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Distressed property

Distressed property is a money term you need to understand. Here’s what it means.

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.

Deeper definition

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.

Now consider these 9 tips for motivating a home contractor.

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