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Four Factors to Consider For When Buying Distressed Properties

Gavin Finch
Written by Gavin Finch 

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Distressed property is one of the best ways to make a quick profit in real estate. But knowing which property has potential and which one will turn out to be a money pit is a skill that takes time to develop. Just because a house has a collapsed porch or peeling paint doesn’t make it a good investment.

There are hundreds of guides that will tell you what to watch out for and what to avoid. But if you want to make money buying distressed property, you need to know what you should be looking for. So in this guide, we’ll explain the top four factors that tell you an investment property is worth your time and money.

What is a distressed property and why is it a great deal?

Before we dive into what you should be looking for, it’s important to have a clear idea of what a distressed property is. A distressed property is a house that’s suffering from disrepair, neglect, or damage that is keeping it from selling for full market value. Investors love these kinds of properties because they can buy them at a discount, repair them, and then make a significant profit off of them. 

Sometimes, distressed properties may also be owned by motivated sellers–people who are facing financial distress factors and need to sell. These situations make especially great deals, because the owner needs to sell quickly to solve or escape their financial situation. But because their house is distressed, they can’t sell it for top dollar. As an investor, you can offer them the quick sale they need in exchange for a discount on the property. 

Clearly, distressed homes can carry great investment potential, but there are pros and cons with distressed property. Buying a damaged property isn’t guaranteed to work out in your favor. Your deal could have hidden damage or structural issues. You’ll also have fewer financing options available, because many lending institutions will be hesitant to finance a distressed property purchase. Finally, unless you run the numbers carefully, you may end up overpaying for an unprofitable house.

With these risks in mind, how can you find distressed properties that will make you money instead of turning into big losses? Here are the top four factors you should be on the lookout for.

The house is in a nice neighborhood

As a real estate investor, your goal is to find and buy properties that people want to live in. A large factor that influences where people want to live is how nice the surrounding area is. You can make decent money investing in bad neighborhoods, but we’re talking about how to find unicorn deals–high-potential properties that are selling for cheap. Those deals are primarily located in nice neighborhoods that a renter or buyer would be willing to pay extra to live in. 

These deals are harder to find, because nice neighborhoods don’t usually have run-down properties, but it’s still possible to find a home that needs some repairs before it can sell for full market value. The best option is to locate highly desired neighborhoods in your target market and then drive for dollars. Spotting the properties you’re interested in will be easy. And while you may not find as many distressed properties as you will canvassing lower income neighborhoods, the deals you do find will be more profitable investments.

Discover how you can easily find great deals by driving for dollars in person…or virtually!

The property is tax delinquent

Generating real estate leads that have liens is usually considered a bad investment strategy, but when you’re buying distressed properties, it can be very lucrative. Tax delinquent properties are houses owned by someone who hasn’t paid their property taxes. In response, the county has placed a lien on the property that blocks the owner from selling it until the taxes are paid back.

None of this sounds like it will be beneficial to a real estate investor, but it actually gives you a lot of negotiating power and leverage when you find a distressed property you want to buy. If a house has a tax lien on it, then the neglect and damage aren’t the primary reasons that the owner isn’t selling the house. The tax lien has simply kept them from listing it.

In many cases, the property may even be in decent shape, meaning you won’t have to invest as much money in repairs when you buy it. You’ll also have a much easier time negotiating the sale–the owner has someone willing to pay off their lien, and that may be an option they can’t afford to pass up. 

If a property is neglected and tax delinquent, then the owner is in a serious financial situation. But as an investor, you can help them pay off the lien in exchange for a significant discount on the distressed house. The only way that a tax lien can make a distressed property investment a bad idea is if the owner owes more than the house is worth or they aren’t willing to sell at a discount. 

The property sits on a large or attractive lot

You don’t always invest in real estate to get a house. Sometimes, a house just happens to be on a beautiful piece of land. So if you find a great lot with an ugly, run-down house on it, don’t be so quick to move on to the next opportunity. You may be looking at a gold mine.

Contrary to popular belief, land deals are actually one of the most sought-after real estate investments, especially if you buy them in agricultural or multi-use zones. From a residential perspective, they offer a homebuyer the chance to plan and build their dream home. This flexibility makes land deals especially attractive to wealthy homeowners.

If you find a deal in an area that’s been zoned for multiple use cases, you may be able to sell or rent the lot for commercial purposes. This can be extremely lucrative, especially if you can salvage the house and rent it to a business for an extended period of time. Certain businesses like law offices, medical clinics, and boutique stores love to operate out of old houses.

Finally, you may find an incredibly lucrative deal if you’re investing in a rural area. It’s less common, because distressed houses sitting on multiple-acre lots in rural communities usually don’t sell for a discount. But it is possible. If you manage to find a deal like this, you have the option to sell the land to a wealthy homebuilder, turn it into a farm, or sell it to a neighboring landowner. With large tracts of land, the possibilities are almost endless.

There are up-and-coming economic opportunities

The fourth indicator that a distressed property can make a great investment is the opportunities coming to the surrounding area. In fact, this is a tip all real estate investors should take to heart, even if they don’t want to put their money anywhere near a distressed property. If you can invest in an area shortly before it explodes in popularity and potential, you’re going to make a lot of money.

So when you’re considering buying a distressed home, take stock of the surrounding area. Do you see new commercial construction projects? Are there new, interesting businesses moving in? Are there unique restaurants to eat at? You don’t have to find the next Nashville or Phoenix but development always raises property values. You’re almost guaranteed to profit from putting your money where large-scale economic development is about to take place. 

Lesser (but still great) ways to find distressed properties

Now that we’ve discussed the biggest factors to consider when buying distressed properties, let’s take a brief look at a few other proven ways to find these deals. One popular method is to attend foreclosure auctions, where you can find homes that went through the foreclosure process and were repossessed by the bank. 

These events are a great way to get the first pick of foreclosed properties. Not everything at a foreclosure auction will be distressed, but many of the houses will be. Auctions are also a reliable way to buy distressed property for a great price, as long as you don’t overbid.

Another great way to find distressed property is to use the federal government’s Housing and Urban Development website to search for real estate owned properties. These are bank owned properties that didn’t sell at a foreclosure auction. Almost all of these properties will have some unattractive level of damage or neglect that made other investors steer clear of them. But you can buy these houses at a steep discount, so it’s a great option to consider.


Buying distressed property is one of the top ways to make a sizable profit in real estate. Whether you’re wholesaling, fix and flipping, or creating a rental portfolio, distressed houses give you the chance to buy at a low price and then increase the value with renovations. And while there are certainly cons of buying a distressed property, this strategy presents far more opportunities than risks.

The four factors we explored in this guide are just the start when you’re evaluating the potential of real estate. Finding houses in nice neighborhoods, connecting with people who need to sell, identifying high-value lots, and capitalizing on areas that are about to increase in value will all have a positive impact on your bottom line. But there are plenty of other, smaller factors you’ll encounter as you develop your investing skillset in your market. If you keep your eyes peeled and stay on the lookout for opportunities, you’ll eventually develop a list of your own winning investment factors.

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