Smart property investors are always looking for effective ways to increase the value of their portfolio. Whilst there are many traditional “passive” strategies for achieving this goal—such as predictive property clock analysis and leveraging the compounding effects of time—the implementation of “active” growth strategies can scale a portfolio’s value and cashflow a whole lot faster.
One of the most attractive active growth strategies is creating “instant equity” when purchasing a property. The process for creating instant equity is simple in theory: purchase a property for less than it is worth. In other words, the difference between (a) the property’s value and (b) the amount you pay is its “instant equity”.
One of the most common ways to produce instant equity is to locate and purchase a suitable “distressed property”.
What Is A Distressed Property?
A distressed property is a property being offered at a reduced price to achieve a faster sale. A property may be classified as “distressed” for the following causes:
- Relationship failure. The owners of the property may be entering a separation or divorce and require a property to be sold quickly. To achieve this goal, they reduce the price.
- Declining value. For some reason, the property may be losing its value and its owner may wish to liquidate before it declines any further.
- Damage to the property or its land. The property may have been negatively impacted by a catastrophic event like flooding, fire, or similar event requiring the owner to sell because they can no longer service it.
- Mortgagee-in-possession. A borrower may no longer be able to afford mortgage repayments, requiring the bank to sell the property to recoup the amount it lent.
- Deceased estate. Often a deceased estate’s trustee will prioritise the conditions for a rapid sale instead of a higher sale amount.
- Other life events. An owner may need to move away to care for a family member or relocate for a job. As such, they will seek to sell a property quickly.
Advantages Of Purchasing A Distressed Property
There are advantages to purchasing a distressed property, including:
- Instant equity may be created upon settlement. Depending on the state of the property and its perceived value, a buyer may create instant equity as soon as the property settles (Please note, not all distressed properties provide instant equity… more on this below).
- Rapid settlement. Distressed properties usually settle quickly because the seller is seeking a rapid sale.
- Negotiation flexibility. So they can achieve a faster sale, distressed sellers may be open to more flexible terms that benefit a buyer.
- Portfolio diversity. In some cases, diversification may provide security to a portfolio. Purchasing a distressed property may provide this diversification.
The Risks Involved In Purchasing A Distressed Property
Investors must assess unique risks when evaluating a distressed property, such as:
- The possibility of overlooking a fault. By nature, the process for purchasing a distressed property usually happens faster than normal. Additionally, the due diligence process for a distressed property may be a little more complex than a traditional purchase (because there are more and different factors to assess). This means that a buyer may overlook a fault because they’re either proceeding too quickly or do not realise the unique factors they must assess. The implications of this oversight could be very costly.
- Not realising the *real* reason for a property’s distress. Whilst this is uncommon, some sellers may attempt to conceal the “real” reason a distressed property is on the market. For example, a seller may pretend they are undergoing relationship stress where instead, in reality, a property has been physically damaged in some way. Overcoming this risk requires strong due diligence and investigation skills.
- Mistaking a distressed “individual” for a distressed “property”. It’s important to understand the difference between a distressed individual, and a distressed property (in the physical sense). Buying from a distressed individual is generally lower risk because there is usually nothing physically wrong with the property (although, of course, you must perform your due diligence on a property’s physical features and surrounding market environment). Buying a property that is distressed due to structural, environmental, or other physical or economic factors is generally higher risk and should be approached with a different set of assessment tools.
- Expecting rapid short-term growth, post-purchase. Instant equity aside, some investors fall into the trap of expecting rapid short-term growth from their distressed purchases. If buying from a mortgagee-in-possession, buyers must realise that this is often due to a suppressed market and should “hold” until the market bounces back. The majority of distressed properties produce a profit through a long-term hold.
How To Locate Distressed Properties
Locating a distressed property requires specialised research and analysis skills. Generally speaking, buyers will need to look further than key population areas like Canberra or Sydney. Strategies for finding distressed properties are:
- Looking for listed properties that contain words like “quick settlement” or “motivated to sell” or “must sell quickly”.
- Looking for properties that are “for sale by owner” and then inquiring why this is the case.
- Doing some Google searches for distressed property reports (“SQM Research” provide good research in this area)
- Individual real estate agent websites
Seeking Finance Pre-Approval Is Important
By nature, the sellers of distressed properties wish to move quickly. As such, it’s a smart idea to have finance pre-approval before you enter into negotiations on a distressed property.
The team at Trilogy specialise in helping investors get this pre-approval.
The quickest and easiest way to learn more is to request a Free 30-Minute Finance Strategy Session during which you will…
- Get an up-to-date picture of the lending landscape including rates, conditions, and how to structure loans for cashflow positive investors
- Gain greater clarity over where you want to be in terms of owning investment properties (and how to structure your loans to get there the fastest, safest way)
- Discover how to unlock the equity in your current properties, so you can build your portfolio – and your wealth – faster (and enjoy a better lifestyle now and in retirement)
- Discover clever, no-cost ways to save money on interest, fees, and charges — immediately
- Learn about our process to find you a better loan that will save you thousands.
This no-obligation free session will be held with one of our experienced mortgage brokers who specialise in structuring cashflow positive property investments.
Please be assured this will not be a thinly disguised sales presentation. On the contrary, you’ll receive our best strategic advice, specific to your situation, so you too can accumulate multiple properties without sacrificing your current lifestyle and accelerate your progress towards wealth.
Please note, the numbers and assumptions listed in this article are for educational purposes only. Individuals should seek specific advice pertaining to their unique situation and the real estate market before making any decisions.
Trilogy Funding Two is a corporate credit representative (Representative Number 506131) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237)