What is 'Distressed Sale'
A distressed sale is a circumstance when a property, stock or other asset is sold in an urgent manner. Distressed sales often occur at a loss because funds tied up in the asset are needed within a short period of time. The funds from these assets are most often used to pay for debts, medical expenses or other emergencies.
BREAKING DOWN 'Distressed Sale'
Mortgage borrowers who can no longer pay for their mortgaged property may opt to sell their property in order to pay the mortgage. Examples of situations where distressed sales occur include divorce, foreclosures and relocations.
A short sale by a homeowner can be considered a distressed sale. In this circumstance, the homeowner is attempting to sell his or her property even though its current market value is below the amount owed to their lender. This can occur if the homeowner is forced to move from the home and cannot wait for the property's market value to recover. The homeowner may have a new job that requires immediate relocation. A divorce could force a home to be sold in order to liquidate assets that must be divided between the parties. A lender usually must still agree to a short sale before it can proceed because such a transaction would remove the collateral that secured the mortgage.
How a Distress Sale Can Lead to a Net Loss
If a distressed sale is conducted for a piece of property such as an antique or collectible art, the seller might choose to take offers that are lower than the value of the item. The seller might request offers by advertising the item herself, or she might sell the item to a pawnbroker.
When the seller of an item deals with a pawnbroker, she will likely be limited to offers that are below the value of the item. The pawnbroker puts in lower bids because his intent is to resell the item for a higher price and turn a profit. The tradeoff with accepting an offer that is below market value is that it will provide the seller with immediate cash. Even if an item is appraised to be of greater value, a pawnbroker will still look for a way to make a profit.
There are times when potential buyers may take advantage of the circumstances that forced a seller into conducting a distressed sale. They may be aware of the seller’s immediate need to complete a transaction and receive payment. This could lead to bids that are substantially lower than the value of the property.