To find a more budget-friendly deal, you might want to search for what’s known as a distressed property.
What is a distressed property?
A distressed property will cost less than other similar-sized homes in the area. But there is a reason for that discount: Typically, the home is either under foreclosure, or the lender is trying to sell it. The most common reason for a home to be classified as a distressed property is a homeowner who couldn’t pay the mortgage or the property taxes.
Distressed property sales make up a small portion of the overall housing market. According to data from the National Association of Realtors, distressed sales accounted for less than 1 percent of all transactions in each of the first two months of 2022.
Types of distressed properties
There are several types of distressed properties in real estate. Here’s a rundown of the most common kinds you might find in your search.
A foreclosed property is the most commonly known type of distressed property. In this scenario, the homeowner has failed to make his or her monthly mortgage payments for many months in a row, and the lender has officially filed a default notice.
Some people buy homes that are in preforeclosure – typically when the owner has hit the 90-day past-due point in payments – and others buy them when they are fully foreclosed at public auctions.
REO stands for real estate-owned, which is synonymous with bank-owned. If a property is described as an REO, the lender is the seller. In this case, the home went into foreclosure, and it did not sell at auction. So now, the lender is working to recoup some of its losses.
In a short sale, the lender has not yet taken the property back. Instead, it has worked out a deal with the current owner to sell it for less than it’s worth. In this scenario, the property is on the path to foreclosure, but a short sale can avoid that final piece of the credit-destroying puzzle. So, the property is technically distressed, but it’s likely on the earlier end of that stress.
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