With foreclosures up more than 150%, investors of all sizes are looking into the financial opportunities provided by distressed properties.
Buying fixer-upper real estate assets can be a very attractive investment. This refers to both residential properties and commercial ones. The idea is to buy the property at a discounted price due to its current condition or the owner’s financial and legal troubles.
Let’s dig into the most important factors you should take into account before buying a distressed property.
What is a Fixer-Upper Property?
Generally speaking, a fixer-upper property is any type of distressed real estate asset that can be used for either living or business purposes. There are different ways to define distress in this arena.
A property could be physically distressed due to its run-down conditions, functionality issues, and lack of maintenance. It could also be financially or legally distressed, meaning that it’s costing the owners more than it’s earning or that they have other issues that force them to sell the property as soon as possible, even at a discount price.
Basically, a fixer-upper property is any real estate asset that you can buy at a much lower price than its potential one due to particularly negative circumstances.
What is the Difference Between Residential and Commercial Properties?
Fixer-upper residential properties are mostly apartments and family-size homes for which the current market value is significantly below what a buyer (or renter) would normally pay if there weren’t adverse physical, financial, and legal circumstances. Once refurbished, they can be sold to families, individuals, or residential real estate investors.
A fixer-upper commercial property is any type of distressed real estate asset that can be used for business purposes and, once refurbished, can successfully be marketed to buyers operating in different industries, as well as used for one’s own commercial activities. They include office, retail, industrial, and hospitality spaces, as well as residential properties with more than one unit, also known as multifamily properties.
When Should I Buy a Fixer-Upper Real Estate Asset?
The answer to this question is typically straightforward: when the overall cost you need to incur in order to fix the property is lower than the increase in its value following the fixing up. Or, to put it differently, when the after-repay value (ARV) of the property is higher than the total cost of the property (the purchase value plus repair expenses).
Obviously, an increase in market value doesn’t just reflect the amount at which you could turn your real estate asset after fixing it up. It is also associated with an increase in the rent that potential tenants will be willing to pay. A distressed property that most tenants wouldn’t rent or would only rent at a very low price could generate a significant long-term return after being renovated, maintained, and made attractive to potential renters.
It’s always a good idea to set the target market value you’re trying to reach. For some people, a desirable after-repay value (ARF) should be at least 70% of the total cost of the property, while others would be happy with just 30% or 40%. As a starting point, check the cost of rental apartments in your desired location. Obviously, this also depends on how much you value the time and effort you need to put into this endeavor and how attractive alternative investments are.
Which Repairs and Additions Can Increase a Property’s Value?
There are various actions you can take to boost the value of a distressed real estate asset. Here are some examples.
Improving the property’s external appearance, including sidings, roofing, and reinforcing safety with security cameras in parking lots
Renovating the interior of a property, improving its plumbing systems, or converting it to a new commercial purpose.
Designing the building in a way that allows for easy maintenance and contains the budget for a cleaning team.
Making sure the property is ready to install cloud-based AIoT devices and future-proof security system for buildings, with technologies such as keypad access readers.
How to Find Distressed Properties?
Numerous sources and databases give you access to great data on interesting fixer-upper real estate assets. These include:
public sources on owners that are facing foreclosure
multiple listing services
bank listings
auctions organized by banks and lenders
probate courts providing information on liquidating properties
Opportunities can also be uncovered by being proactive and asking for information on properties that look neglected and abandoned. If you are interested in properties in particular areas, apps like Google Street View give you the tools to “walk around” a district without physically going there.