What Is a Distressed Property? Does Your Situation Qualify?
In real estate terms, a distressed property is one where something about the property or the situation around it makes a conventional sale difficult or impossible. Under that definition the situations vary considerably, and the first useful question is which category you’re dealing with.
Most people who call and use the word “distressed” are describing their situation, not specifically their house. Sellers have used it to mean the property needed a full rehab, others were behind on payments and getting notices from the lender.
More than once someone has used the word to describe a tenant who stopped paying rent months ago and hadn’t left, or an inherited property where probate was still working through the courts and nobody knew what came next.
Since 2008, most of what we’ve been doing is buying properties in Southern California with some version of this problem attached to them, and the first question to work out in any of those calls is which kind we’re dealing with.
When the Problem Is the Property Itself
Deferred Maintenance
The most common version of this I see is deferred maintenance that’s accumulated over years, sometimes over decades. A leaking roof or an HVAC that stopped working and never got replaced are what I run into most often on these properties.
I spent seven years as a certified residential appraiser before I started buying houses, starting in 2003, and the pattern I saw in that work was how significantly those deferred decisions show up when it comes time to put an actual number on the property.
How the Comp Calculation Changes
A distressed property doesn’t run through comps the same way a move-in-ready house does. The buyer is pulling the same closed sales, but the condition adjustments create a wider gap than most sellers anticipate.
The pattern in appraisal work was that a property with significant deferred maintenance sat in a different pricing tier from the clean sales nearby. In markets like Los Angeles County, where the spread between distressed and updated properties is wide, that gap can be substantial.
What Renovation Work Gets Paid Back
The gap sellers typically run into is between what they’re advised to spend before listing and what the market ends up rewarding at appraisal. I’ve had sellers put $25,000 or more into a property and come out of the sale having barely recovered what they spent.
If the capital isn’t there for a renovation, or the timeline doesn’t allow for several weeks of contractor work, selling as-is through an agent or to a cash buyer can sometimes make more practical sense than spending money on work the market won’t fully pay back. The repair cost vs. recovery breakdown covers where that spending tends to pay back and where it doesn’t.
When the Problem Is Financial
Notice of Default and the Foreclosure Clock
Some of the sellers we talk to have a property that’s in perfectly fine shape, but there’s a financial problem attached to it. The most common version is a Notice of Default, which in California is the formal start of the foreclosure process.
Once that’s recorded, the timeline moves and the window to act shrinks as it goes. Sellers calling with a trustee sale date already scheduled a few weeks out don’t have much room for anything beyond the most immediate options.
Tax Liens and Judgment Liens
Tax liens and judgment liens are the other financial version I see come through regularly. In my experience most of them clear through escrow at closing, but the payoff amounts aren’t always what sellers are expecting and the title work to get there takes time.
If you’re not sure whether there’s a lien sitting on your property, I’d pull the county recorder search before getting any further into a transaction. The lien search guide covers what public records show and where they fall short.
When the Problem Is on Title
Some of the most complicated deals we’ve worked through had nothing wrong with the house itself. The seller wanted to be done with the property, and everything slowing things down was on the title side.
Deceased Owners and Probate
Deals have come through where the original owner had passed away two or three years earlier and the estate was never formally opened, so the title still showed a deceased person as the owner when we opened escrow. Others had a probate proceeding still working through the courts, with co-heirs in different states who all needed to sign before anything could close.
When Someone Died on the Property
When a seller inherits a property where someone passed away, one of the questions I address early is the death disclosure. Under California Civil Code § 1710.2, sellers have to disclose a death on the property to any buyer who asks, going back three years from the date of sale.
The disclosure changes who will buy and sometimes what they’ll offer. In practice, a buyer who asks the question directly is one who has thought about it, and most cash buyers I work with factor it into the offer rather than walking away.
Why Conventional Buyers Won’t Wait
A conventional buyer with a 30-day close and a lender’s underwriting requirements isn’t going to wait through that kind of process, and most won’t try. California’s probate courts run on their own calendars, and if court approval of the sale is required, that adds a layer most lenders and buyers won’t build their schedule around.
The probate sale guide covers what court approval requires and how much runway to build in.
When the Problem Is an Occupant
Non-Paying Tenants
I talk to landlords fairly regularly who’ve been dealing with a non-paying tenant for six months or longer before they decide to call. By that point they’ve tried everything informal and the tenant is still there.
A tenant who won’t allow showings and has stopped paying rent is a problem most retail buyers won’t touch. Their lenders typically won’t finance a purchase on a property where someone is living outside the terms of a lease.
Why Lender Financing Falls Apart
In practice, a buyer who needs financing can’t close on a property where someone is living who isn’t contractually supposed to be there, and most lenders won’t even try to work around it. Selling with the tenant still in place requires a buyer paying cash who’s willing to take ownership of whatever comes next after closing.
Clearing the Tenant vs. Selling Occupied
The net comparison between clearing the tenant and selling occupied comes down to removal cost against the occupied discount in the offer. I’ve seen it go both directions depending on how drawn out the tenant situation is.
Two Deals That Show What This Can Look Like
Stobaugh Street, Lamont
In October 2020 we closed on a property on Stobaugh Street in Lamont for $55,000. The property had been in the family for decades and it was already a hoarder situation when the family inherited it, one that had gotten progressively worse over time.
The roof had active leaks and the swamp cooler hadn’t worked in about a decade. Several cars on the lot had unclear ownership, and the family member handling the sale was coordinating everything remotely while her mother was transitioning out.
The tax liens alone took a few rounds to resolve before we could get the title cleared.
33rd Street, San Bernardino
In October 2019 we closed on a property on 33rd Street in San Bernardino for $170,000. That one came in as a probate case, and while it was under contract another investor tried to claim the agreement wasn’t enforceable.
The judge approved the sale at a court hearing in late July 2019. Several court appearances stretched the timeline well past what we’d originally expected, and we didn’t have much leverage over when those dates got scheduled.
What to Do Once You Know Which Category You’re In
Once a seller figures out which category they’re in, the conversation about what to do next gets a lot more specific. The distressed property sale guide covers the path forward on each category, including where a listing tends to make more sense.
If there are liens or a probate proceeding involved, get an attorney to look at anything before you sign. Sellers have gone into complicated title closings without one and come out wishing they’d made that call before they got too far in.
Getting a Number on Your Property
We’ve been on the buying side of over 400 transactions in Southern California since 2008, and distressed properties of one kind or another are the majority of what we work through. We’re a cash buyer, so we have a direct interest in sellers going that route.
The agent vs. investor comparison covers when a listing tends to get a better net number, including some situations where it will even after commissions.
If you want to know what your property would net, call us at (951) 331-3844 or request an offer through our website and we can have a number in front of you within 24 hours.
Doug Van Soest spent seven years as a certified residential appraiser starting in 2003 before co-founding SoCal Home Buyers with his wife Andrea Van Soest, CA DRE #01505854. Together they have closed over 400 transactions across Southern California.
