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What is a Distressed Property?

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  • Written By: Carol Francois
  • Edited By: Bronwyn Harris
  • Last Modified Date: 31 August 2016
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    Conjecture Corporation
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Distressed property is a term used to describe property that is in foreclosure proceedings. It is not a description of the actual property, land, or buildings, but of the financial situation for the property. Foreclosure is a legal proceeding where the bank or financial institutions that provided the money to purchase the property have seized it due to non-payment. There are three possible causes for a distressed property: foreclosure, bankruptcy, and estate sale.

When a home or property is purchased, a bank or financial institution usually provides the actual money. The money is loaned to the people who have purchased the property and this loan is called a mortgage. The expectation is for the bank to receive monthly payments of principle and interest over a specific period of time. If the payments are not made, the bank has the right to file legal papers to foreclose on the property.

In a foreclosure proceeding, the bank demonstrates to a judge that the mortgage payments have not been made for the property. The judge reviews the evidence and then returns the ownership of the asset or property to the bank. Once the property is returned to the bank, they can now sell the asset and obtain the money back that was originally loaned.

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The amount of payments that can be missed before foreclosure proceedings start, but they usually range between two and four months. There are multiple notices to the property owner by the bank to provide them with opportunity to make the missing payments during this period. These notices are required by law.

Bankruptcy is a legal process initiated by the debtor to settle outstanding debts. This may include a mortgage. The distressed property can be sold during bankruptcy proceedings, so long as the funds from the sale are used to pay the mortgage. If the property is not sold, at the end of the proceedings, it returns to the bank as a distressed property.

Estate sales occur when someone has passed away. Their property can be sold and the proceeds distributed between their creditors. After the bills and taxes have been paid, the beneficiaries of the estate receive any funds remaining. Distressed properties are often found in estate sales, as the debtor is no longer available to pay their bills.

During recessions or economic downturns, there is an increase in distressed properties available for sale. If you are interested in purchasing these properties, take the time to inspect them carefully to ensure that you get a true idea of the costs and status of the property. Do not be rushed into purchasing a distressed property, as you may be unable to sell it.

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