Purchasing a “Distressed” Property

Short sale, foreclosure, REO: these are some of the most-heard words in today’s real estate market. Along with those terms, you’ve probably read plenty of articles exhorting you to take advantage of today’s market and to buy now. Depending on a few factors, this really could be the perfect time for you to pick up one of these properties, generally termed ‘distressed,’ at a great deal. But remember, distressed properties are not for everyone. The following facts may help you determine whether a distressed property is right for you.

Short sales. In a short sale, the original mortgage lender agrees to allow the current homeowner to sell the home for less than the balance of the loan. This often leads to the home being competitively priced. You should always work with an agent that has some expertise in short sales. The seller’s agent coordinates with the seller’s lender.

In the past, short sales were time-consuming and often ended with the original lender denying the sale. That’s no longer true most of the time, thanks to recent regulatory changes that have streamlined the process.


  1. You may still experience a delay in closing. If the sale of your own home is contingent on your purchase, this can be a huge headache.
  2. You may not be getting such a super bargain. The lender must agree to the price and they may not want to take a loss of thousands of dollars on the property.

Foreclosures.A home goes into foreclosure when the current owner defaults on his or her mortgage. The home then goes to a foreclosure auction, where interested parties bid on the home. The lender asks for a minimum bid.


  1. You’re generally going to get this property as-is, no repairs or fixes.
  2. You don’t get much time to review the home. The auctions move very quickly.
  3. Winners must pay the full amount of the winning bid at auction. For a typical homebuyer, this is usually not a realistic choice.

REOs.When a home fails to sell at a foreclosure auction, it becomes a real-estate owned property, or REO. Lenders don’t like to own homes so they are generally motivated to sell. You can order an inspection of the home as you would in any real estate transaction, so if the inspection uncovers costly necessary repairs, the terms of your offer might change. But remember that the lender is still in the game to get the most money it can for the property.


  1. These properties are likely to be in the worst condition of the three types reviewed here.
  2. Like foreclosures, REOs are generally sold as-is. Even if you uncover necessary repairs, they probably won’t be made by the lender.

Many people think that short sales, foreclosures and REOs are the equivalent of bargain-basement sales. This is really not the case. You’ll need to remember that whoever the seller is — whether an individual or the lender — they want to get the most money possible for the property, so it is important to manage your expectations about what constitutes a good bargain.

by John King – Summit Funding

About LODI360 Editor

Keith Colgan is the Editor of and owner of Keith Colgan Photography


One thought on “Purchasing a “Distressed” Property

  1. Great information John!

    Posted by Randy Elliott | June 26, 2012, 2:27 pm

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