Distressed Real Estate for Sale: What You Need to Know

distressed real estate for sale

Even though the economy has improved, buyers are still likely to encounter foreclosures, short sales and Real Estate Owned sales (REOs) in the market. Here’s what you need to know about distressed real estate for sale.

Short sales

Short sales occur when the current market value of a home is lower than what the homeowner owes to the bank. The homeowner is the seller, and they have a good deal of control over the home sale.

The seller’s short sale position could be no fault of their own. A job transfer, divorce or growing family could mean a move is necessary. But unfortunately, their home’s value took a hit since they purchased the property.

The risks: The seller needs the bank’s permission to take less than what’s owed, which can complicate matters. A buyer may make an offer, and the seller accepts and even signs a contract. But it could take months for the bank to respond. And the bank could put conditions on the sale, like asking the seller to bring money to the table or countering on price. This uncertainty scares some buyers off, because most want to be in their new home by a certain time. Also, some buyers get emotionally attached to a home, only to be let down if the bank rejects their offer, or the seller and the bank can’t come to terms.

The rewards: You can get a good deal, sometimes up to 10 percent below market value. The longer the process goes on, the better the price, because the market, in some cases, is improving as the bank works through its processes. Also, short sale sellers tend to price below market value because they know many buyers won’t want to deal with the uncertainty of the bank’s decision.


Foreclosure sale are only for the savviest of real estate investors. If a homeowner doesn’t make their mortgage payments over time, the bank initiates foreclosure proceedings. After providing enough notice to the homeowner, the bank will sell the home to the highest bidder on the courthouse steps, auction style. If the loan amount is much lower than the market value of the home, you can expect to see bidders there. If the mortgage amount is more than the market value and nobody purchases the home, the bank is forced to take the home back and become the new owner.

The risks: You can’t go back to the bank for credits or ask for a refund if there are problems. And bidders must show up with cashier’s checks in hand, because foreclosure sales are cash-only sales.

Also, chances are most bidders won’t have the opportunity to step inside to inspect the property. Foreclosures are sold “as is.”

Finally, there could be additional liens on the title, tenants in place, or any number of red flags. All of this makes the purchase riskier because these problems become your problems.

The rewards: Usually, foreclosure sales go for at least 25 percent below market value, sometimes more because most home buyers can’t show up with cash, won’t buy a home as is, and don’t have the experience or knowledge to take on such risk.

REO sales

If nobody shows up to purchase a home at the foreclosure sale, the bank takes it back, and the property becomes “Real Estate Owned” or REO.

Banks don’t want to own real estate; it’s not their business. So, once they take the property back, they want to sell it ASAP. You’ll likely see bank-owned homes for sale through online listings and your agent, just like other listings or sellers, except they’ll be marked as REO and the seller isn’t a person.

The risks: Like foreclosure sales, there are few to no disclosures; the home is sold as is. With an REO, you can actually go inside the home, look around and see it for yourself. There may even be an open house. You can have the property inspected and learn as much as you can. But since there isn’t a homeowner there to disclose what they know, it’s still a risk.

The rewards: REOs are usually listed at 15 to 20 percent below market value, depending upon region and bank. And REOs often need improvements, both cosmetic and structural, so consider an REO to probably be a fixer-upper (which can increase in value after improvements are made). An REO could be listed at even 30 percent below the home’s true potential value, after it’s cleaned up and habitable.

Note that few banks are negotiable on price today. They know the real estate market has improved and will hold out for top dollar. Also, it’s all a numbers game to the bank, so don’t expect letters to the “seller” to get you anywhere.

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