A distressed property is a real estate asset in poor condition or facing financial difficulties. The term "distressed" indicates that the property is experiencing some form of distress, typically resulting from foreclosure, bankruptcy, short sale or neglect.
Seeking out a distressed property such as a foreclosure or short sale can be a great money saver, and thankfully, military buyers can take advantage of their VA loan benefit to achieve this.
However, VA lenders can only grant distressed property loans if the properties meet the guidelines set by the Department of Veterans Affairs.
Distressed property loans can offer unique challenges in this regard. That's why we're here with four tips to help you navigate the homebuying process.
All properties in consideration for VA financing must submit to a VA appraisal, which evaluates a property’s safety and livability using a list of Minimum Property Requirements (MPRs). A distressed property is not inherently in poor condition. However, borrowers should know that homes that fail to meet each MPR can't be approved for VA financing.
MPRs aim to secure well-built, economically sound homes for Veterans. Homes must be move-in ready and free of safety hazards. Some MPR requirements include:
We’ve created a full list of minimum property requirements you can use in your property search!
Distressed properties can have a hard time living up to MPRs. Previous owners may not have maintained foreclosures or short-sale properties, and bank-owned properties are frequently sold "as is" with zero tolerance for repairs.
Pristine foreclosures and short sales are out there, but they can be tough to locate.
Borrowers should use all available resources to quickly find distressed properties that can easily pass the VA appraisal. This can include carefully reviewing home listing photos and summaries to ensure the property falls within MPR guidelines. An agent familiar with the VA loan is always an excellent resource for specific questions.
Finding cooperative sellers is also a vital tool. Obliging banks can simplify the VA loan process by agreeing to bring distressed properties up to MPR standards.
Assessing the value of a distressed property can be difficult for both agents and appraisers. A volatile market or a neighborhood with foreclosure sales can make it tough to agree on a home's value.
VA appraisers will typically exercise caution when evaluating distressed properties. The appraiser will use comparables that reflect "typical transactions" for the market, which may likely include other distressed property sales.
Distressed property comparisons can drag down your Comparative Market Analysis (CMA) value, but they may need to be included.
Luckily, VA loan buyers have recourse for erroneously low appraisals. The VA's reconsideration of value option allows buyers to petition for a secondary property appraisal. A second appraisal may be granted if the buyer can show that pertinent information was not used in the initial appraiser's report.
Agents know there's nothing short about a short sale, and buying a distressed property can be tedious and complex.
Informed buyers are satisfied buyers, so make sure you know how VA loan requirements will come into play.
Military borrowers on a strict purchase timeline may be better off with a more traditional homebuying process. But for those who can be patient with the process of buying a foreclosure, a steal of a home may be just around the corner.
If the property is in good condition and doesn’t violate any major minimum property requirements, then a foreclosure purchase could be a good use of your VA loan benefit. On the flip side, if the foreclosed property is in rough condition, then the amount of repairs needed may make the purchase unreasonable.
At the end of the day, purchasing a foreclosed home should be handled on a case-by-case basis and discussed closely with an experienced VA lender.