When Wisconsin-based real estate investor Nick Koenen shops for deals, he doesn’t bother with Zillow. Instead, he heads straight to the clearance rack of distressed sales.

These homes, which account for about one-third of Koenen’s business, sell for a 20% to 30% discount because they must move fast—due to foreclosure, divorce, death, and other dire straits. To find them, he’s scoured public records, cold-called strangers, knocked on doors, and gotten yelled off porches. Sellers also approach him after stumbling across his website or spotting coasters at local bars that promise to buy any house, in any condition, for cash, and close the deal in a matter of days. And though it might seem awkward to profit from a homeowner’s tough situation, when handled right, most sellers thank him in the end. Really.

“The key is to get them to trust me,” Koenen says. “It is imperative to show sellers that you are genuinely there to bring the correct solution, even if it means I make less.” Transparency is paramount, which is why he always visits the house, takes photos, puts together a scope of work and budget, and explains the formula they use to back into the offer with a profit target of 10%–20%. “Being brutally honest and transparent helps form a bond and close deals.”

Not that it isn’t messy: Koenen once sweet-talked a pre-foreclosure client in the middle of a divorce, only to realize his ex-wife was on the deed. “So I had to begin the trust-building process all over again with her,” he says. Another time, he got a call from a woman whose grandmother was getting gouged by a wholesaler, so he intervened. Koenen puts up with the headaches because the payoff can be substantial: In a recent estate sale, he bought a Lake Geneva property for $220k, spent $60k on renovations, and sold it for $415k—netting a six-figure profit.

The thrill—and risks—of distressed sales

Distressed sales are rare but on the rise, with foreclosures alone up 28% year over year in March—and set to rise further due to recent rollbacks of Biden-era forbearance programs. Many more seeking quick cash offers might not need to sell but just want out fast (say, to relocate for a new job or upsize into a bigger house for a growing family) and are willing to forfeit top dollar to speed up the sales process, which has grown sluggish in today’s high-rate environment.

Whatever their reason, “The seller is usually trying to solve a problem, not squeeze every dollar, which can create strong margins,” says Brett Johnson of New Era Home Buyers, who recently bought a pre-foreclosure in Aurora, CO, for around $285,000, put about $55,000 into renovations, and sold it for $415,000. “That sounds clean, but it worked only because I kept the scope tight and moved fast.”

Where people get burned is in the unknowns. “These homes are often sold as is, and what appears to be a light rehab can turn into something much bigger once you open walls,” warns Johnson. “I’ve had deals that looked great on paper, then a structural issue shows up, and suddenly the numbers barely work. Lately, it feels like the margin for error has shrunk. Higher rates and softer demand mean the big discounts people used to expect are harder to find.”

Advice: Finding these deals isn’t as easy and breezy as surfing Zillow. Many start out searching public records for pre-foreclosures or foreclosures in their area. Also, since these homes might be run-down, you need to “Stay conservative with your numbers,” says Johnson. “I build in extra room on both the rehab and the exit, because something almost always shifts.”

The key is to remember that many of these sellers may be panicked, so focusing on their situation with compassion can really help you break through.

“Never knock on a stranger’s door saying what you want; ask what they need,” says San Antonio, TX–based real estate investor Daniel Cabrera, whose most memorable distressed sale involved a homeowner who’d fallen behind on her mortgage due to medical bills and was just three weeks away from foreclosure. “Two prior investors had approached her, making lowball offers. I did not start our discussion with numbers, but with trying to understand her situation. She needed enough money to cover her remaining mortgage balance, moving expenses, and rent deposit for her new apartment. After learning what ‘enough’ was, I offered her a deal that met her expectations. We closed in nine days.”

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Q: Why buy this meth house? “I’ve done dozens of properties with meth contamination, so I’m familiar with the process. This condo was referred to me by a meth remediation company. The seller couldn’t get her ‘friends’ to leave. I purchased it sight unseen, as is, while I was on vacation in Hawaii. I told the seller I’d deal with the squatters. She was very, very grateful. Even so, I was surprised by just how many squatters were in there when the police helped me clear the property. I mean, the place is pretty small!”

Q: How did it look inside? “It was as bad as I imagined. Since the drug makes users angry and gives them ‘super strength,’ meth homes tend to have punched-in drywall, kicked-in doors, destroyed kitchens, and unhinged writing all over the walls. Plus, recreational meth use leaves a sticky residue on the walls. The smoke gets sucked into the HVAC, then is distributed throughout the home and onto all surfaces that must be wiped down with a solution. Even though it was a relatively new house built in 2009, it required a complete overhaul that cost $90,006 and lasted five months. I even budgeted for a full replumbing in case the squatters had cut out and sold the copper pipes for money.”

Q: Did the condo sell? “It cleaned up nicely and sold for $369,900—a $47,676 profit. And as you can imagine, the neighbors were grateful.”

Q: What advice do you have for others who might want to try rehabbing a meth house? “Sight unseen, it’s best to just budget for a full gut job. I didn’t feel like I was taking a gamble, since condos are predictable with after-repair value, and I had budgeted for the worst case.”

This week, we spoke with Nader Wahba of SoldFast Georgia about Atlanta.

Average home price: $387,752 (down 3.6% YoY)
Homes that sell over list price: 17.6%
Homes that sell under list price: 65.3%
Average rent: $1,873/month

How he got started: “Back in 2013, I bought a townhouse near a university and rented out the rooms while living in one of them,” Wahba says. “Then I spotted another townhouse a block over listed on Facebook. They wanted $87,000; I paid them $82,000 in cash. I held it for one year while renting it out for $1,290 a month, then sold it for $125,000. That deal showed me how much I enjoy buying and selling real estate.”

His market’s pros: Delta, Coca-Cola, Home Depot, and a bunch of other big companies keep the “Hotlanta” housing market hopping. And although the pandemic-era frenzy here has died down, “Atlanta has stabilized into a healthier normal with modest price growth and fewer emotional bids,” says Wahba, who has bought and sold over 100 properties.

Cons: Institutional buyers are active and aggressive here, plus property taxes have risen as assessed values catch up, killing margins. “Coupled with higher interest rates and prices, getting single-family rentals to pencil has become near impossible,” explains Wahba, who’s been reducing the number of long-term rentals because some no longer cash-flow well, transitioning to short- and mid-term rentals.

His advice: “Investing in properties with multiple units makes the math more feasible,” says Wahba, who recently partnered with a friend to buy a six-unit apartment building in rough shape for $300,000. “The monthly rents were only $400 to $800,” he recalls. “We renovated the entire building for $120,000, then raised rents to market rate, around $1,200 a month. Our tenants were very thankful to have updated units with new air conditioning.” Six months later, they sold the building for $575,000.

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