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What is a distressed property?
Distressed property is any property that is under foreclosure or being sold by the lender. Normally, a distressed property is a result of a homeowner who was unable to keep up with the mortgage payments and/or tax bill on the property. It is common for a distressed property to be sold below market value.
Not all distressed properties have been repossessed due to late payments. On occasion, lenders, banks and credit unions seek to repossess a property to protect their investment. Lenders may take this action due to other claims being made on the property or due to a discovery of mortgage fraud.
There are at least two good reasons to buy a distressed property:
- Price. The below market value price on a distressed home allows those who might not otherwise be able to afford a particular neighborhood to buy there.
- Potential profit. If you buy a distressed property at a good price and know which repairs and updates will add the most value, it is possible to build equity and sell at a profit.
Distressed property examples
It may be tempting for a first-time buyer or investor to purchase a distressed property without fully considering the ramifications. As great a deal as it might seem, here are two red flags to look out for:
- You have to compromise on location. Not all, but many distressed properties are located in low-income neighborhoods. Buying in such a neighborhood severely limits how much you can invest in upgrades, without making your home too valuable for the area.
- You are not sure you can make repairs. It is common for distressed properties to be in less-than-pristine condition and need a number of repairs, immediately and in the near future. If you are not certain that you can make the repairs yourself or have it done at a price you can afford, that is a red flag.
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