Wondering if your property qualifies as “distressed real estate?” In the legal world, “distressed property” doesn’t have a uniform definition, but the term is often used in legal proceedings involving foreclosures or other financial hardships for a property owner.
However, it’s not all about bank repossessions on foreclosed property. The same language is often used based on the condition of a home—so exactly what is a distressed property, and does it apply to your home?
Let’s clarify the common uses of this terminology.
What Is Distressed Property?
There are three key factors that are taken into consideration when determining what distressed real estate is. These include:
- Poor condition
- Perilous financial status
- Below-market value
Distressed property may qualify based on one or more of these areas. A distressed home in extremely poor condition will drop below market value, and if owners are in default, it can end up in a foreclosure process.
However, it can also be limited to a single factor. A home in danger of foreclosure that is listed for sale as a last-ditch effort to avoid bank auction may be described as distressed, even if it’s in solid condition and retains its market value.
Types of Distressed Property
Distressed properties can be found in any community across the United States. Specific situations and types include:
Mortgage-Related Financial Distress
Financial distress is generally based on one of the following stages—when the owner doesn’t have the resources to rectify the situation, or it’s too late to do so:
- Loan in default – The property owner is behind on one or more mortgage payments
- Pre-foreclosure – Default status with a warning of impending foreclosure
- Judicial foreclosure – The property is sold at auction through a court or sheriff’s office1
- Statutory foreclosure – The property is sold at auction by the lender
- Strict foreclosure – The lender takes ownership of the property and lists it for sale
Tax-Related Financial Distress
Financial distress can also be related to unpaid federal income or state and local property tax. These may result in:
- Property liens – Either the state or the federal government could place a lien on your property for unpaid income or property taxes. A lien attaches a legal claim to a property that is collected when it’s sold, transferred, refinanced, or foreclosed upon.2,3
- Tax sale foreclosure – While rare at a federal level, you can face foreclosure from either the IRS or your state, although the process is generally longer than a bank foreclosure.
Need-Based Financial Distress
A property could also be considered distressed simply based on urgent economic need by the seller.
Even if a homeowner is current on mortgage and tax payments, if they’re experiencing unrelated financial urgency that essentially cancels out their negotiation power or prompts a below-market sale, it may qualify as distressed. This can be due to debt or hardship, such as:
- Medical treatment needs
- Death, illness, or other family change prompting an immediate move
- Funding a criminal defense
Distress Due to Poor Condition
So what is a distressed residential property based on condition? It’s not when a residence simply needs cosmetic upgrades. Instead, if the property’s condition is significantly bad enough to imperil a sale or drop the house below market value, it is likely a distressed asset. This may include homes:
- Damaged by fire or a natural disaster
- That are abandoned or damaged by squatters, vandalism, graffiti, or deterioration
- With environmental or other hazards severe enough to make them unsafe to inhabit
- That are structurally unsound
- Where murder, home invasion, or other major crimes have taken place
- In too much disrepair to qualify for some mortgage loans
Distress Based on Drop in Home Value
If a home experiences any of the damage mentioned above, that will generally be accompanied by a logical drop in property value. However, property value can be lowered by other causes, including:
- Neighborhood deterioration, riots, and crime
- Overall loss in local property values based on real estate market changes
- Deterioration of property values related to national or local economic downturns
In some situations, the distressed property owner may opt for a short sale by selling the distressed property for less than they owe on it. If they can’t afford to wait for a rise in home value, particularly if the value drop is accompanied by conditions that also lower their income or assets, then walking away at a loss may trump sinking into further debt for a distressed homeowner.
The Best of Both Worlds for Your Distressed Property Sale
Whether your residential property is officially distressed or just needs some clean-up and repair work, you may be reluctant to devote the time and money needed to get it spic-and-span for an open house. But if you are taking the route of selling a house as-is, are you walking away from potential profit?
Not anymore. You can opt for a third choice by partnering with FlipSplit.
We purchase homes in any condition, and our team creates a plan to get the property move-in ready for new homeowners. In addition to basic maintenance and renovation, we know which upgrades and choices will pay off the most to reach a peak resale price, and we have the workforce to make it happen, even when it comes to handling distressed homes.
Best of all—when the property is resold, we split the extra profit with you! Ready to learn more? Visit FlipSplit today to find out if your property qualifies and connect with a FlipSplit consultant.
Interested in something else? Not only do we specialize in buying houses, we can also help answer your home-selling related questions, whether it be about the process of selling a rental property or understanding what closing costs are tax deductible when selling rental property. We’re here to help you navigate the home selling process and make it as simple as possible no matter the situation.
- U.S. Department of Housing and Urban Development. Foreclosure Process. https://www.hud.gov/topics/avoiding_foreclosure/foreclosureprocess
- NOLO. What Happens to My Home If I Don’t Pay Income Taxes? https://www.nolo.com/legal-encyclopedia/what-happens-my-home-if-i-dont-pay-income-taxes.html
- NOLO. What Happens If I Don’t Pay Property Taxes in Minnesota? https://www.nolo.com/legal-encyclopedia/what-happens-if-i-dont-pay-property-taxes-minnesota.html
Reviewed by: Brandon Brown
As a long-time Asset Manager, Investor, Real Estate Agent, and Broker/Owner of BayBrook Realty in Orange County, Brandon Brown is one of FlipSplit’s lead Real Estate experts. Having worked on over 2,000+ real estate transactions, Brandon brings a depth of knowledge that ensures clients are appropriately treated with honesty and integrity. His insights and advice have been published in numerous blogs beyond FlipSplit, and he keeps a close eye on market trends and statistics, which are updated weekly on his social media pages. Outside work, you can find him participating and serving at church, cycling, mountain biking, surfing around Orange County and beyond, and enjoying time with his wife and two daughters.