Distressed properties are present in that corner of the real estate market that only people well versed in the field like to access. A new investor or first-time buyer in the Indian real estate market doesn’t normally tread over and look at distressed properties as their first purchase or amateur investment.
It’s simply because the awareness around distressed properties is frighteningly low in India. Let’s change that today and take a deep dive into the corner of real estate called distressed properties.
What is a distressed property?
When you take on a home loan or a mortgage against the property you’re buying, the bank or the lending institution introduces many clauses to protect themselves in case you default on payments.
The most protective clause is foreclosure. In case a borrower fails to make any future payments on their home loan or mortgage, the lender needs to recover their remaining loan. To do so, the lender seizes the collateral that the borrower took the loan against. In the case of home loans, the collateral is the house.
Once the house has been foreclosed by the bank, it becomes distressed property.
The next step for the lender is to sell off the property to primarily recover the outstanding loan or mortgage amount. Distressed properties can be put on the market at a price that is either significantly higher or lower than the property’s market price.
More often than not, the price of a disclosed property is set to a number much lower than the market value of the said property.
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Why invest in distressed properties?
A simple answer would be yes, you should invest in distressed properties. But as with any other investment decision, the first step would be to educate yourself. Here are some reasons why investing in distressed properties might be a good idea for you.
1. Lower Prices
As discussed above, distressed properties are generally offered at throwaway prices as compared to the market value of the property. It’s simply because the lender is primarily interested in recovering their outstanding payment on the property instead of making a profit in real estate.
If you’re someone with low capital available to invest or wish to spread your savings across multiple investments, distressed properties can allow you to do so.
2. Lower Risk
Another benefit of investing in a distressed property is that it removes two of the biggest risks associated with buying a home:
- There is no risk of the builder not delivering your home on time.
- The ownership or title of the property is clearly and legally transferred as the bank takes charge of the proceedings.
3. Higher capital gains
Since you get to buy a distressed property at a price much lower than the market value, you gain more in the long term as compared to any similarly priced units. Forget about the long-term capital gains, simply flipping the property in the short-term will also help you cash out quickly with significant profits.
Risks associated with buying a distressed property
As you must have guessed if something sounds too good to be true it probably isn’t. The same goes for distressed properties. There are some significant risks involved with buying distressed properties as well.
1. Buying the property as-is
This means the lender won’t be making any renovations to the property before selling it to you. Thus look at a property carefully before deciding to buy it. Make sure the investment in the renovations doesn’t add on to the price of the property in a significant way.
2. Paying a higher price due to auctions
Distressed properties are generally auctioned off by the lender. Properties in a good condition and a prime location might interest multiple buyers. This increases the chances of the price of the property rising during the auction. Make sure you don’t blow through your budget buying a distressed property in an auction.
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3. It can be a lengthy process
Since a distressed property has to be bought through a lender and has outstanding costs associated with it, the process of relieving the property might be lengthy.
If you’re looking for a property to move into right away, distressed properties might not be the way to go. However, if you’re simply looking to make a high return on your investment, these types of properties can surely get you there.
Just make sure you keep an eye out for the risks pertaining to making the purchase of distressed properties so that you can enjoy the capital gains that come from them peacefully.