People tend to get excited when first starting out in real estate investing about buying a “fixer upper” and quickly turning a profit. However, fixing-and-flipping is generally not the best way to make money investing in real estate. It can get costly, and the risk is very high. Not only can there be unexpected repairs but you can run into other trouble like unreliable contractors. Needless to say, it is very easy for your budget to get out of control, resulting in the loss of profit.
Do you know the difference between a distressed property and a fixer-upper? You may think so, but there are many misconceptions about these terms.
Problems with Fix-and-Flip
It may seem logical to buy a rundown property for a low price, fix it up, make it look shiny and new to potential buyers, and walk away with a hefty profit. However, it is not as easy as it sounds.
What’s the problem with fix & flip? The repairs cost money. Sometimes a lot of money. And that defeats the purpose of investing in real estate to make a profit.
Remember, the key word here is investing. This is not a property that you are trying to turn into your dream home. You are buying it to make money – and despite common perceptions, you CAN sell a distressed property without making extensive repairs.
Distressed Does Not Necessarily Mean More Work
When you hear the word distressed, you may imagine a run-down, bleak home that would take thousand’s (or more!) to fix and flip. However, that is not always the case. The term distressed is not describing the condition of the property, it just means that the owner urgently needs to sell the home.
The definition of a distressed property is a foreclosure, pre-foreclosure, short sale, or other transaction where the owner is in “distress” and not able, or willing, to pay for the property.
Are distressed properties sometimes run down and in need of significant repairs? Yes.
That is why it is essential to do your research on a property and its background. Doing some minor, inexpensive repairs may be necessary, but a property that will require many extensive fixes may not be worth it.
How To Find A Distressed Property
There are many ways to find distressed properties.
- Scan foreclosures, pre-foreclosures, short sales, and
- Find motivated sellers who need to sell quickly (divorce, relocation, pre-foreclosure).
- Develop a marketing strategy targeting motivated sellers.
Ultimately, the thing to always keep in mind is your potential profit. Determine your overall costs and determine a maximum offer price to ensure a substantial return on your investment.