A distressed sale in property is when an owner is forced to sell – often at a discount – due to financial difficulties.

From residential housing to commercial buildings and land, any type of property asset could potentially fall into this scenario.

In this article, our auction team explores how such situations arise.  We also provide some guidance on buying and selling these types of properties.

How Can a Property Become in a Distressed Sale Situation?

There are many reasons why property owners may feel they’re in a “distressed” position.

Mortgage Lender Threats of Repossession

If a home or other type of property loan falls into arrears, the mortgage lender has the legal right to claim possession.

Much will depend on how much mortgage debt there is, but it only takes a few months before the lender can take serious legal action.

As a means of avoiding repossession, homeowners often choose to sell quickly to a distressed property buyer.

Rising Interest Rates

The lender’s Standard Variable Rate (SVR) when a mortgage term ends becomes unaffordable.

Homeowners can often find it difficult to swap to a more competitive rate, perhaps due to having little or no equity.

Rather than hold on to the property, sellers become motivated to dispose within a shorter timeframe.

Secured Loan Covenant Breaches

Mainly applying to commercial real estate, covenants within the finance contract set out parameters that cannot be breached.

Under the terms of a loan, for example, it may be the case that the property should be leased in a certain way (to retail tenants for example).  Other times, if the property value falls under a certain level in a market downturn, the lender can effectively “call in” the loan.

Commercial property loan terms, indeed, tend to be more onerous.  Rather than allow the lender to take possession, it often makes more sense to sell the property to an active buyer (albeit at a distressed price).

How Can a Property Become in a Distressed Sale Situation?How Can a Property Become in a Distressed Sale Situation?

Issues with Credit Card and/or Unsecured Debts

Falling behind on other types of loans that are not collateralised against a property can sometimes lead to complications that result in mortgage debts not being paid.

Examples include private finance, car leases, credit cards and/or other forms of personal debt.

As a means of balancing the budget and avoiding a County Court Judgment (CCJ), a quick sale to a distressed property buyer may be the best solution.

Job Loss / Redundancy

Unemployment or underemployment can also result in property owners falling behind with debts or struggling to keep up with life’s “overheads”.

Releasing money quickly in the form of a distressed sale may be the only / best way to deal with the situation.

Tax Issues

With the laws often changing, tax-related obligations can often surprise property owners.

For example, some residential landlords with relatively high mortgage borrowings continue to face financial pressure as a result of Section 24 of the 2015 Finance Act.

If the tax burden becomes too much and the HMRC are unwilling to provide any leeway, property owners may choose to sell up to clear their liabilities.

Divorce / Separation

Much will depend on how amicable the split is.

If both sides are willing to be patient and sell on the open market, the property sale does not need to be distressed.

Serious Illness / Injury

Sadly, lenders are unemotional when it comes to situations like this.

They will rarely be sympathetic to a borrower’s inability to pay mortgage or other debts – particularly if the debt has accumulated over a few months or more.

Inherited Property

Distressed sellers can also be those who have inherited a property they can no longer afford to keep.

Things could get more complicated where there is no legally valid Will.

Negative Macroeconomic Factors

Often in combination with the factors above, the number of distressed sales tends to increase during periods of recession or economic downturn.

If You're In a Distressed Sale Situation, Remember There Are Options

Remember, if you’re facing any of these situations, there’s often a simple solution. You may not need to sell (unless you really want to).

Buying a Distressed Property

Distressed sales often appeal to property buyers due to often being available at competitive prices.

Buyers often purchase with the intention of letting, refurbishing for resale or for use as a personal / family home.  Other times, buyers refinance these properties and hold them as a property investment (buy-to-let).

Controversies Over Distressed Property Buying…

Buyers of distressed sale properties can sometimes be referred to as “vultures” capitalising on someone else’s misfortune.

Whilst there is an element of truth to this, it’s worth bearing the following in mind:

  • In many cases, the seller could end up losing the property through repossession.  This means the lending institution could end up selling the “distressed” property themselves.  The lender will then chase the original borrower for any balance, interest on the debt, legal and court costs;
  • Working with a distressed property buyer that knows what to do can take away a lot of the stress;
  • Buyers and distressed sellers often can come to a “win-win” solution where the financial losses may not be so hard to bear;
  • Distressed property buyers often use cash, meaning things can get done fast;
  • Related to the above, a quick sale (through auction or direct) means several months of costs savings;
  • We Buy Any Home companies like Property Solvers cover legal fees.  As it’s a direct sale, the seller also avoids paying estate agency fees;
  • Distressed property buyers (at auction or otherwise) often take on the risk and huge range of costs that come with owning property. Depending on the condition, it can often take many months to bring the property up to standard.

Buying a Distressed Property

Distressed Property Buying Tactics

Prepare to move rapidly as distressed sales are often sold at auction and may not be on the market for long.

It is also important to be aware that these sales are often subject to negotiation through the estate agent, auctioneer (through competitive bidding) or direct with the vendor.

It’s also a good idea to show proof of funds – preferably in the form of cash or legitimate auction finance – before making an offer on the property. This will show that you’re serious.

Finally, remember that once an offer is accepted or the auction hammer falls, the clock starts ticking. Failure to meet deadlines with the latter can often result in heavy financial penalties.

Beware of the Risks of Buying Distressed Property

There are a lot of potential pitfalls associated with these types of transactions, so it’s best to be as informed as possible before making any bids or offers.

Distressed sale properties are often sold at a discount due to being in poor condition or having other hidden problems that can be expensive to put right.

For these reasons, it’s crucial to:

(a) Understand the true value of the property, principally by using HM Land Registry and Energy Performance Certificate (EPC) data;

(b) Factor in the costs of repairs, renovations and/or resolving mortgageability issues;

(c) Explore any potential legal issues surrounding the sale. Here, asking a solicitor to review the legal aspects of the property can be a wise (albeit costly) decision.

However, given the time constraints and competition from other buyers, it may not be possible to undertake all the above.

Distressed Property For Sale

As well as our own and other auction houses’ websites, in addition to the well-known portals such as Rightmove and Zoopla, there are also a number of independent sites worth checking out:

Note that it is not usually obvious that a property is in a “distressed” position. You’ll often have to do some digging to find out the exact situation.

Indeed, for privacy reasons, many estate agents and auctioneers may not be willing to disclose too much.

Selling a Distressed Property

If you are in danger of becoming a distressed seller, it’s worth remembering that there are solutions.

You will not always need to accept a lower price in order to get rid of the property quickly. Above all, make sure you understand your own position and not make any hasty moves that you’ll regret down the line.

Crucially – the more in advance you can anticipate problems, the better.

This means that you will be able to have more time on your side to find an open market buyer who – by and large – will pay more.  This is often because they will be using mortgage finance (as opposed to cash and traditional auction buyers who often look to negotiate harder on price).

Selling a Distressed Property

Here are some other options worth considering:

Speak with Your Mortgage Company / Secured Lender

If you are having trouble keeping up with your mortgage payments, regular communication with your lender is hands-down the best way to appease the situation.  In our experience, it’s those that bury their heads in the sand that are at most risk.

Most secured lenders are willing to work with you to create a payment plan or modify your loan. If you are able to negotiate a new payment schedule, make sure to get it in writing and keep up with your financial obligations.

What’s more, it’s worth noting that lenders are governed by a strict set of procedures known as “pre-action protocols”.  This essentially means that they cannot simply start the repossession process without approaching the borrower to discuss potential solutions.  This often involves a payment management plan.

Remember that lenders, by and large, do not wish to repossess properties.  The costs of doing so and subsequently selling to recoup their losses often make it a task they simply don’t want to deal with.

Refinancing the Property

It’s worth checking how much equity you have in the property.

Generally, if you have anything above 30% (which would be 70% loan to value) you may be able to remortgage the property to a better pay rate.  This can be either with your existing lender or a different one.

It’s worth speaking with an experienced mortgage advisor to explore all your options.

Borrow the Money

Are there any sources of funds where you could plug in the gap which would give you more time to sell on the open market?

We would generally recommend staying away from hard money lenders or using credit card debt. But perhaps friends or family could help?

Sell at Auction

Selling a distressed property at auction is a great way to get a level of security that’s rarely possible through a private treaty (estate agency) sale.  What’s more, there’s a good chance of getting a good price – particularly if there are multiple interested bidders.

However, it’s worth being cautious on the valuation to ensure you avoid a situation where there is a low amount of interest.  Good auctioneers should be able to advise you accordingly.

Talk to Property Solvers

As a quick sale agency, we have 2 decades of experience of speaking with sellers who feel they’re in a “distressed” situation.

In many cases, we can figure out a fairly simple way to maximise the sales value and find the right kind of buyer.

We offer a fully-fledged estate agency, 28 + 56-day auction and cash home buying services.