Should You Invest in Distressed Properties?

Buying distressed properties can be a fruitful investment, but profiting is no simple matter. Make sure you've done your research.
Magazine Contributor
2 min read

This story appears in the February 2007 issue of Entrepreneur. Subscribe »

Interests rates are up, the housing market is down, and foreclosures are on the rise. It's tempting to think that now might be a good time to make hay buying and selling distressed properties. Tempting, but also potentially foolhardy. There's money to be made in real estate--as at any other time--but don't expect to find low-hanging fruit that just anybody can pluck. More likely, the inexperienced or overconfident will get plucked themselves.

It's true, though, that foreclosures are relatively high at the moment, so anyone interested in real estate investing would do well to understand the process. Plenty of books and websites can teach you the basics, but beware of those that charge thousands of dollars for get-rich-quick real estate plans. (They'll get rich, while you find that a little bit of information and a lot of cheerleading is a costly combination.)

First, disabuse yourself of the notion that you'll find a diamond in the real estate rough for pennies on the dollar. It almost never happens. Lenders tend to be savvy about foreclosing these days, and the housing boom of recent years has attracted flippers and speculators like moths to the camp stove. A more likely possibility is that the crush of competition among would-be moguls will pressure newbies into paying more than they should. Also note that the cost of a house or property is frequently higher than the sale price, after you figure in tax liens, unpaid bills by previous owners, renovation work and so on. Buying properties out of foreclosure is like picking your way over a floor full of trap doors: Even when you know they're there, it's dicey territory.

There are profitable ways to play the foreclosure market, however. At this point, you probably shouldn't count on short-term price appreciation driving your gains. Five years ago, sure--not now. Instead, search up-and-coming neighborhoods for fixer-uppers in which you are willing to invest time and energy before reselling. Or find property in an area affordable enough that you can cover the mortgage with rental income. Then hold on to it for a decade or more before you sell it for the big kill. There is money in foreclosed properties, but it may not be the easy money some gold rushers expect.

Scott Bernard Nelson is a newspaper editor and freelance writer in Portland, Oregon.

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