A wild ride through the bargain bin of distressed sales

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.”