If you’re thinking about entering the real estate investment business, you’re probably looking for a property with an asking price lower than its market value. These properties are referred to as ‘distressed assets’. Often, a property becomes ‘distressed’ due to its deteriorating condition. In other cases, properties may be sold at a discount due to the owner’s financial situation.
The question is: how do you determine whether buying a distressed asset is a bargain or a burden in disguise?
Certified Distressed Property Expert and Investor Specialist Omid Akale with Twin Cities Portfolio Group explains what a distressed asset is, how to decide whether one is a sound investment, and the steps involved in buying one.
Distressed Assets Explained
In terms of property, a distressed asset is real estate sold at a discount. A core property can become a distressed asset due to:
- Incorrect pricing
- Deteriorating condition
- Environmental issues
- Excessive debt
If a homeowner fails to keep up with their mortgage payments, they may fall into debt, forcing them to sell their property as quickly as possible at a discounted rate. As unfortunate as such situations are, they provide investors with potentially lucrative opportunities.
Distressed Assets: Temporary vs. Permanent
Real estate can either be permanently or temporarily distressed and understanding the difference between the two is essential.
If a property is temporarily distressed, it means you could resolve the issue either through a change in market conditions, building- or management improvements. For example, an apartment building with a 50% occupancy rate could be sold as distressed. However, if a new owner brings the occupancy rate up, the property will no longer be distressed.
Permanently distressed assets are unlikely to return to their previous value regardless of what actions an owner takes. For example, if a major employer relocates, property values in the vicinity may never recover – or it may take years or decades.
When investing in distressed assets, it is crucial to understand which factors you can control. This situation is just one of many which a real estate investment consultant can provide invaluable advice.
How to Buy a Distressed Asset
You can either invest in distressed property as a general- or a limited partner. The general partner is the person or entity actively involved in the deal, usually handling all tasks related to the transaction. A limited partner might provide the required capital to close the sale, but they may not take an active role in the transaction, upkeep, or management of the property.
To buy distressed real estate, you’ll need to form relationships with local lenders, appraisers, contractors, and potentially other investors. You’ll also need capital, legal expertise or advice, a solid reputation, and access to/plenty of experience.
How a Real Estate Consultant Can Help
Unless you possess a wealth of experience, it’s worth seeking impartial advice from an investment expert. Unlike a real estate agent, consultants don’t earn commission from the sale, which means providing sound investment advice is in their best interests. Consultants can perform in-depth market analysis, carry out risk assessments, guide you through the purchasing process, help you set up partnerships, navigate the local landscape, and much more. If you want to invest in distressed real estate, you might want to discuss your plans and goals with a real estate investment consultant before signing any paperwork.