Distressed Sales
Candlefocus EditorIn a foreclosure sale, the seller has failed to make payments on the loan secured by the property, and the property is taken over by the lender. Once in control of the property, the lender will usually list the property for sale using a real estate broker and recover as much of the original loan balance as possible.
A short sale involves the seller attempting to sell a property which has a current market value less than the amount of the loan owed on the property. The seller typically lacks funds to pay the difference between the loan balance and the market price, so the lender will agree to accept that difference as a complete payoff of the loan. After the lender approves such an arrangement, the broker will then list the property for sale at its current market price.
Due to the urgent financial pressure associated with a distress sale, the market price of the asset is often lower than what it would have sold for in a more normal market. This sets up a potential financial loss for the seller, but may also make the property an attractive bargain for the buyer.
Though the asset may be a good deal, it is important to remember that it is being sold in a distress sale, which means the property may be in a poor state of repair due to neglect or lack of maintenance. It is important to thoroughly inspect the property and hire a qualified professional to assess any repairs prior to purchasing it.
Distressed sales represent opportunities for buyers to purchase properties at below market value, but also involve a greater level of risk since the background and condition of the properties may be uncertain. For sellers, a distress sale may be the only option in order to meet their urgent financial obligations, but should also be cautiously entered into with the understanding that the asset may sell for a lower price than it would have under normal market conditions.