Real property is land and any buildings permanently attached to it, such as home on a lot. All real property is valued in certain ways, such as a home's market, appraised and assessed values. When valuing real property, real estate brokers, home appraisers and assessors consider its material condition as well as the value of comparable nearby properties. A home in very poor condition or in foreclosure, or both, is typically a distressed property, and its value suffers accordingly.
Foreclosures and Distress Value
In real estate, a property that's in the process of foreclosure is generally referred to by brokers as being distressed. Property owners in the process of foreclosure are typically motivated to sell, sometimes greatly so. Owners of foreclosure properties may consider purchase offers well below what they'd normally accept under normal circumstances.
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In the case of real property in foreclosure, its distress value may be much lower than its current true market, appraised and tax-assessed values.
Material Condition and Distress Value
Real property, such as a home in need of much repair, is also frequently considered distressed. A home requiring thousands of dollars in repairs to be salable could have a distress value far below that of comparable nearby homes. Homeowners with properties in need of a great deal of repair sometimes discount list prices to attract buyers. Distressed properties in hot real estate markets, though, may experience fewer value issues because many buyers are chasing relatively few available properties.
Distress Value and Appraisals
Residential real property is normally appraised by comparing it to recent sales of similar properties. If a neighborhood has recently seen several distressed homes sold, the value of nearby similar properties can be negatively affected. The distress value of homes can also interfere with accurate appraisals of non-distressed nearby homes.
Lenders require home appraisers to compare for-sale properties with several comparable recent sales and some of them may have been distressed properties.
Avoiding Distress Value Issues
Property sellers and real estate brokers can help reduce distress value issues by insisting on accurate property appraisals. If your home is being appraised as part of its sale, insist the appraiser be licensed or certified and have experience with the local market. Though you can't do much about nearby distressed properties, you should ensure your own home is in good repair. Real property in good condition and with high curb appeal or attractiveness to buyers may avoid some of distress value's negative effects.
Distressed Properties as Investments
Although buying distressed real estate isn't for everyone, some real estate investors purposefully seek out such properties so they can renovate and sell or "flip" them. As with any type of investment, there are pros and cons to purchasing a foreclosure or distressed property. The primary advantage of purchasing a distressed property is the price.
If you're willing to put in the work necessary to fix it up, you could realize a nice profit from its sale. But, be sure you know what you're in for. Aside from the purchase price, you'll need to have funds available for contractors, materials or other necessities to get the distressed real property up to snuff.