What is a Distressed Property? Definition, How to Sell, & More

What is a Distressed Property? Definition, How to Sell, & More

Whether you intend to purchase a home and flip it or looking for a great deal for your next home, distressed properties are a bargain, but they come with risk.

If you’re selling a distressed property, then you face challenges traditional home sellers don’t. Many people don’t realize their property is distressed, so we created a guide that helps buyers and sellers understand what it is and how people can get their hands on these properties.

Don’t discount distressed properties but know what you’re getting into before purchasing or selling a distressed home.

What is a Distressed Property?

When a person buys a house, they traditionally get a mortgage from a bank or other lender. If they fail to keep up with the payments and the home is on the brink of foreclosure or already owned by the bank, then it’s considered a distressed property.

Also, homes not sold at a real estate auction are considered real estate owned properties and distressed. Keep in mind that the distressed connotation has nothing to do with the condition of the home or the area of the home.

It’s simply a classification for a home that is or near foreclosure.

Benefits of Distressed Properties

When a home is at or near foreclosure, the last thing the bank wants is to own it. A lender is a business and doesn’t want to keep up or pay taxes on a home that reverted to them for ownership. They want to sell it fast and get on with their day.

Distressed properties for sale are traditionally sold at a foreclosure auction or directly through the bank. The biggest benefit of distressed properties is they often sell for much less than their estimated value. They are ideal for anyone looking to flip or buy a “fixer-upper” because they can buy for cheap and then sell at a higher price.

Risks of a Distressed Property

With a distressed property, you’ll likely not get financing and must pay in cash. Distressed properties are sold “as is” so if there are any major issues, they’re something you must repair. This is always a concern when you buy houses in as is condition.

Since the state and value of the home are difficult to assess, lenders don’t want to risk providing a loan for a foreclosed home. You’ll have to come up with the capital on your own.

Potential buyers aren’t likely to get an appraisal done before the auction. You might be able to go in and see it, but an in-depth review isn’t an option. With that, you’re risking major electrical, plumbing, or structural problems that you can’t see in a walkthrough.

While unlikely, you could spend more in purchasing the home and repairs than what the house is worth.

Risk vs. Potential

Distressed property has the potential to be a massive financial boon for property investors. We hope this guide provides you with the information you need to make an informed decision on the risks of investing in distressed properties versus the benefits.If you want to learn more about foreclosures and distressed properties, then please explore our site.