A distressed property is either in financial distress or physical distress from a lack of upkeep and repair. Financial distress is typically due to the non-payment of a mortgage or property tax. That includes pre-foreclosure when the property is near foreclosure, foreclosure when the bank has taken possession, or REO (real estate owned) when the bank has listed the property for sale. It can also include properties with a tax lien or those taken over by government agencies due to payment failure.
Distressed properties offer several advantages to the purchaser. They are often priced well below their value since either the owner or the lender in possession is very motivated to sell the property. Or, in the case of a home in disrepair, it can be renovated to regain and even enhance its market value.
The disadvantages of distressed properties are that they are sold “as-is” and may need extensive repairs, any liens or back taxes will need to be paid off, and when sold at auction, the total price must be paid that day.