Most people have hear the term Distressed. It evokes thoughts of suffering from anxiety, sorrow, or pain. A state of extreme necessity or misfortune. But...
What is Distressed Property?
DEFINITION of 'Distressed Sale' When property, stocks or other assets are sold in an urgent manner, often at a loss. Distressed sales often occur at a loss because funds tied up in the asset are needed within a short period of time.
When considering real estate, most people think of ‘Distressed Property’ as homes which have fallen into mortgage default, and are facing foreclosure. ‘Distress’ generally refers to the legal and financial state of the property where the owner has missed payments and may be forced out of the house. In some cases, it can refer to a property that has become neglected and has fallen into disrepair.
There are several ways that a property may become distressed. These categories may seem clear cut, but often there is a combination of these issues that send owners and properties into distress.
Types of Distress
The loss of a job or a demotion can cause serious financial stress. In cases where income cannot be completely replaced in a new job, such as accepting a lower paid position, economizing may not be a workable solution. The inability to find work at all may precipitate the need to sell.
In these cases, a home owner may realize that they can no longer afford their current house. They may need to sell quickly to avoid going into pre-foreclosure or foreclosure.
Property owners who have to move quickly due to a job relocation are motivated to sell their current residence quickly so they are not paying two mortgages. If they are not able to quickly sell their old house before moving to the new location, the owner may find themselves paying two mortgages. This can be a great source of stress when the old house is draining financial resources. This often leads to a willingness to accept an offer that is significantly lower than they would have otherwise considered.
Disaster Without Proper Insurance
A property may be located in an area prone to natural disasters. Sometimes the homeowner is unaware of these hazards, or is gambling that these events will not occur. Poorly purchased insurance may not cover for the hazard. It is also possible that the value of the property and cost of repair may be grossly underestimated.
In these cases, a property owner may find themselves with a damaged property and financial distress if they do not have the funds to repair. The may need to sell the property at a steep discount just to get out from under the costs of holding on to the property.
A house is condemned when a government entity has determined that the building is no longer fit to live in. No one may live in a condemned building or use it until the owner has proven that the cited violations have been fixed. The owner is given a fixed amount of time to correct the infraction. If the owner is unable to do so in time, they may appear in court to challenge the order.
There may be several reasons a property is condemned. The owner may not be able to care for the property in a reasonable fashion due to their age, psychological issues, the property’s age, or lack of funds for maintenance. There may be serious health issues in or around the property.
The owner may be advanced in years and no longer able to physically manage the upkeep of the property. They may not have sufficient funds to hire help.
Lack of Concern
If the property is a poorly managed rental or the occupants are just uncaring, the occupants may have damaged or even destroyed the property to have made it inhabitable. They may leave garbage and discarded items on the property. These conditions may be a fire, health, or infestation hazard. The occupant may either not know or not care about the safe condition of the property.
There may be an issue of hoarding causing conditions dangerous to health. Hoarding is a disorder where the individual experiences persistent difficulty or distress, when discarding or parting with possessions because of a perceived need to save them. This disorder often creates such cramped living conditions that homes may be filled to capacity, with only narrow pathways winding through stacks of clutter. In some cases, the person also collect animals, keeping dozens or hundreds of pets in unsanitary conditions because they can't care for them properly.
A property may be used for illegal activities such as manufacturing illicit drugs. The residue of manufacturing methamphetamine, or meth, is considered hazardous waste by law. When discovered, it is the landlord’s or property owner’s obligation to clean up after such a lab.
If the problems aren't corrected in a condemned property, any occupants have no choice but to move. In cases where the owner is unable to correct the issues with the property, they may be forced to sell quickly.
A property may have a serious mold condition. A family may decide to continue living in these conditions, even though they can be a severe health hazard. If the property is a rental, the owner may be reported and forced to remedy the situation immediately. If the mold is more than in an isolated place, the house can be condemned. An owner who does not have the funds to carry out the mold remediation may be forced to sell at a discount to get rid of the property.
A sever rodent or insect infestation may be grounds to have a property condemned. In addition to the actual pest, there are issues of chewed wiring, holes, excrement and accumulated carcasses and corpses from poisons and pesticides that may become a factor. In the case of termites, damage to the structure of the property may be very costly if left unchecked.
Older properties sometime seem to need constant repair. These properties may need extensive work if they have not been updated for a long time. They may need layout changes to enlarge small kitchens and bathrooms. Sometimes they need additional square footage through an extension of the property footprint. In cases where walls are moved or opened, plumbing and electrical work may be mandated in order to conform to current standards. Often there will be roof, or foundation work needed. In some cases, the property may need to be gutted with a full renovation.
An owner of an old property may not have the resources to maintain it. If these properties need more than a few simple updates, they are often called “Fixer-Uppers”. The owner may sell at a greatly reduced price to account for the work needed and because there may be less interest in a property that needs so much work.
These older properties may need to conform to a community’s heritage guidelines for any work if they are in a historical district. This specialized work can be costly and a financial burden the owner is unable to bear.
Properties that require major renovations sometimes cost more than expected and are not finished. It can happen that the owner runs out of money and is unable to complete the renovation. Often the property is not habitable and does not qualify for a traditional mortgage leaving a very small pool of potential buyers. These properties and owners are distressed and need to find a way to liquidate the property quickly.
Properties bought as a business, as in the case of rental homes and multi-family dwellings may have multiple owners, or partners. In cases where there is a serious disagreement between partners, a property may be sold quickly to liquidate the funds for distribution so the partners may go their separate ways. There may be pressure to sell quickly so the partnership can be dissolved. In these cases, a property may be sold for less than market value to hasten the sale.
Divorce can be personally and financially devastating. If a couple owns a property together and separates or divorces, the home is often put up for sale to liquidate the asset. These individuals are highly motivated to get rid of the property quickly for both emotional and financial reasons. These houses are often priced to sell quickly rather than to get full market value.
A serious illness in most families will take focus. In some cases, the illness may be very costly draining the family of funds normally used for mortgages and taxes. In these cases, the home owner my become financially distressed and may need to sell the home.
Death in the Family
A death in the family can lead to an emotionally distressed owner and a financially distressed property. If the home is owned by two individuals and one passes away, the remaining person may not be able to fulfill the house payments on their own. They often just do not want to live with the memory of their departed spouse. They may put the property up for sale with the hope of getting it sold quickly so they can move on with their life.
If a property has a single owner that passed away, the property may be put up for sale as an estate sale. This is usually a quick sale to liquidate the property and divide the money up among the heirs.
An heir might receive a property as part of an inheritance. Sometimes these properties are in poor condition due to the decline of the former owner over a period of years. It may be in a state of sever disrepair, or even a hoarder house. In many cases the new owner does not have the time or money to fix the property for a sale on the open market. In other cases, the property is located in another state or region and just makes it too difficult for the new owner to manage it. In these cases, the heir may still benefit greatly by selling the property as is.
Delinquent Property Taxes
It is possible to make all payments on the house loan and still lose the property. If the owner fails to keep the tax payments current, they may lose the house.
A tax lien sale occurs when the tax liens are auctioned off to the highest bidder. The highest bidder now has the right to collect the liens, plus interest, from the homeowner. If the homeowner can't pay the liens, the new lien owner can foreclose on the property.
HOA Or Condominium Fee Liens
If a home owner lives in a community with a Home Owners Association (HOA) and fails to pay their HOA’s fees, they may be subject to a lien. An assessment lien is an automatic lien that attaches to a homeowner's property for the benefit of the HOA once any HOA member becomes delinquent on HOA assessments. An assessment lien allows the HOA to sell the homeowner's property to repay assessments owed to the HOA.
Owning a condominium typically requires paying monthly fees for common areas and services. When a condo owner fails to pay any required fees and assessments, the HOA can take action to collect the delinquent payments, which includes filing a lien against the condo owner's property.
There are many reasons a home owner may default on payments. These usually involve one of the other categories where an external source or event causes the owner serious personal or financial hardship.
Inability To Refinance
At the end of a mortgage, a property owner may still need to pay a balloon. The final payment is called a balloon payment because of its large size. A balloon payment mortgage is a mortgage which does not fully amortize over the term of the loan, thus leaving a large balance due at maturity. If the owner does not qualify for a new loan at this time, they are unable to pay the debt.
Real Estate that is bank owned is also called REO – for Real Estate Owned. Properties that have been foreclosed on belong to the bank. For every property the bank owns, money is tied up. Banks are interested in liquidating these properties as quickly as possible in order to continue their business of lending money. These properties may be sold to investors in pools or at auction and can often be bought for steep discounts.
The Foreclosure Process
While the process of losing a house can vary, a house rarely lost immediately. Contrary to some popular mis-information, a home is not lost if one mortgage payment is missed. There is a period known as “pre-foreclosure.”
A pre-foreclosure property has a delinquent loan and the owner is in imminent danger of losing his home due to foreclosure.
The way this process can happen depends on the location of the property. There are two types of foreclosure processes that residential distressed debt may undergo. Depending on the state where the property is located, this may be a judicial or non-judicial foreclosure. A judicial foreclosure means the lender must go through the court system. Non-judicial foreclosures generally do not require the lender to get a court judgement to force the sale of a distressed property.
The pre-foreclosure stage may also be called 30-60-90 days late even though it sometimes a lack of payments can go to a year or more. After no payments have been made for 90 days, usually 3 payments missed, an owner will get a notice of default. This notice is put on the front door of the house. This is a Notice of Default (in non-judicial foreclosure) or lis pendens (in judicial foreclosure) and is issued to the homeowner. The loan will be handed over for foreclosure and the lender will give the homeowner 90 more days for payment to reinstate the loans.
During this time, the property may be sold as a short sale.
A short sale of real estate is a sale in which the net proceeds from selling the property will be less, or fall short, of the debts (usually the mortgage) secured by liens against the property.
A Short Sale is successful when the lien holder(s) (the bank or mortgage company) is agreeable to net less than the amount owed on the debt as the result of a sale at or below the appraised value for that property. The agreeable selling price is intrinsically defined to be at or less than the appraised value allowing this process to be attainable. If all lien holders agree to accept less than the amount owed on the debt, the sale of the property can be accomplished.
If the parties cannot agree to a short sale, the property may eventually be sold at a foreclosure auction or to investors through individual offerings or pools.
Why Are Some Sellers So Motivated?
There are many ways a property or owner can be in distress. Whether there are issues for the owner or the property, these owners realize that the best course of action is to end the bad situation and move forward with their lives.
In cases where the seller owes as much or more than the property is worth, they will try to sell by themselves as a For Sale By Owner. For these sellers, using a real estate agent is out of the question because there are not sufficient funds generated from the sale to pay the agent’s commission. These owners must take the time to advertise, arrange visits, and have their own open houses if they insist on getting every penny for their house. With persistence and compromise, they will sell.
Some sellers recognize that their property does not hold the value it once had and understand that without extensive and costly renovations that the property will not get market value. These sellers are able to let go, sell the property quickly and move on.
Other owners in this situation learn that there are other options for an advantageous sale. They can work with investors to engineer a win-win deal that often includes terms and advantages beyond a traditional sale. The most motivated sellers come up with creative solutions to facilitate a quick sale. They entertain reasonable offers, find ways to make the deal interesting for buyers and are willing to do what is necessary to get rid of the house.
With an open mind where reason wins over emotion, anything is possible!
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