Seven big tips for buying a distressed property.

1. Location, Location and Location! You are investing in a community, not just a home. The neighborhood in which the home is located will ultimately determine its long-term appreciation. Before being lured in by a low price, do your homework. For example what are the absorption rates for that town and what are the price points? Is the town growing in size or shrinking? Is the town putting money into its infrastructure? (It’s a small thing, however I tend to look and see when the road was last paved. If it’s going to be paved soon, time your sale to occur right after the work is completed.)

2. Stick to REO’s. "Real Estate Owned" is the bank’s term for foreclosed and bank owned properties. There is a big difference between a home that is in foreclosure and one that is foreclosed. Unlike a home sold at auction or purchased during pre-foreclosure, its title is held by a bank or lender; there are no other liens against the property. Another benefit about buying an REO is that you can often inspect the home in greater detail than at auction.

3. The more bedrooms the better. No less than three! Other features that will help you charge higher rents are garages, basements (a must), and at least one-and-half bathrooms.

4. Know when to walk away. There are hard fast rules as to when to pass up on a foreclosure. Damage to the foundation is a serious red flag, as is mold infestation or extensive plumbing repairs that will require breaking open floors and walls. It is crucial that you hire an experienced home inspector before making a bid. Otherwise, a foreclosure that seemed like a good deal could end up costing you more money than the home is worth.

5. 10% - 15% Rule. Plan on 10% less income than in the budget, and 15% more in overages and expenses. Whenever I take a bid from a contractor, I automatically add 15% for change orders and unexpected costs.

6. Be decisive. Failure to make a decision and wavering can kill a project and a timeline. Remember a good answer today is better than a perfect answer tomorrow.

7. Know your way out. Never buy any property without an exit strategy. Unless you are doing estate planning and hope to leave a property behind for future generations, always have an exit plan. After years in real estate, I’ve heard tons of clients claim that they are going to own that new house forever. 5-7 years later they make great return clients.