A friend asked me recently if it was good time to invest in real estate, my answer has always been default, you can’t go wrong with real estate investment, especially in our side of town that has seen an economic downturn. With other financial instruments also not completely reliable, where do you store or invest your money to avoid a “hair cut” or loss of value? While there’s a wide range of property types to invest in, we will focus on residential properties including distressed properties. Residential properties have sort of an almost inelastic demand since it is a basic necessity and is always in demand. This analysis will be in 2 parts and we will first begin by revisiting investment in distressed properties
What are distressed properties?
Well, your layman guess may not be too far off. A distressed property is one under pressure in terms of regular maintenance, completion or financial sustainability. Simply put, there comes a time when either through inability to continue maintenance of the physical structure or financial commitments like mortgage repayments. There are other specific reasons like separation or divorce, death in the family, job relocation, job redundancy, pay cut, divorce, medical condition, condition of the property, inability to continue with monthly mortgage repayments etc.
All of the above go to reduce individual or joint owners’ ability to continue property maintenance or other financial commitments, leaving them with no choice but to sell below market value in the hope of a quick sale to overcome the said challenge. This is quite common especially with banks and financial institutions who foreclose such properties in the hope that they will receive cash quickly rather than be burdened with a distressed property. On the face of it, buying distressed properties are quite a steal but it has its disadvantages too, here is a quick summary of the pros and cons of buying distressed properties.
Pros
Super Bargains – It will amaze you that you can purchase a distressed property with discounts ranging from 25% to as much as 50% off the market value. This is especially true of properties that are being foreclosed by banks and individuals who just want to rid themselves off the headache of mortgage or other financial commitments. Make friends or speak to your lawyer friend who are the ones that usually have leads on such properties.
High ROI– The return on investment can be very high either via capital gain or rental income. This is especially true for properties bought in prime or marketable neighbourhoods with high demand for rentals or sales. With the property bought at a super bargain you are most likely to reduce the payback period significantly from the standard 8-9 years to about 5-6 years and thus leave the subsequent years as net positive cash flows.
Easier Financing Opportunities – It is not a dream that you will make an offer to purchase a distressed property from a bank and this same bank will even offer you a facility to buy the property and to boot offer favourable terms as well. It isn’t a dream at all, it is reality that you may end up with lower interest rates, lower closing and finance costs as the bank is more interested in offloading the distressed property.
Cons
Tedious Paperwork – So you clearly won’t be the only one reaching into your pocket to buy that distressed property at an unbelievable price. There will be several interests from the market and even some officials in-house (Seller’s associates). There will be several offers and the seller will usually be stalling for the best deal and this usually affects deal closure and subsequent paperwork, as seller, usually a second or multiple property owner or bank may be tied down with other more lucrative deals. Then there is also clearance required from the courts like an order of warrant to recover possession of the property etc. Patience here is key as getting the right title is non-negotiable.
Potentially Poor Location – Stats indicate that majority of distressed properties lie in the least developed localities, usually with poor infrastructure. Most people when buying distressed properties are focused on the price to the detriment of other factors like the value of the location and may thus suffer when looking to on-sell or rent.
High Renovation or completion Costs – Some distressed properties are exactly that, very tired and worn out properties that require extensive injection of cash to bring them back into livable conditions and in some cases where construction is abandoned halfway, to redesign and complete. If at the point of buying, you are only excited about the price and pay less attention to future renovation or completion costs, you may end up actually paying more than the market value.
From the above, it is clear that distressed properties can be a great investment once you get your projections and sensitivity analysis right or Yaw? “Yeah Nii, Copy that!”
The writer is the Executive director of Yecham Property Consult
& Founder of Ghana Green Building Summit.
Email: [email protected]
Linkedin: Cyril Nii Ayitey TettehTweet
