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

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.

last updated Wednesday, May 17, 2023
#Buy Distressed Property #Short Sales

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


A Foreclosure Auction

This is where homes are auctioned to the highest bidder. The foreclosing lender could bid automatically for an amount equivalent to their loan or less by making a deficiency judgment to the borrower if the borrower had guaranteed the hard money loan. Foreclosing properties being auctioned is beneficial due to the high winning possibility of the auction and purchasing the property below the market price. However, these auctions have a downside because buyers won't be able to inspect the property before buying, 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. If you are an amateur, don't bid at Public Trustee Auctions without talking to a legal expert.

Short Sales                         

This is when properties are sold to the titleholder for less than the outstanding amount. These properties are beneficial because the commercial hard money loan borrower can inspect the property before making a purchase, the deed is often clear of any liens, and all outstanding taxes are the seller's responsibility. The only risk in purchasing is that the lender can approve the sale. Because the property needs the property owner's approval, the process can be drawn out and take between 3 to twelve months. Therefore, you should be patient enough.

Note Purchases

These 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 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 loan borrower to sign over the property deed instead of foreclosing if they cannot pay the loan. Sound legal advice when purchasing properties through this method is highly recommended.


Real Estate Owned properties allow buyers to purchase a foreclosed property directly from the commercial hard money loans lender without needing 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 often differs from an auction because you can inspect the property. In most cases, there are very few problems with the transfer process of the title. The seller is also responsible for paying all taxes and liens, not the buyer.


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