Mark Twain famously advised: “Buy land; they’re not making it anymore.”
Twain wasn’t wrong. Back in his day, land speculation was rampant, and there was real money to be made buying land along — for example — future railroad routes.
Today, many real estate investors bypass unimproved land in favor of properties that have seen better days. Investing in distressed real estate — residential and commercial parcels begging to be fixed up and resold for profit — is a lucrative endeavor for those who know what they’re doing.
Many don’t know what they’re doing. If you’re thinking about dipping your toe into the distressed real estate market, you’ll want to keep these five things in mind.
1. Market Price and Total Cost Don’t Always Correlate
This seems like a no-brainer, but you’d be surprised how many overeager real estate investors fail to look past the topline price and really consider what’s necessary to ready a distressed property for resale.
Before you purchase a distressed real estate asset, you need to have an exit strategy — a clearly defined “after” vision that you’ll bring to market when all renovations are complete. Even more importantly, you need to know how much those renovations will cost. If you don’t know where to start, you need to partner with someone who knows more than you.
2. Going It Alone Is Risky, But Not Always Unwarranted
About partnering with “someone who knows more than you”: it’s not absolutely essential, but it’s likely to be a net positive, provided you select someone with whom you can actually have a fruitful working relationship.
“When choosing a real estate investment partner, look for someone who has skills and interests that complement your own,” says Florida real estate investor Ralph Serrano, who specializes in distressed assets. “You want someone who will help you expand your horizons, not close you off to new opportunities.”
3. Local Geography Matters
How well do you know your own backyard? Most real estate markets are incredibly granular, with asset quality and buyer interest varying almost by the block (and certainly by the subdivision). This is another area in which a partner is handy: someone with deep experience in a particular submarket can help you avoid bad decisions and steer you to safer bets.
4. Pessimism Pays (But Not Defeatism)
“If you want to come in on budget and on schedule, you absolutely have to be a pessimist,” says Billy Procida, a New Jersey real estate investor quoted in this Forbes article about investing in distressed housing.
There’s a fine line between pessimism and defeatism, though. Successful real estate investors see past the inevitable hiccups and setbacks; those who take their eyes off the prize tend to underperform those who maintain relentless focus.
5. Look Beyond the MLS
Lastly, don’t assume that the best deals are public knowledge. In distressed real estate, the greatest value is often found outside the MLS.
“For buyers, the benefits of an off-market listing are twofold,”writes Investopedia contributor Donna Fuscaldo. First, off-market listings, or pocket listings, are generally less competitive than on-market listings — a boon in competitive markets. Since the same agent often represents buyers and sellers in pocket deals, commissions may be lower as well.
Don’t Go It Alone
It bears repeating: going it alone in the wild and woolly world of real estate investing is not always the wisest course of action, particularly for first-timers apt to underestimate the challenges (and overestimate the upside) inherent in distressed real estate.
It’s absolutely possible to make serious money in this line of work — but nothing is given. You’d do well to align yourself with a more experienced partner or working under someone who’s been around the block.