A definitive guide to distressed property investing

Dominique Grubisa
Dominique Grubisa

Published 2:13 am 5 Jan 2021

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Not everyone selling a property has the luxury of waiting until they obtain the best possible price. The term ‘distressed property’ refers to situations where property owners are forced to seek a quick sale, often due to financial or personal difficulties. In such circumstances, people who have suffered a death in the family, loss of employment or relationship breakdown may be eager to dispose of their properties as rapidly as possible, even if it means achieving less than the true market price.

While distressed properties usually represent hardship for the home owners forced to sell up, they can present a golden opportunity to investors and would-be owner-occupiers seeking value. Distressed homes often sell for far less than they would had the vendor had time to conduct a proper sales campaign or been able to sell at a better stage of the market cycle. By stepping in and offering vendors a quick sale, distressed property hunters can achieve two goals. They can help the struggling vendor to quickly resolve their financial troubles and they can pick up a bargain for themselves in the process.

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Distressed property sales in Australia are expected to increase in the wake of the COVID-19 pandemic. While property prices held relatively steady in 2020 due to low stock levels, significant numbers of Australians were reported to be experiencing mortgage stress throughout the year. The roll back of Job Keeper payments in 2021 is expected to push many people into financial hardship and increase forced sales.

So what’s the process for buying distressed property? That depends on the reasons for the forced sale and who is in possession of the property. A common way to buy distressed property is to attend a mortgagee-in-possession auction, where the bank has repossessed the home. In other cases, mortgage holders may still be in possession of the property and would-be distressed-property buyers will need to conduct direct negotiations.

What is considered a distressed property?

There is no single reason why a piece of real estate becomes a distressed property. The common theme however is a hardship that has made it necessary for the vendor to go after a fast sale.

Some of the more common types of distressed property you will encounter include:

Mortgagee-in-possession sales

In cases where a mortgage holder has repeatedly failed to make payments over an extended period of time, the mortgagee (typically a bank) can take possession of the property in question and hold a sale to recoup the principal, missed interest payments and other associated costs. Extensive negotiation typically takes place before the situation reaches this point. Because of the stigma attached to such sales, the condition of the property, and the timing of the sale, the property may sell for less than its true market value.

Property damage

Storms, floods, fires and other natural disasters can severely damage properties. So can issues such as poor construction, mould and subsidence. In such circumstances, a vendor may wish to dispose of a property quickly rather than undertaking the necessary repairs. Buyers willing to take on the responsibility can land themselves a bargain.

Falling value

Many people buy into the property market, expecting prices to keep on rising. When prices fail to do so, home owners can find themselves with an asset that is worth less than they paid for and an unrelenting mortgage. It may make sense for these people to sell for a loss and free themselves of the burden of the mortgage.

Relationship breakdown

One in three Australian marriages end in divorce. Often divorces are acrimonious and former spouses want to be free of each other as fast as possible. In such circumstances they may be open to a rapid sale of the family home or any investment properties.

Deceased estates

The loss of a loved one, particularly an elderly parent, is difficult. A grieving family who inherits a piece of real estate is often keen to sell, split the proceeds and move on. In many cases, families will seek the fastest sale possible.

Where can I find distressed properties for sale?

As is the case for regular properties, real estate websites are a great place to start your search for distressed properties. Read through ads in the areas you are interested in and be on the look-out for terms such as ‘quick sale’, ‘motivated sellers’ and ‘open to all offers’. These are indicative of sellers who simply don’t have time to wait for the best offer. Also be on the look-out for the term ‘mortgagee-in-possession’ which indicates the homeowner has lost control of their asset and the bank has ordered a sale. However, note that banks do not usually advertise properties that have been repossessed as ‘mortgagee-in-possession’ when they are first being sold. So, properties advertised as ‘mortgagee sales’ have often already been on the market.

Another good strategy is to develop relationships with local real estate agents. A proportion of distressed homes are sold off-market without marketing campaigns, and a friendly agent can tip you off to these situations.

Some professional distressed property hunters rely on court lists and death notices to identify families who may have a need to quickly dispose of a property. There are also websites and companies who specialise in identifying distressed properties, including australia.trovit.com and forcedsale.com.au.

How do I buy a distressed property?

If the distressed property you are interested in is not yet at the mortgage-in-possession stage, you will need to negotiate directly with the vendor.

Do your research before making an approach and have an idea in your head of what the property is worth in its current state, what you are prepared to pay, and what you might be able to sell it for down the track.

When you reach out to the vendor, you will need to balance empathy and soft skills with business acumen and a knowledge of the market to come to the right sales price. Find out what their needs and goals are around the property, and present them with an offer. Be prepared to negotiate.

In the case of mortgage-in-possession sales, you will need to compete for the property with other buyers.

How do I sell distressed property?

Often distressed properties are in a poor state due to a lack of upkeep by the previous owners or, in the case of damaged properties, natural disasters. These flaws are likely to have kept the final price down as many buyers will be put off by undertaking the repairs. You can quickly add value to many properties by carrying out repairs and making cosmetic improvements such as landscaping the yard and painting the façade.

Do your due diligence and understand what the market is seeking. In some instances, there may be a case for making major renovations such as adding a room, provided it greatly increases the final sale price. You should have conducted research to calculate the current and potential value of the distressed property you have purchased.

Unlike the original seller, you likely have time on your side. In many cases, it may pay to conduct a decent sales campaign and possibly invest in hired furniture to present the property in the best possible light.

What are the risks involved with buying a distressed property?

There is a degree of risk with any form of property investment. For distressed properties, the risks to consider include:

  • You may misread the market and pay too much for the property;
  • You may not fully understand the extent of any repairs and renovations required to bring the property back to market. Remember that costs on any type of renovation typically blow out;
  • You may over invest in improvements that don’t add value;
  • The market may fall considerably between you acquiring the property and selling it;
  • You may not be able to obtain finance due to flaws with the property.

Frequently Asked Questions

Should I buy a distressed property?

Distressed property is not for everyone. Some people are put off by the stigma of buying from a vendor in financial or emotional distress. Others don’t want to take on the work required in preparing the property for market. But there are good potential profits to be made for those prepared to roll up their sleeves and work hard.

How do you finance a distressed house?

Assuming you don’t have the money to buy a distressed property outright, you will need to obtain finance. If you already own your own home and are buying the property in your own name, you might consider using equity in your existing property to fund the purchase. If you don’t own a property, shop around the finance on offer with a mortgage broker.

What is a mortgagee in possession?

In a typical loan arrangement, a borrower (mortgagor) borrows money from a lender (mortgagee) to buy a property. The property itself is considered ‘collateral’, meaning that should the borrower default on the loan, the lender can seize possession. Mortgagee-in-possession sales come about where this scenario has arisen. After the home owner has missed many mortgage payments over a lengthy period of time and all avenues to recoup the shortfall have failed, the mortgagee (lender) is granted possession and can conduct a sale of the property to recoup monies owed to it.

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Lawyer, Asset Protection Specialist and Property Educator

Dominique Grubisa is a practicing lawyer with over 25 years experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author.

This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.

About DG Institute

Founded in 2009, DG Institute strives to empower everyday Australians to grow and protect their wealth. Our goal is to provide direction, motivation and inspiration to our clients and help them perform at their very best. We do that through our professional services, in addition to teaching them how to grow their wealth through property and business education.

This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.

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