A distressed property is what is known as a “foreclosed” property.
In this case the term “distressed” does not carry its regular meaning of “great pain or sorrow”, “misfortune”, “difficult situation”. When we talk about a “distressed” property, the bank is using a specific legal definition.
According to The World Book Dictionary, the word “distress” on its legal definition means “the legal seizure of the goods of another as payment for debt”.
A distressed property, also known as a foreclosed property, is a home that has been or is about to be seized by a bank because the homeowner defaulted or is about to default on his/her loan. This does not mean that the bank is distressed! A very common misconception, in fact banks are sitting on what is called the “shadow inventory”, these are homes they have repossessed but they are not selling, have not hit the market yet. Banks do this in order to keep the price up, otherwise they would be flooding the market with cheap homes and thereby reducing prices.
The Los Angeles Times reported in March 31 2011 that this inventory of unsold homes, yet to hit the market, amounts to 1.8 million homes, down from 2 million homes in 2010. As you can see most banks are not in a distressed position. Below I will explain how this affects you.
The first time I read about this “shadow inventory” I thought that residential prices would come down even more than what they are today, however remember that now that Banks have received 12.3 Trillion Dollars! (just by way of comparison, about 192 billion, a tiny fraction when compared to 12.3 Trillion, would balance the budget of ALL the States)
Banks, thanks to the taxpayer, are no longer in a bind to sell foreclosed homes.
There is another important factor to be aware of, have you ever been inside a distressed, foreclosed home? In some the toilets have been removed, on others the previous owner left deep holes on the walls, tore mirrors down, removed pieces of the floor, etc… not every distressed property is in such bad shape, but many if not most, will require a lot of sweat equity in order to be habitable. Owners are frustrated and angry at the bank, so they make sure the house is in a horrible condition before they are forced out.
Another issue with distressed homes is that you need cash to buy them.
Lenders and banks would generally NOT lend on a distressed home, why? Because if you don’t pay it would be harder for them to sell it in its distressed condition. So what do banks do? They do the minimum and cheapest repairs they can get away with. The price is good but you may not like the way it looks inside and it may be very costly to rehabilitate.
The fact that a home is distressed (foreclosed) and has a great price does not mean that the average person is going to be able to finance its purchase (or like it) unless you have the cash or the means to invest in repairs. (In general most FHA loan programs require the property to be in an acceptable, functional condition.)
Unless you have cash, a good down payment, money for repairs, patience and a good construction crew (may you have the time to do it yourself) a short sale is usually a better deal. (follow the link)
If you find yourself on a foreclosure situation, this is an interesting video with information that you should know: