Distressed property sales are not limited to bank foreclosures. Homeowners can be forced to sell quickly because of tax liens, divorce, job relocation, or other financial hardship. But for some real estate, the distress is associated entirely with the condition of the property. The house could be in poor condition or be located in a bad neighborhood, for example.
While most American home buyers want a home in good condition, there are also the ones who are looking to buy a property cheap and don’t mind to fix it up or deal with such complications of a real estate transaction as assuming the homeseller’s debt. Particularly real estate investors buy distressed properties at a discounted price to resell them at a profit.
Lion Share of Distressed Homes Sales Is Attributed to 3 Types of Real Estate Investors in the US
Real estate investors purchase most of the distressed homes sold in the United States. Those investors consist of three main groups.
- The first type is commonly known as “rehabbers” or “flippers”. This investors of this type mainly conduct business locally. They buy a distressed property to either ‘fix it up and flip it’ or to ‘fix it up and rent it out.’
- Investors of the second type operate as ‘wholesalers’, who look for bargains in distressed houses wherever such properties can be found. After signing a purchase agreement with a seller, they ‘wholesale’ (sell a contract or assign a contract) the property to another investor before the closing date.
- Investors of the third type buy properties ‘sight unseen,’ using an online platform for valuation. The iBuyer then verifies the property’s condition. If the iBuyer’s onsite appraisal is less than the seller’s report, the seller will be asked to accept a repair credit, due at closing.
Regardless of the way they do business, investors buy houses in any condition. And they can close on a property with cash in only a few days, typically. This in-depth guide on selling a house to a real estate investor on America’s largest platform for off-market properties – House Cashin, helps to get a proper understanding of each investor type and explains how they operate.
Types of Distressed Real Estate Sales
Inherited property is a gift from the deceased to their heir/s. But an old house with costly repairs can appear to be anything but a gift. And when multiple heirs are involved, disagreements over the home during probate can cause severe divisions within a family. Thus, some inherited property is considered distressed.
Tax and Mortgage Foreclosures
By its narrowest definition, real estate facing bank foreclosure is considered to be distressed property. The homeowner could have also failed to pay a property tax bill because of financial hardship. Unless a delinquent tax bill is paid, the county will eventually consider the property distressed. And they will sell it on the courthouse steps to the highest bidder.
Asset Division During Divorce
A contested divorce can force an otherwise lovely home onto the ‘distressed properties’ list. Asset division during divorce can get ugly. And since the marital home is usually a couple’s largest asset, a quick sale can significantly ease the distress of divorce. An actual cash amount can then be divided rather than a speculative cash amount from a future sale.
Homes in Bad Condition
If a conventional buyer is scared away by the condition of a house, such a home qualifies as distressed. Most conventional buyers can’t see the value of pouring money into a fixer-upper. And such hesitancy is multiplied when the house has issues with mold, termite infestations, rot, or foundation settling.
Sales Due to Relocation
The house may or may not be distressed, but the seller who must relocate immediately for a job in another city can become distressed. When there’s no relocation package for new hires, and no savings left to maintain two residences, the situation can immediately deteriorate to the need for a quick sale.
Financial emergencies can create a distressed house out of even a new home in perfect condition. When the seller’s cash flow takes a hit because of a medical emergency, a job loss, or other unforeseen expenses, house payments can become unaffordable. And an immediate downsizing can become the only way to avoid a foreclosure.
Overview of Distressed Property Sales Over the Last 10 Years in the US
ATTOM Data Solutions is a multi-sourced national property data warehouse for over 155 million U.S. properties. According to their analysis, distressed property sales peaked in the fourth quarter of 2008, with distressed properties making up over 45% of U.S. home sales.
Since then, the market share held by distressed properties has seen a steady decrease to approximately 14.2% in the first quarter of 2019. Please keep in mind that these statistics only include:
- Bank-owned sales. (The lender sells the property to a third party, as a part of foreclosure proceedings.)
- Third-party foreclosure auctions. (Non-bank sponsored auctions by third parties, such as a tax auction, who have sold a property through a foreclosure auction.)
- Short sales. (A sale by the owner in which the bank settles for an amount less than the outstanding loan.)
Please note: Data for other types of distressed real estate sales, such as sales because of divorce or relocation, is not readily available for analysis.
Historically, distressed property sales constituted a single-digit percentage of the housing market. And experts predict that the numbers will return to single digits as the economy continues to improve.
Local US Markets with Highest Percent of Distressed Property Sales in 2019
According to ATTOM Data Solutions, the highest percentage of distressed property sales in the first quarter of 2019 was the Atlantic City, New Jersey market. With 33.1%, Atlantic City topped the list of 135 metropolitan areas with at least 100 total distressed sales.
Atlantic City was followed by:
- Trenton, NJ (28%)
- Rockford, IL (27.3%)
- Peoria, IL (26.1%)
- Shreveport-Bossier City, LA (25.9%)
- Columbus, GA-AL (25.6%)
- McAllen-Edinburg-Mission, TX (25.5%)
- Philadelphia-Camden-Wilmington, PA-NJ-DE-MD (24.7%)
- Toledo, OH (24.6%)
- Baltimore-Columbia-Towson, MD (23.9%)
The nation-wide trend has been a decrease in the percentage of distressed property sales. But 33 of the 135 metropolitan areas (with populations over 200,000 and at least 100 distressed sales in the first quarter of 2019) saw an increase.
According to the report by Auction.com, In the first quarter of 2019, third-party buyers purchased 36.9% of all properties sold by foreclosure. This number is down from 37.5% a year ago. The demand for distressed properties can be measured in part by the rate of foreclosure sales to third-party buyers.