What You Need to Know: Buying a Distressed Property

In your search for a home, you may find yourself in the position of making an offer on what is called a “distressed” property.

This term has less to do with the condition of the property and more to do with who owns it.

“Distressed” here means that the property is either close to being taken back by the lender, usually because of missed payments, or is already there.

There are three main types of distressed properties that you may encounter in your home search: short sales, foreclosures, and REO (real estate owned) properties.

Short sale

A short sale occurs when the lender allows the property owner to sell it for less than is owed on it. The current owner may be still be making mortgage payments and living in the property but wants to get out from under that payment. The lender may prefer this route as opposed to going through the long and expensive foreclosure process, especially if they stand to take less of a loss in a short sale than in a foreclosure.


In a foreclosure, the lender is in the process of taking back the property, and the owner may or may not be living in the property.


With an REO, the lender has already taken back the property, and it is almost certainly vacant.

When looking at these types of properties, you must realize that you’re going to need a lot of patience. Because you are dealing with a lender instead of a homeowner, another layer of complexity is added to the mix.

The lender may well be dealing with a large number of distressed properties, and depending on how many, the purchasing process could take a long time.

Once you’re past the lender, however, financing a distressed property is almost identical to financing a traditional property. Contact your mortgage professional for more details.


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