When a homeowner is forced to give up a home because of financial hardship, the house is referred to as distressed property. Buyers can often purchase distressed properties at a deep discount, but these transactions are not always easy. Here are three categories of distressed properties and how a buyer can purchase each of them.
The term short sale refers to situations where a financially distressed homeowner’s property is worth less than the owner owes the lender. The homeowner tries to ward off foreclosure by selling the distressed property at a price lower than the loan balance. Buyers who want to short sell must get their lender’s approval before the sale. If they don’t, they’ll owe the difference between the sales proceeds and the full loan balance. The lender can then sue the short seller for that amount.
Some real estate agents focus their business on short sales. These agents can help a buyer through the arduous process of purchasing one of these discounted properties. Be aware that the word “short” belies the length of time it takes to close a sale like this. The buyer’s lender and the distressed homeowner’s lender on the house must both approve the sale. This can take weeks or even months, especially in an economic downturn, when lenders are inundated with distressed properties.
Foreclosure is the legal process a lender initiates to take back a distressed property when a homeowner is behind on several mortgage payments. The lender files legal documents with the county government and then attempts to auction off the property. If no buyer purchases the property for the price of the mortgage payoff, a mortgage company trustee buys it. The mortgage company then owns the house and puts it on the market to try to recoup its money. (See Real Estate Owned properties below.)
Some buyer-investors specialize in buying up distressed properties. They seek out owners who are behind on payments but have not yet reached the foreclosure threshold. These investors strike a deal to buy the house in the nick of time, sparing the owner the anguish of foreclosure.
To buy a foreclosed property at auction, a buyer must have cash or proof of funds.
Real Estate Owned properties
Once a lender takes back a house through foreclosure, the home is referred to as real estate owned, or REO, property. The bank puts the house back on the market. Since the bank wants to recoup the amount of the mortgage, the sales price may be less than the full market value. This presents would-be buyers an opportunity to purchase property at a discount.