When an owner is forced to sell a property under extenuating circumstances like bankruptcy, excessive debt, or regulatory constraints, it usually goes on the market at a significantly reduced, or distressed, price. This affords others the opportunity to buy it at, or below, face value. As such, the distressed real estate market has provided profitable investment opportunities for many since the 2008 recession. And while distressed properties offer serious potential, the process of turning them into profit is not quite as straightforward as Flip This House and other “reality” series might suggest.
For those looking to create assets from these properties, the best approach is to follow the advice of real estate professionals with experience, who have helped investors at all stages purchase, rebuild, and sell distressed properties. The knowledge—and in some cases the intuition—gained in their experience is invaluable.
First and foremost I warn buyers to realize the investment of their time. Getting a fixer upper is going to either take a serious devotion of your own time and labor, or require you to manage the process of the expertise provided by others. Some recommend turning to real estate companies like Mack Co in Chicago. They provide all the resources you need to purchase, reconstruct, and broker the sale of a property, while barely lifting a finger. While this might seem like a good approach, it requires the commitment of a monthly fee, and may seriously eat into your profits.
For those who don’t want to give up a predetermined fee for these services, it may help to hire other experts to whom you can delegate each piece of the project on your own terms. I prefer to steer investors in this direction, because it allows them to be hands on in the process, while still entrusting the skill to experienced individuals. If you go this route, just be prepared to commit to the project management required from you as the landlord, in every stage of the process.
Before you even think about getting your hands dirty, however, give some serious consideration to where you are investing, and the type of property you are buying. This impacts everything from your potential clientele to your potential for income based on the average capitalization rate of the local market. A recent article in Curbed provides a snapshot of who is buying and in what range: “Boomers are the second-largest group of homebuyers (31 percent) after millennials (35 percent). More than half the homes owned and occupied by boomers (53 percent) are between 1,400 and 2,600 square feet, with 12.5 percent measuring 2,600 square feet or more, according to Trulia.” A huge consideration for investors is to understand how these breakdowns impact the trends in the types of property being bought and sold.
Baby boomers are looking to sell home in suburban areas to move to more densely populated urban areas in search of smaller homes and apartments for rent, with great amenities and less requirement for upkeep. If you have the capital to invest in larger communities or apartment buildings in locales that cater to and attract baby boomers, be sure to have a strong handle on what they are looking for. Those that are looking to downsize want smaller spaces so they have less responsibility inside the home, and more opportunity to spend time outside enjoying their retirement in beautiful shared spaces.
Millennials, on the other hand, are in the market to buy starter homes, “trade-up” homes, and even premium homes. If you’re investing in single family homes, think about what might be important to the younger generation in a property—whether it’s space for family, the opportunity to work from home, or ease of access to a downtown area. These things will later be selling points that work to your advantage.
The younger generation is also comprised of some fairly savvy buyers, which might require you to “hook” them with updates that set the property apart. A little creativity and attention to trends can make a big difference here. For example, mixed-use property is becoming an attractive option for buyers. In urban areas, look for opportunities to blend residential space with commercial and even retail space, as well as take advantage of common areas to maximize the potential for residents to make use of shared space and mingle.
As the “future cities” infographic below provided by 616 Development in Michigan suggests, this is more akin to the model that lures baby boomers into 55+ communities, but it is also effective for millennials who are looking to remain in urban areas and maximize the potential to network and meet people who might be influential to their future. Investing in features such as solar paneling and other green attributes that make properties sustainable in the long run, may pay off for you as the seller in the short term. Millennials, especially, will look for features that make the home sustainable, and heed growing concern over the depletion of the Earth’s natural resources, which will directly impact their lives and the lives of their children.
Finally, don’t forget the help that federal financial assistance can provide to investors. For example, for those looking to go the opposite direction of “smart homes,” distressed properties purchased in historically preserved districts may be eligible for federal financial assistance from the ACHP, for their efforts to preserve historical status. This is a key source of funding to promote economic development for historic preservation projects, rehabilitating everything from historic houses and commercial buildings, to infrastructure in historic neighborhoods.
They key in purchasing distressed assets is to plan, know your market, and gear your efforts in that direction before buying and strategizing for increased assets.