Distressed Properties

When we talked about "distressed properties" it is possible to apply the term two ways.

First, and most often, "distressed" refers to the condition of the property. That is, the physical condition of the structure(s). A "distressed" property is typically considered to be a dilapidated property, or at least one that requires a significant amount of rehabilitation. Often, distressed properties do not qualify for "conventional" forms of financing.

I put conventional in quotes there because I am using conventional to mean "usual and ordinary, commonplace" rather the the strict definition of a conventional loan -- which would be a non-government loan program, typically with 20% down. FHA, VA, USDA (aka RD), and conventional loans would all fall under the "conventional" heading as herein defined. Owner financing, private money, or "hard" money loans would fall outside the scope of "conventional" loans.

Second, "distressed" can be used to refer to the situation of the property owner. Therefore, it is also common to hear short sales and foreclosures referred to as "distressed" sales. A foreclosure or short sale could possibly fall under both meanings of "distressed" if the property is in poor condition. In this second meaning, short sales are called distressed because the homeowner is (usually) experiencing some financial hardship (or distress) which is necessitating the short sale.

In a foreclosure, the institution who owned the mortgage and foreclosed in order to take ownership of the property is an "unwilling" owner (because a bank/mortgage holder would much rather collect interest than be a property owner and it has taken back the property as a last resort). Needing to sell the asset (house) in order to return to normal business operations (lending money) puts the owner of a foreclosure in a "distressed" position.

Finally, remember that there are exceptions to most rules. It is possible for a homeowner to consummate a short sale without ever having missed or been late on a mortgage payment. In this case, the homeowner may simply be "underwater" (owing more than the property is worth) and desire to be rid of that negative equity position. In that case, a short sale would not be a precursor to foreclosure, as is often the case.

Questions?