What is a Distress Sale?

Malcolm Tatum
Malcolm Tatum

Distress sales involve the sale of assets that must take place due to conditions outside the control of the owner. With a distress sale, there is the need to sell the asset quickly, even if it has to be sold at a loss. The idea is to generate some type of return on the asset, even if it does not cover the current market value.

Distress sales are made when there is a need to sell an asset quickly.
Distress sales are made when there is a need to sell an asset quickly.

One example of a distress sale in the securities market has to do with the issuance of a margin call. In the event that such a call is issued, the futures, stocks, or bonds associated with the call will have to be sold. They are highly unlikely to yield the return originally envisioned by the investor under these circumstances.

An urgent need to sell may be brought about due to a margin call that leaves the investor short of available cash.
An urgent need to sell may be brought about due to a margin call that leaves the investor short of available cash.

A distress sale that many people can relate to involves real estate. In the event that personal finances undergo a downturn, home owners may no longer be able to make mortgage payments. In order to prevent foreclosure, the home owner will actively seek a buyer for the property that can either qualify to assume the mortgage, or buy the property outright for enough money to pay off the mortgage. In both scenarios, the home owner is highly unlikely to receive any monies that are close to the amount of equity invested in the home.

Bank-owned distressed properties may be sold at live auctions, which are typically advertised in local newspapers.
Bank-owned distressed properties may be sold at live auctions, which are typically advertised in local newspapers.

The key component of a distress sale is the urgency associated with the transaction. For some reason, it is necessary to achieve a sale sooner rather than later. While the asset would be likely to generate a higher return if held on to for a longer period of time, the owner is unable to do so. In order to alleviate the current factors that make the sale necessary, the owner will sell the asset at a loss, and begin to rebuild his or her bank of assets at a later date. Fortunately, the reduced price associated with an urgent sale of this nature often attracts buyers, making it possible to complete a distress sale quickly and with relatively ease.

While a distress sale often takes place due to adverse conditions, the end result of the sale can be viewed as a new beginning. Going through with the sale does reduce the assets held by the owner. At the same time, the distress sale usually generates needed capital to retire some sort of ongoing debt and thus relieve the financial stress currently impacting the owner. Once the financial issues that led to the distress sale no longer encumber the individual, he or she is free to begin rebuilding their financial holdings.

A distress sale may be a way to avoid foreclosure.
A distress sale may be a way to avoid foreclosure.
Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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Discussion Comments


Bhutan-I totally agree with you. Buying a foreclosure is best, but some real estate investors do try contacting people that are in preforclosure and try to buy the home directly from them before they lose it.

This can occur if the homeowners owned the home for a while and had considerably equity. The thing with bank owned foreclosures is that the title is clear and you are not responsible for any liens. However, if you go to a real estate auction at the courthouse steps then you are.

The bank owned foreclosures also have auctions. A company by the name of REDC offers them all over the country. They require a cashier’s check of $5,000 and a buyer’s premium of 5%. This requirement is only if you plan on bidding on a property.

You also have to make sure that you register for the auction and do inspections of the property before you go because these sales are as is and there are no negotiations.


GreenWeaver-I tried to buy a short sale and it was a nightmare. The problem was that the seller had a first mortgage with one bank and a second mortgage on the property was with another bank. The beach condo that I was looking for was listed for $200,000.

The problem with short sales is that even though a realtor may set the price in order to get an offer on the property, but the realtor does this without consulting the bank. This means that the price is artificial. This is what happened to me.

You have to then see if the bank approves the offer. If there is a second mortgage as in this case, the bank might want more money because the second mortgage is not going to get proceeds from the loan.

In my case the bank wanted an additional $75,000 after six weeks of waiting for word from the bank. This was a waste of my time and I ended up buying a foreclosure at an auction and was very happy with my purchase.

A foreclosure is better because they bank now owns the property and wants to get rid of it.


Crispety-This was possible for a while due to the high speculation in the real estate market that drove the prices up.

To add to that problem people got subprime loans which were loans that were made to less desirable credit profile applicants.

The terms on many of these ARMs, or adjustable rate mortgages offered a fixed rate for one to two years with adjustable rates after that.

Since people that got these loans assumed that the real estate market would continue, they did not assess the loan as risky.

However, the real estate market crashed in 2007, and many of these people that got these adjustable rate loans can now not afford their home.

The way that these mortgages are structured is that the first year or two years is an interest only loan in which the homeowner does not even touch the principle. This makes the homeowner have even less equity in a home.


Distress home sales are usually short sales. Short sales occur when a homeowner wants to sell a home for less than what is owed on the home.

This happens when the homeowner can not sell the home because he or she owes more than what the property is worth and he or she can no longer afford the home.

This happened a lot in the many real estate markets across the country because property values were inflated and many people took risks that they probably should not have.

For example, many people were hoping to buy a home and then sell it quickly in order to gain a fast profit but that was short lived.

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