Distressed homes is a term used to describe homes needing to be sold due to financial difficulties of the current or previous owners. This includes bank foreclosures, sherriff's sales, and short sales (click the link to read about short sales). Sometimes the term is also used to describe estate sales also, where the owner of the home is deceased.
Public sentiment towards distressed properties seems to always be that properties can be purchased at a tremendous value. We often here from home buyers that they only want to see foreclosures. This can be a 'can of worms' for home buyers looking for a good home at a value that many won't see until its too late.
The upside of buying a distressed sale is that you can buy homes for less than the normal retail value. In cases where someone wants to fix up a home, this can be a good option, since these homes are frequently in need of repair. Many buyer's looking for move in ready homes won't be interested in these properties. Buyer's that can't seem to decide on anything available on the resale market, but can't afford new construction, this may be their only route.
The downside of buying distressed properties should be a no brainer. The reasons are numerous.
1st, when a bank forecloses on a home and tries to sell it, they are not required to complete a seller's disclosure or make any representations about the home. In a standard real estate transaction, the seller must provide the buyer with information about the house like the age of the roof, etc. Major problems that an occupant would have knowledge of are not always easy to determine in a 2-3 hour building inspection, so disclosures can be handy.
The 2nd downside of buying distressed properties is the the homes can sometimes be damaged intentionally. People getting foreclosed upon have been known to do all sorts of things to the home to take out frustration with the bank.
The 3rd downside comes from being vacant opens up the possiblity that the home can be broken into and vandalized or stripped.
4th downside, damages can also occur due to extended vacancy. Damage to the plumbing system due to lack of use as drain pipes are designed to stay moist and in use. Damage to wall finshes takes place in places like St. Louis, that have extremes in heat and cold. These extremes, with no interior heating or cooling, cause cracks throughout their drywall and plaster.
#5, Vagrancy, both people and animals can inhabit the home in its vacancy, causing damage that is difficult to detect. Knicked wires and nests in attics can be latent fire hazzards that aren't evident until its too late.
#6. When a homeowner is unable to pay the mortgage, they are also unwilling to keep up with maintenance issues like moisture intrusion in the basement or attic, replacing furnace filters, and even keeping the home clean. Lack of system maintenance can be a major cause of early breakdown on what otherwise appears to be a functional system.
#7, The transaction itself can be inflexible and unpredictable. The purchase contract always requires a bank addendum that replaces the normal contract with terms that are favorable to the bank, but not the buyer. If the bank fails to perform in the contract, there's no consequence other than possibly allowing the buyer to terminate the contract. If the buyer fails to perform, there are steep costs and potential for retribution.
Lastly, ALL OF THE ABOVE, can be factors on every distressed home. While many may be easy to observe and inspect, it may be more costly to repair than the buyer anticipates. They can be overlooked as superficial repairs, which they are, but many home buyer's aren't prepared for the amount of work that it takes to make all these repairs. Things add up and without the proper experiece and approach, the foreclosed home can be a money pit that causes the cycle to repeat itself by creating financial distress for the new buyer.
Every real estate opportunity is unique, so there's no way to generalize whether its a good or bad opportunity. With foreclosures, many people assume that they are a great deal just because they are a foreclosure. More often that not, the above factors aren't considered by buyers unless pointed out. In any real estate transaction, considering all the factors is important for the buyer and is good cause to work with experienced professionals throughout the process, starting with a good Realtor, inspectors,