What You Should Know Before you Find and Buy a Distressed Property

    by Aditi Bansal

Updated on Monday, May 15, 2017

A commercial hard money loan is mostly used to buy distressed homes. However, this doesn’t mean that purchasing distressed homes is always a good thing to a bridge loan borrower. Distressed properties are categorized into four, and each category has unique risks and benefits that you can weigh before you proceed.

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A Foreclosure Auction

This is where homes are auctioned and to the highest bidder. The foreclosing lender can bid automatically for an amount equivalent to their loan or less by making a deficiency judgment to the borrower in case the borrower had guaranteed the hard money loan. Foreclosing properties being auctioned are beneficial due to the high winning possibility of the auction and purchasing the property at a price below the market price. However, these auctions have a downside because buyers won’t be able to inspect the property before purchasing, and there is a high possibility of complex legal issues with the property title. The buyer is also responsible for paying the property tax and other charges that may be due. In case you are an amateur, don’t bid at Public Trustee Auctions without talking to a legal expert.

Short Sales                         

This is a situation when properties are sold for a price that is less than the outstanding amount to the title holder. These properties are beneficial because the commercial hard money loans borrower has a chance to inspect the property before making a purchase, the deed is often clear of any liens, and all outstanding taxes are the responsibility of the seller. The only risk in making such type of a purchase is that the lender can give approval before the sale. Because the property needs the approval of the property owner, the process can be a drawn-out procedure that can take between 3 to twelve months. Therefore, you should be patient enough.

Note Purchases

These types of purchases often involve a commercial hard money loan borrower buying a promissory note from the lender instead of the property. This process is very risky compared to all other categories of purchasing distressed properties. The main risk is that the buyer has only purchased a lien right from the commercial hard money loan lender and not the right to own the property, and this means that the buyer cannot inspect the property. The promissory note is valuable to the buyer as long as he can pay the loan, and in case he defaults, the buyer will have to foreclose for them to get the property. The only advantage of these property purchases is that the property buyer can decide to reduce the monthly payments made by the borrower due to the low price of the promissory note. The buyer can also convince the commercial hard money loans borrower to sign over the property deed instead of foreclosing if they are unable to pay the loan. Sound legal advice when purchasing properties through this method is highly recommended.


Real Estate Owned properties give buyers the opportunity to make a purchase of a foreclosed property directly from the commercial hard money loans lender without the need of an auction. Such can happen if the commercial hard money loans lender had made the highest bid during the sale and now owns the property. The foreclosure procedure is often different from an auction because you will have the ability to make an inspection of the property and in most cases; there are very few problems if any with the transfer process of the title. The seller is also responsible for paying all taxes and liens and not the buyer.

This page has a focus on Buy Distressed Property, Short Sales was shared by Aditi Bansal.

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