What You Should Know about Investing in Distressed Properties

Distressed properties are homes sold at lower than market value due to owners' financial difficulties or defaulting on obligations such as mortgage payments. They can present profitable investment opportunities, but require sound knowledge to navigate the challenges effectively.

Understanding the various types of distressed properties is essential for investors to grasp their unique benefits and risks. One type, foreclosures, occur when homeowners default on mortgage payments, presenting distinct investment opportunities. A second type, short sales, involves homeowners selling their property for less than the mortgage owed. A third, real-estate-owned (REO) properties, owned by lenders such as banks, result from failed foreclosure auctions. REOs offer the potential to purchase distressed properties at discounted prices.

Investing in distressed properties carries potential risks, such as substantial repair and renovation expenses, legal issues like foreclosure proceedings, and limited financing options from traditional lenders. Consequently, investors need to assess their risk tolerance and consider if they can manage these challenges. A solid plan and adequate funds are crucial to cover costs until the new owner can rent the property or put it up for sale.

Investors should also understand that investing in distressed properties may necessitate expertise in real estate, property management, construction, and other related areas. If lacking these skills, they should partner with a professional. Moreover, distressed property investment often demands a significant time commitment, particularly in the search for properties and conducting thorough due diligence. Unlike some other investments, active involvement is vital for success. Otherwise, the investment may not generate the desired returns, or could even result in losses.

Location is key when investing in distressed properties due to its direct impact on property prices and demand, in turn affecting returns. Potential buyers should target areas with desirable neighborhoods, high occupancy rates, and solid economic fundamentals, such as job growth and diversified industries. Comprehensive local real estate market research can help identify areas with ample investment opportunities and favorable conditions. Understanding market dynamics will also help investors optimize their potential returns.

When searching for distressed properties, buyers have several options. They can utilize listing services such as MLS to track various properties. Properties listed for over three months may indicate a highly motivated owner or seller. Another option is to review tax records, which can reveal homeowners facing pre-foreclosure due to delinquent property taxes. Probate courts are worth exploring, as they oversee the liquidation of property assets in cases of death, divorce, or bankruptcy. Investors can also attend foreclosure auctions banks and lenders hold to bid on lower-priced properties. Moreover, building relationships with real estate professionals, including agents, can help in discovering these events.

A thorough inspection of a distressed property before purchase is crucial for uncovering hidden issues or damage that may not be immediately apparent. Potential buyers should engage an independent inspector to provide an unbiased assessment of the property's condition, even if the seller has provided an inspection report. Thoroughly inspecting the property allows buyers to make informed decisions about their investment and avoid potential financial burdens.

Sellers of distressed properties typically favor cash offers over traditional mortgage financing due to their quicker transactions and reduced uncertainty. Cash offers also offer a negotiation advantage, as sellers perceive them as more attractive. However, other financing options are still viable. Hard money or loans can offer quick funding, albeit at higher interest rates. Non-traditional lenders may also finance experienced investors with credible plans to improve a property.

 

Notable Changes in the US Rental Market

 

The US rental market is among the world's largest and most dynamic, accommodating over 44 million households. It has undergone a rapid transformation in recent years, positively and negatively changing its landscape.

This market has witnessed steep growth in the past decade, primarily due to increased demand for apartments fueled by various factors. For instance, rising mortgage rates, currently at а 16-year high, have led many would-be homebuyers, both individuals and families, to rent instead.

Similarly, Millennials and members of Gen Z are further driving rental housing demand, as many prefer the flexibility of renting. Some want to rent for years before purchasing a home. With many flocking to cities for better employement opportunities, the pressure for more rentals keeps piling up. The urbanization rate in the US is now at over 83 percent of the population residing in urban settings.

Subsequently, the increasing demand for rentals has driven up rent prices, surpassing inflation rates, according to a Pew Research Report. From 2017 and 2022, rent prices in the US surged by 18 percent, burdening 46 percent of renters who allocate а sizable portion of their income to rent payments. The residents of some states, such as California and New York, are particularly impacted by high rent costs.

The COVID-19 pandemic has also affected the rental market, causing widespread economic disruptions and increased tenant delinquencies from people facing financial hardships due to job losses or reduced incomes. Moreover, with the government implementing measures to prevent evicting defaulting tenants, many landlords are experiencing declining rental revenues and struggling to maintain their properties and meet their financial obligations.

When individuals switched to working remotely during the pandemic, it gave them more flexibility. The shift to remote work has changed the rental market since then. The demand for office space decreased, commercial rents fell in response, and downtown areas in particular suffered higher vacancy rates. Conversely, there has been a surge in residential property demand as remote workers seek suitable spaces for their home offices. As a result, landlords have adjusted their investment priorities, focusing on amenities such as high-speed Internet, dedicated workspace areas within units, and workout areas in shared spaces.

Regarding investments, previously, individual landlords held the majority of rental properties. Today, large investment firms, such as private equity firms, have emerged as significant market participants. Not only are these institutional investors acquiring rental properties and purchasing portfolios of properties, they are also concentrating their ownership in specific neighborhoods. This concentration reduces the available rental properties for individuals and small investors and poses affordability challenges for residents, since the control the institutions gain may influence prices, making housing less affordable.

Moreover, technological advances, such as the accessibility of online platforms like Redfin and Zillow, enable investors to browse listings and acquire and oversee rental properties from remote locations. This provision has led to the rise of what is known as “laptop landlords.” Various tech companies have also entered the market, offering services that facilitate property purchases for investors and the remote management of rentals. Landlords also leverage technological tools, such as algorithms, to enhance rental pricing, simplify tenant screening, and automate property maintenance procedures.

Increased regulation and transparency in the rental market are crucial for addressing concerns regarding ownership, rent increases, and affordability. Implementing appropriate regulations allows tenants to understand their rights, knowing landlords cannot impose excessive rent hikes or evictions. Landlords, in turn, also benefit from transparent guidelines that promote fair practices and protect them from legal complications.

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I published “Addressing the Challenge of Affordable Housing in the US.” on @Medium

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Tackling the Affordable Housing Predicament

 Renters and prospective buyers in the US have witnessed housing prices increase since the Great Recession. The COVID-19 pandemic has further exacerbated this trend. Low-income families have been particularly affected, as the shortage of rental homes has risen to 7.3 million in 2023 from 6.8 million in 2019. However, there are strategies that can help alleviate this crisis.

Promoting affordable housing is one solution. Local governments can offer builders tax breaks, reduced permit fees, and other incentives to encourage them to construct low-cost, high-quality homes. Local governments can also streamline the permit-acquisition process to create a favorable environment for builders and developers.

Embracing manufactured housing instead of on-site construction is another cost-effective solution. Developers build manufactured homes in factories and then transport them to desired locations for assembly. Expanding manufactured housing production can increase the number of affordable housing units, meeting the demand for rental units and homes, especially for low-income families.

Sometimes, prospective homebuyers struggle to meet home ownership requirements, leading them to continue renting, which drives up rental costs. Alleviating this pressure necessitates removing barriers to home ownership through practical steps, such as lifting restrictions on providing mortgage loans to purchase condominium units, promote the construction of more condos that could serve as an entry point for home ownership. Additionally, implementing policies such as down-payment assistance can help prospective buyers and reduces the strain on the rental market.

Governments at all levels can also assist low- and moderate-income families through subsidies for acquiring and constructing houses. The low-income housing tax credit (LIHTC) program addresses the housing crisis by offering incentives to developers and investors to create new affordable housing or rehabilitate units designated for this target demographic.

In addition to subsidies, preventing the loss of affordable housing is equally crucial. One way to do so is by providing support and resources, such as eviction prevention programs for renters to prevent homelessness. Such programs assist renters by offering financial aid, legal representation, and mediation services, and aim to address underlying issues. Moreover, with many affordable units at risk of becoming more expensive due to their affordability agreements expiring, governments can assist by offering incentives to help property owners keep the rents lower.

Another way to address the crisis is to comprehensively assess publicly owned assets, including underutilized or vacant lots, and designate them for housing development. Local governments can create a list of suitable vacant lots and sell or lease them at a reduced cost to developers of affordable housing. Local governments can also donate such lands to nonprofit organizations specializing in affordable housing projects. Montgomery County in Maryland has implemented similar policies, promoting low-income housing development on public land.

Affordable housing trust funds are also crucial financial mechanisms in major cities, offering funding and assistance for developing and preserving units intended for low- to moderate-income earners. These funds help bridge the financial gap between affordable housing development costs and available resources, such as private subsidies and LIHTC. Seattle and Philadelphia are among the cities that have used trust funds to bolster their affordable housing inventories.

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I published “Risks of Real Estate Investments” on @Medium