What is a Distress Sale and Property?

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A distressed property is a property that has a financial burden attached to it.  It might also mean a run-down property in need of serious repairs.  Distress properties, properties where the owners are unable to make the mortgage payments, end up in foreclosure.
 

What is a Foreclosure?

Foreclosure is a process of legal action taken by a mortgage holder against a homeowner, when the terms of the contract are not met.  Almost all foreclosures occur when the homeowner defaults on payment and cannot live up to the demands of the loan agreement.

Why take foreclosure actions?

The goal is to take over the possession of a property from the homeowner and sell it in the market to pay off the balance of the loan. 

Reasons for foreclosure actions

Most of the reasons are common day situations that occur in our lives.  The most important reasons for foreclosure actions are:

• Job Loss
• Divorce
• Economy
• Health
• Death
• Financial Mismanagement
• Business loss
• Interest Rates

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Opportunities in Distress sales

Buying real estate at market prices today is not the same investment opportunity as it used to be.  The only way to benefit is to buy real estate ‘below market value’.  Here are the reasons why:

• Lower Purchase Price
• Cost savings
• Price reductions
• Lower Down Payments
• The lower the price, the lower the down payment
• Get more for less
• With a lower down payment and monthly payment, you may be able to purchase a bigger home or cover other expenses you have
• Motivated sellers or lenders
• They do not want to keep the properties in their possession for too long
• Less Competition
• Many buyers are aware of foreclosure opportunities
• Better terms
• The buyer may receive better structured mortgages from the lender

Sources for Foreclosures

• Foreclosures Club Canada
• Magazines
• Reports
• Journals
• Newspapers
• Newsletters
• Advertisers
• Real estate agencies

Where to start looking for distress sales?

• Call your real estate agent
  • Ask your agent to locate distress sales for you
• Look in you neighborhood
  • Best approach is to look in the areas you are comfortable with and know the value of the properties
• Newspapers
  • Check the Real Estate section and small ads for distress sale indications.  Look in Legal Notices & Auctions
• Banks
  • Call the Banks and ask them to forward you information on distress sales.  Most Banks will work with specific Real Estate agencies.  Ask for that information and call the Agency
• Real Estate Publications
  • More and more ads appear in local Home Magazines
• Online Websites
  • Some websites like ours offer this service for free

NOTE: a real estate agent’s job is to get the best price for a property that is for sale.  Therefore, they might not be willing to promote and deal with discounted opportunities, which conflicts with one of the directives.

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Tips to dal with foreclosures

Build a support team you are comfortable with.
Every experienced investor establishes a solid support team consisting of: real estate agents, lawyers, accountants and lenders.  They in turn understand the investor’s motives and support the investment initiatives and decisions.

Review the documentation thoroughly
Properties will have liens and encumbrances registered against them.  Ask for a title search.  You do not want to be left paying that debt.

Evaluate your Selection and Determine the Potential
When you have decided to proceed with a specific property, make sure it meets your investment objectives. If you will use as a rental property, make sure you will meet your income objectives.

Compare the property with others in the area.  Pick 3 comparable properties that sold in the immediate area, add the amounts they have sold for and divide by 3.  The result is the ‘average market value’.  Take this amount into consideration when putting in your offer.

Contact the Home Owner
Write a simple hones letter and make an offer to purchase the property.  Offer incentives they can’t refuse, such as you will pay for relocation costs, you will cover lawyer’s fees as they relate to the sale of the property, you are willing to pay cash for the property.  Follow up with a couple more letters ore serious in tone.

Prepare itemized list of repairs and expenses
Prepare a list of expenses to negotiate with the lenders.  Take pictures.  Document your findings. 
Less $5,000 for repairs
Less $20,000 for the lien
Less $4,500 for closing expenses
Less $6,000 for reselling expenses
Then start negotiating at 1/3 of the debt amount

Foreclosures Club Canada offers a distress sales locator service.  The distress sale reports include properties for sale by Banks, Mortgage Lenders and other sources.

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