there’s high demand. Last time, all the homeowners who short-sold or experienced foreclosure couldn’t get a mortgage to buy when the prices dropped.

Today’s corporate investor activity is another reason today’s housing market doesn’t favor a crash. In times of rising house prices, people are eventually priced out of the market (that is, they are if subprime mortgages aren’t an option). Being priced out normally lessens demand, and that would typically cause housing prices to drop.

But remember, banks and corporations can buy — and they are — at these inflated prices. So, don’t expect any price drops to happen, at least not soon. Instead, try to work a deal to get ownership of real property for yourself, to either flip or hold and rent. 

If you can get an undervalued and distressed property now, you might want to, even if it needs work. Prices are slated to continue to rise this year, so you’ll likely gain equity, regardless of what you do.