Basics of buying distressed properties

Basics of buying distressed properties, Despite a strong return to standard sales, distressed properties still exist and are in high demand here in southern California. The properties are attractive for their perceived discounts and potential profits.

Foreclosures, short sales and REO’s (real-estate-owned) are all considered distress sales, but are different from one another. Not every short sale is in foreclosure, but many are. Not all foreclosures are short sales. REO’s are not short sales, but some short sales end up as REO’s. It’s a complicated situation and may require specialized knowledge to handle the purchase.


This is a home on which a Notice of Default has been filed in public records. The most common reason for foreclosure is nonpayment of the mortgage for a certain period of time, often as little as two months. The lender then gives “notice” that they will sell the property unless the payments in arrears are brought up to date.

If the loan is not brought current, the lender will foreclose upon the property, taking it away from the homeowner. Often the lender will auction the property to the highest bidder at a public sale. Not all foreclosures go to public sale; the homeowner has an irrevocable right for a specified period of time (known as the redemption period) to cure the default, including paying missed principal payments, back interest and foreclosure costs.

Real estate investors and home buyers can often buy the foreclosed property for the amount owed. They see profit in acquiring the home and gaining the homeowner’s equity for free.

The optimal time for buyers is during the time period after the foreclosure process has been initiated but before the foreclosure sale occurs; this is known as “pre-foreclosure.” Buyers are extended all the standard protections of regular purchase transactions – access to the property, expert inspection of the property, and the ability to qualify the purchase on the issuance of title insurance – as well as statutory protections, which mandate that the seller provide a “transfer disclosure statement” (disclosing property conditions). Many of these rights do not exist if a buyer purchases at the foreclosure sale or after the trustee’s sale.

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