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.
- Investopedia
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
Job
Loss
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.
Relocation
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.
Being Condemned
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.
Age
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.
Hoarding
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.
Hazardous Waste
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.
Mold
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.
Infestations
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.
Property
Age
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.
Partial Renovation
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.
Partnership
Dispute
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
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.
Health
issues
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.
Inheritance
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.
Loan
Default
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.
Bank Owned
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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