although their reduced sales prices, hidden value and huge inventory may sound appealing, distressed properties often represent false opportunities. Mortgage brokers can help lessen
the risk for investors while also leading them to appropriate financing solutions.
For investors, the best-case scenario typically means buying
a property that is in process of foreclosure, bank-owned or under water; making some improvements; and selling it for quick
profit. For many, the promise of fast riches will prove too hard
to ignore. Often, however, reality takes an ugly turn.
When a property falls into distress, the likelihood of it generating a profit at sale decreases dramatically. That’s generally
good news for investors. Those who act without foresight, however, can assume the risk rather than take advantage of it.
Many distressed properties have been abandoned, rundown
or both and require substantial rehabilitation before anyone
will consider living inside. When these properties are bank-owned, the owning institution will handle the sale as it sees fit.
In some cases, a bank will let a real estate agent take the reins.
In others, it may hold an auction.
Banks end up owning properties for many reasons,
including:
• nonpaying borrowers;
• abandonment; and
• death of the mortgagor.
Regardless, the homes often become dilapidated either
before the bank takes ownership or after. In-process foreclosures and homes with negative equity also face increased risk
of poor upkeep. When investors purchase these properties,
they’re often looking at thousands of dollars in deferred maintenance. Because of this, gains don’t materialize as quickly as
many investors would prefer, and quick flips become more difficult to execute.
This risk creates opportunity for investors — as well as for
mortgage brokers and loan originators who provide sage advice and a path to sustainable financing.
Key questions
Mortgage brokers and loan originators should have the experience and knowledge necessary to help investors tap the
distressed-property market. you also should encourage frank
discussions about would-be investors’ financial position and
investment approach.
Distressed-property buyers have many preliminary decisions to make, all of which play important roles in determining
how they proceed. When meeting with such prospects, discuss
each of the following topics:
• Purpose: Find out why prospects want to buy a distressed
property. The more you know about their intentions, the
better.
• Time frame: ask how long they want to own the property. Do
they want to flip it quickly, or do they have more patience? If
they are willing to wait, what are they waiting for?
• mindset: Determine their perspective on future pricing
trends and research the reasonability of their thinking. are
they in touch with the reality of the market?
• interim plan: For buyers willing to hold purchases for longer
amounts of time, ask about their intentions for their period
of ownership. Do they plan to rent out the property, let someone live in it for free or leave it empty?
• finances: ask about how much money buyers are willing to
put down. Find out their cash reserves. Discuss the importance of being prepared for prolonged ownership and continued price declines.
• renovation experience: If they want to purchase a property
that needs major renovations, find out their construction
experience and budget. Do they plan to do the work themselves or hire someone?
Investors should benefit from your experience in the market,
so you should remain aware of distressed-property trends in
the geographic areas in which you work. Track listing and sales
prices. Figures from the previous six months will often be most
important.
Brokers and loan originators also can assist buyers in hiring appraisers to identify the property’s value. Depending on
the type of financing buyers hope to receive, an additional appraisal likely will be necessary later on, as well, and may be
subject to appraiser-independence requirements. Nonetheless,
getting an accurate value assessment early can help investors
determine whether to proceed. It also can help determine how
much work, if any, the property needs and the cost of that work.
time to shop
after answering your preliminary questions, potential buyers
should be prepared to make an educated decision about whether
to move for ward. When they decide to proceed with a distressed-property purchase, a new set of questions arises that must be
addressed before you prequalify borrowers for a loan. Consider:
• what’s the property location?
• what caused the property to become distressed?
• what was the property’s previous use?
• what is the market value of similar properties in the area?
• how many other similar properties are for sale in the area?
Make sure to differentiate between distressed and nondis-tressed properties.
continued on page 48 »
Manuel v. Sicre is chief financial officer for EMP Medical Services and Central Medical Equipment Rental
in Miami. He has more than 36 years of experience in
the banking and lending industry. Sicre has worked
as a financial consultant and is now employed in the
medical-equipment industry. Reach him at (305) 281-
1919 or mannysicre@aol.com.
