Do you know what you’re buying? Distressed properties have at least one lien against them, and possibly more. One of the biggest fears of a real estate investor is unknowingly purchasing a junior lien (e.g., a second mortgage). Doing so means that you own the property subject to a more senior lien, which can leave you in a highly unfavorable position that often results in loss of money. Work with your title agent or an attorney to make sure there are no surprises.

There may be other title issues that you will need to contend with, such as bankruptcies, judgements, tax liens, HOAs, easements, etc. An O&E report (ownership and encumbrance) can be easily obtained from your preferred title company and can be a great tool to initially identify problems with title. Always make sure to obtain a title commitment before purchasing a distressed property (i.e., don’t rely on an O&E report alone).

Chances are that you won’t be able to access the property ahead of an auction, however, sometimes it is as easy as knocking on the door and politely asking for a peek (please be respectful). While nearly all properties will require some level of cleanup and/or repair, be especially alert for structural issues, fire and water damage, and remediation concerns (asbestos, meth, pets, etc.). These can make a home repair budget spin out of control. Also, make sure you have a good sense for the cost of common big ticket items needed to make a home livable, such as a furnace, water heater, sewer line, and roofing.

Even the most straight-forward deals take time. Make sure that you haven’t overestimated the potential sale price and have accounted for seasonal timing and carrying costs. Leaning towards more conservative returns during your planning and due diligence period will help you to avoid later disappointments.

Someone living in the house can complicate things quite a bit. Make sure you have a plan for dealing with existing tenants or homeowners. You may need to provide incentives to encourage occupants to leave a property in a timely manner, and in good shape.