What Is a Distressed Property and Should You Buy One?

A distressed property is a home at risk of foreclosure, currently owned by a bank, or repossessed by a mortgage lender.

Have you heard of a distressed property? No, it’s not a character or style of the home. A distressed property is a category of homes that are on the real estate market. Here’s what you need to know about the pros of buying these properties (such as lower purchase prices) and the potential drawbacks. 

What Is A Distressed Property?

A distressed property refers to a home that is in imminent danger of foreclosure, owned by a bank, or has been repossessed by a mortgage lender. Real estate investors are drawn to these properties due to the opportunity to acquire them at a discounted price. 

Investors may choose to purchase distressed properties with the intention of either renting them out or renovating and selling them for a profit. Given that distressed properties typically require substantial repairs or renovations, potential buyers should carefully evaluate all associated costs and risks before finalizing any purchase agreements.

Types of Distressed Properties

You may see several types of distressed properties come up for sale. 

Foreclosures

Foreclosures are homes that have been taken over by a lender because the homeowner was unable to pay their mortgage. 

Real Estate Owned (REO) Properties

An REO property is one that entered foreclosure but didn’t sell above the minimum that was set at the auction. When this happens, the ownership of the home defaults to the original lender.

Short Sales

Short sales are when a homeowner sells their home for less money than they owe on their mortgage. It is often used as an alternative to the home going into foreclosure. 

Pros and Cons of Buying

If you’re thinking of buying a home, you might be considering a distressed property. It can be an attractive option because these homes are sold for lower than market value in many cases. However, you should be fully aware of the pros and cons before buying one of these properties.

Advantages

• Lower purchase prices
• Can be a good opportunity if you’re looking for a fixer-upper
• Good opportunity for real estate investors

Disadvantages

• You’ll have to buy a home as is 
• The closing process is longer than it is with a traditional home sale
• There can be a lot of competition for you to bid against at an auction

How to Find 

Finding distressed properties for sale can be a bit more of an involved process than simply logging onto websites such as Zillow. There are a few options:

Work With a Real Estate Agent

As with any home buying experience, finding a trusted real estate agent to work with can be a key first step. You can look for a real estate agent who specializes in distressed properties, though these are not available in all areas. Let your real estate agent know you’re interested in distressed properties so they can look those up specifically for you.

Search Online and Make Private Offers

Another option is to do your research online and make offers without the help of a real estate agent. You can search online public records for properties that are going through foreclosure or short sale. On some occasions, you may also see these properties listed by the owner on popular real estate websites. 

Attend Foreclosure Auctions

You can also keep an eye out for foreclosure auctions in your area. These are generally listed in local newspapers and on real estate auction websites. If you opt for this option, keep in mind that you will have to make a bid on the spot. When possible, it’s a good idea to try to find information about the property and drive by it beforehand. 

How to Finance 

Some distressed properties are only available for cash buyers. However, if you can finance the home, the options to look into include:

Conventional Mortgage

A conventional mortgage is a standard mortgage that is offered by a bank or lender. It can be available in a variety of loan terms and comes with a variable or a fixed interest rate. For distressed properties, the important thing to keep in mind is that conventional mortgages require that a home be in good condition. Most lenders will require an appraisal of the home as well. 

Conventional mortgages can be a good option because they are the most straightforward mortgage loans and come with flexible loan terms. However, they may not be suitable if an appraisal cannot be done or if the home needs serious repair. 

Renovation Loan

A renovation loan is a loan that can help borrowers cover the costs of purchasing the home and making necessary repairs to the home. It can be a good option if you’re interested in a distressed property that is not in good condition. However, it can be more difficult to find a renovation loan and each loan program will have its own set of allowed repairs that the loan will cover.

Find the Best Mortgage Offer from Benzinga’s Top Home Loan Providers

Looking for financing? Here are some options for you to explore:

Is a Distressed Property a Good Purchase?

Distressed properties can be a good purchase for some people, but it’s not for everyone. It’s important to keep in mind that you may only have limited information about the property and may not be able to view the property before you make an offer. These factors might not matter as much if you’re looking for an investment property and are willing to put in some work to get the home in good condition. If you are particular about the layout of the home or want to make sure the home doesn’t need any major repairs, a distressed property might not be right for you.

Frequently Asked Questions