Definition of Distress Value of Real Property

Definition of Distress Value of Real Property
Distressed homes sometimes sell at discounts of 40 percent or more.

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. 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.