What should you know before you buy a distressed property in San Diego?
Yes, distressed properties are still out there, even in sizzling San Diego County. Distressed property, and homes in particular, remain in high demand in Southern California, and are hotly pursued by real estate investors, Realtors, and regular home buyers. Their perceived discounts, and potential profits make them especially attractive.
However, there can be much more than meets the eye when it comes to real estate at the best of times. This is even truer of distressed property in SoCal, and in many ways. So what do San Diego home buyers and real estate investors need to look at when purchasing property? Could there be even more valuable and profitable buying and investment opportunities among other types of options?
Know Why You Are Buying ‘Distressed’ Property
Know why you are buying ‘distressed.’ Is it just the promise of discounts and profits? Or is it wanting to feel as if you have gotten a deal? Is it because you really like handyman work and have been inspired by TV shows like “Flip This House” to flex your DIY weekend warrior and interior design talents and muscles? Is it wanting to add value to something, or that you already have a ‘value-add’ real estate investment strategy you are pursuing? Are you inspired to want to help recycle properties and revitalize communities?
If the answer is simply for a ‘deal,’ give some thought to what might be better. And remember that distressed, doesn’t always equal profit or cheap.
Be Aware of All Your Options
There are many types of distressed properties and sources for them in San Diego, CA, including:
- Bank owned Real Estate Owned (REOs)
- Corporate asset managers
- Credit unions
- HUD homes
- Foreclosure auctions
- Tax auctions
- Estate sales and inherited property
- Other real estate investors
- Private equity and hedge funds
- Realtors and real estate agents
- 1st, 2nd, and 3rd position mortgage notes
- Real estate, divorce and bankruptcy attorneys
- Property wholesalers
The Distressed Property Digits You Need to Know
Know your numbers before you buy. This should include:
- Local market size
- Predicted market direction and appreciation expectations
- Asking and actual rents
- Average days on market
- Closing costs (both ends)
- Property taxes
- Insurance
- Any liens
- Association dues (and special assessments)
- Potential mortgage payments
- Days to repair a property
- Days it will take to inspect and close
- How much repairs and improvements will cost
- Area vacancy rates
- Demographics of most likely buyers and renters
- The property value as-is
- The After Repair Value (ARV)
- Rebuild cost
Is this really a deal?
After evaluating the numbers, determine whether or not it is actually a deal. Only then can you decide if the property is a good value for what you intend to do. After fixing up, or at least satisfying any outstanding critical items, is there still a profit to be made?
Always double verify numbers provided to you, and your own assumptions. Some properties may already be rented and in pristine condition, even if they are foreclosures. Others, even new construction properties, might hide a whole lot of major structural issues. Roofs, foundations, infestations and contaminants can be extremely expensive to deal with. Sometimes they can far exceed the purchase price of a property; rendering it a total ‘write-off.’ However, even teardowns aren’t cheap. Some of these issues are obvious. Others may not be until months later, unless proper inspections are done. For example; if a property has been sitting empty for 10 years, there may be a good reason for it. How do you know the plumbing is good? What if it all needs to be replaced?
Some San Diego real estate investors are experts at turning any property into a gold mine. They may even have mortgage lenders ready to fund the worst burnouts and flooded homes. But it isn’t for everyone.
Are There Better Strategies for this Property?
Even on a ‘no-brainer’ deal, with $50,000 down, and $50,000 in needed repairs, which might ultimately be flipped for $180,000, real estate investors ought to ask if there are better strategies. Instead of going through major gut rehab and renovation work on a tight budget, and little room for overages, is there a better way to profit?
Could the property be wholesaled for a less profit, but less risk, and faster? Could the contract simply be assigned to another investor for a hefty fee? Could the scope of work be pared down to a ‘pre-hab’ and resold faster, and with less cash and time in? Can you find another San Diego real estate investor to partner or JV with to trim cash needs and reduce repair issue exposure?
Are There Better San Diego Properties to Choose?
For some, the more distressed a property is, the better. For others, the net returns and rewards may be far higher on a property which has already been freshly rehabbed, on already rented turnkey properties with property management provided, or simply straight off of the MLS. Or maybe it is better to loan your capital to an expert in flipping distressed properties and just collect a nice check, while they do all the hard work. What’s right for you?
