Distressed property is an umbrella term used to refer to real estate assets whose position in the market is financially precarious. This position might be caused by the inability of the owners to pay off mortgages, property taxes or other financial obligations. While investing in such properties can often be risky business, it can also turn out to be a great bargain if treated with caution. Learn more about distressed properties and their potential as a two-sided investment tool by continuing to read.
Types of distressed property
Distressed property can be of several types. Here is a list of the ones that legally fall under this label in India:
Foreclosed properties
When a property owner applies for a loan using the property as a security deposit, the bank has the right to auction off the property to recover the losses in case the loan is not repaid. Such properties that have been seized by lenders due to non-payment of loans fall under this category.
Bank-owned properties
If the foreclosed property fails to sell at the auction, it becomes the property of the bank or the lending institution. In this case, the property might be sold at discounted amounts to recover the financial losses incurred due to non-payment of the loan.
Short sale properties
This involves selling the mortgaged property with the permission of the lender at a price lower than the outstanding loan amount. Generally done to avoid foreclosure, it is useful in controlling the loss incurred by both the parties.
Insolvent or bankrupt properties
Under circumstances of complete bankruptcy, property owners can choose to sell off their property, often at reduced prices, to settle outstanding debts. This is generally done at a large scale by commercial organisations such as real estate developers or other profit-based companies.
Properties under legal dispute
Properties that are the bone of legal contention might be perceived as distressed properties. Their sensitive position might act as a barrier to a promising value in the real estate market as investors might be reluctant to go ahead with deals on such properties.
See also: Property foreclosure: How does it work?
Finding distressed properties
Now that you know all the types of distressed properties, you might be interested in investing in one. But how can you find such properties? Here are a few options for you to check;
Online real estate portals
While looking up distressed properties on online portals and websites, check out the sections specifically meant for foreclosures, bank-owned properties or distressed sales. Apply the relevant filters wherever necessary. Moreover, there are several websites and online portals that specialise in the auction of distressed properties you can go through.
Government auctions
Keep a regular check on government websites for the auction of properties seized due to non-payment of taxes or related legal issues. Various Indian government agencies conduct such auctions for distressed properties.
Local real estate agents
Getting in touch with local real estate agents experienced in dealing with distressed properties might be helpful in gaining in-depth insights. They might provide you with information about listings that are not widely advertised or easily accessible online in the real estate market.
Networking
Get into the network of industry professionals by attending local real estate events and seminars. By building a relationship with real estate agents, developers and investors may give you information about distressed properties.
Legal notices and public records
Keep a check on records and legal information about distressed properties available in the public domain. Notices of default, auctions or similar legal proceedings indicating financial distress are useful for this purpose.
Banks and financial institutions
Keep in touch with banks and financial institutions to inquire about distressed properties they might be selling off. Regular contact might help you establish a relationship with the bank representative, asset manager or other officials who handle such properties and give you better access to relevant information.
Local newspapers and classifieds
Local newspapers and classifieds might prove to be a goldmine for information related to distressed properties or auctions. You might even be able to get in direct touch with the property owner advertising their sale through this means.
Property wholesalers
There are several property wholesalers who specialise in distressed properties you can connect with. They have a good eye for identifying lucrative deals and are well-connected to investors they can pass on the deals to.
Online forums and social media groups
One way by which you can find distressed properties with minimal effort involves participating in online forums and social media groups dedicated to real estate investment. Here, the members regularly share useful insights about distressed property deals and opportunities.
Should you buy distressed properties?: Pros and cons
Now that you know about the types of distressed properties, let’s address the elephant in the room. Should you or should you not invest in distressed properties? How safe is it? Well, we can provide the relevant information to help you make a more informed decision. Here is a list of pros and cons of investing in distressed properties:
| Pros | Cons |
| Distressed properties are available at a price lesser than the market value of the property and therefore have a high potential ROI. | Distressed properties might be a risky investment due to structural flaws or legal complications. |
| Most distressed properties have high potential for appreciation with strategic improvements and renovations. | Financing distressing properties can be tricky due to their unstable market value. |
| Due to the urgency of the owners, the buyers might have an upper hand in the negotiation process, thereby bagging a better deal on the property. | Repairs of distressed properties might be expensive and time-consuming due to long years of neglect and damage. |
| Inclusion of such properties in your real estate portfolio is a good move for diversification as they have unique risk and return profiles. | The process of purchase can be tedious due to problems in financial transactions, legal documentation and long-drawn negotiations with multiple parties. |
| Smart investors can identify the potential areas of improvement in distressed properties and later increase the market value of the property for resale by incorporating those improvements. | Distressed properties come with a baggage of market risks and unpredictability influenced by changes in economic conditions and real estate market. |
| Distressed properties can be used as rental properties for a steady flow of income for the buyers with the scope for long-term appreciation. | Buying distressed properties might make the buyer liable to pay outstanding taxes and similar financial obligations. |
| Since distressed properties are not listed on regular markets, it allows buyers to leverage deals not available to the public otherwise. | Obtaining detailed information about distressed properties can be tricky due to the scarcity of authentic sources that are readily available. |
| Distressed properties might have unique features like some niche historical significance that impacts the resale value positively. | Purchase of distressed properties might come along with resistance from various parties and stakeholders. |
| By purchasing such properties, the buyers contribute in stabilising the real estate market of the area, thereby minimising its impact on neighbouring properties. | Resale potential of such properties is limited due to the attached stigma. |
| Buyers can create a positive social impact by revamping such properties and contribute to increasing the space available for residential usage. | Purchase of distressed properties can be a longer process than regular real estate purchases. |
Read also: Key legal checklist for buying a property
How to finance distressed properties?
Financing distressed properties can be a tricky business. Unstable market value, outstanding legal obligations, lack of proper documentation and the general stigma surrounding the property add to the apprehension of investors when it comes to such properties. Nevertheless, here are some avenues you can explore for funding distressed properties.
Traditional bank loans are the most common and accessible option that potential buyers can approach for information about the available mortgage options. Non-banking financial companies (NBFCs) offer an alternative to traditional banks by providing more flexible financing options. Moreover, you can also go for government-sponsored housing finance schemes to discover options suited for distressed property purchasers.
If you are looking to renovate distressed properties, it is viable to go for specific home loan products tailored for renovation purposes. Joint ventures and partnerships with investors or developers is an option that can help pool resources and mitigate risks associated with distressed property investments.
You can also approach private lenders and hard money lenders as alternative financing sources, but be prepared to pay a higher interest rate due to the risky nature of the investment. Peer-to-peer lending platforms provide a crowd-based approach to financing that connects borrowers with individual lenders. Also look for Asset Reconstruction Companies (ARCs) specialising in distressed assets as they regularly offer financing solutions or might help you collaborate with investors. Seller financing can also be a helpful option, albeit subject to negotiation wherein the property owner acts as the lender, allowing the buyer to make payments over time. Finally, for existing property owners, taking a loan against their property (Loan Against Property or LAP) is the most viable option of leveraging financial means to acquire distressed properties.
FAQs
What are distressed properties?
Distressed properties refer to real estate assets with outstanding financial obligations or those under legal dispute.
What are the types of distressed properties?
The main types of distressed properties include foreclosed properties, bank-owned properties, short sale properties, bankrupt properties and properties under legal dispute.
Is it legally permissible to purchase distressed properties?
Yes, there is no legal restriction on purchase of distressed properties unless the property is under legal dispute.
What are some risks associated with purchasing distressed properties?
Unstable market conditions, financing issues, legal disputes and high cost of repair and maintenance are some risks associated with disputed properties.
What are the important things to consider while purchasing distressed properties?
While investing in distressed properties, it is important to consider the nature of dispute, resolution possibilities, availability of documentation, market conditions, occupancy status and resale potential.
Do distressed properties yield high ROI?
Distressed properties have the potential to yield a high ROI if properly and strategically maintained and renovated.
Can I get a loan from the bank against distressed property?
It is not possible to obtain a loan from the bank against distressed properties.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |