Distressed properties refer to real estate that is in foreclosure, returned to the bank, or in need of extensive repairs. Many foreclosed and bank owned homes require considerable renovation to return them to livable condition. Oftentimes, damage is caused by frustrated homeowners who were evicted from their home because they couldn't afford their mortgage payment.

Approximately 25-percent of distressed properties require major repairs such as structural damage. Others require removal of mold, lead paint, asbestos and other environmental hazards. These types of properties should be avoided unless buyers have the knowledge and resources for safe and proper renovation.

A large percentage of foreclosure homes require new roofs, windows, flooring, countertops, appliances, heating and air conditioning system, interior and exterior paint, landscaping and pool maintenance. These repairs can be costly and quickly deplete potential profits.

Although distressed properties generally require more work than the average home, they are sold below market value. Buyers capable of performing all or part of the repairs can save considerable money. Buyers who need to hire contractors should obtain repair estimates prior to investing in distressed real estate. Otherwise, their cheap home could quickly turn into a cash cow.

Real estate investors who engage in buying distressed properties need to realize this type of investment practice does not yield overnight profits. Distressed properties are best suited for conversion into rental properties or for investors who participate in house flipping.

The primary goal of investing in distressed properties is to seek out cheap homes for sale that can be affordably renovated. Doing so allows real estate investors to charge a reasonable amount of rent in order to attract tenants. These properties can be rented on a long- or short-term basis.

Short-term rentals are a good option when real estate is located in popular neighborhoods or vacation destinations. Investors can charge a higher rental rate for vacation properties. However, vacation homes can be a risky venture; particularly with the current recessed market. Most vacation rentals are furnished and require thorough cleaning after each rental period.

Foreclosure houses are purchased through public auctions. Investors place a bid on the property and must present a down payment and be qualified to finance the balance or buy the property with cash.

When foreclosed properties do not sell at auction they are given back to the bank. At this point they become bank owned homes and must be purchased through the bank's loss mitigation department.

Bank owned properties are usually priced higher than foreclosure real estate because the mortgage lender negotiates with creditors to remove attached liens. Currently, lenders only entertain offers of 90- to 95-percent of the appraised value.

One little known secret for buying distressed properties is to seek out real estate investors who purchase bank portfolios. When investors buy properties in bulk they pay wholesale prices. It is not uncommon to purchase wholesale properties and obtain instant equity of 30-percent or more.

Money can be made by investing in distressed properties; however, it is imperative to engage in due diligence to determine the actual cost of the property. Buying distressed real estate is rarely an easy task. If you are willing to hold properties long-term or capable of locating buyers quickly, you could potentially double or triple your investment.