Understanding Distressed Properties: A Guide for Sellers and Investors
What makes a property distressed, the options open to an owner who is behind on payments, and the checks an investor should make before buying one.
Updated & fact-checked Figures are linked to their sources at the end of the article.
A distressed property is one that is likely to sell below its market value because the owner is under financial or legal pressure, or because the building itself needs serious work. For an owner, the earlier the problem is dealt with, the more options remain. For an investor, the discount only pays off if the risks are found before closing, not after.
This guide covers both sides: what counts as distress, what an owner who is falling behind can do, and how a buyer should check a distressed property.
What counts as a distressed property
Distress usually falls into one of two groups, and many properties have both.
- Financial distress. The owner is behind on the mortgage or property taxes, a lender has started enforcement, or the owner is in bankruptcy or insolvency proceedings.
- Physical distress. The building is vacant, damaged, unfinished or out of compliance with local codes, so it cannot be financed or rented in its current state.
The common stages of financial distress are:
| Stage | What it means | Who usually sells |
|---|---|---|
| Pre-foreclosure | Payments are missed and the lender has sent or filed a formal notice of default, but no sale has happened yet. | The owner |
| Short sale | The lender agrees to accept a sale price lower than the loan balance. | The owner, with lender approval |
| Foreclosure or court-ordered sale | The lender enforces its security and the property is sold, often at auction. | A trustee, sheriff or the court |
| Bank-owned (REO) | No buyer met the price at auction, so the lender took the property. | The lender |
| Tax sale | The municipality sells the property to recover unpaid property taxes. | The municipality |
How common distress is right now
Foreclosure activity in the United States has risen since the pandemic-era moratoriums ended, but it remains well below its pre-pandemic level and far below the peak after the 2008 financial crisis. In Canada, the share of bank mortgages in serious arrears is still very low by historical standards.
The latest figures
US properties with a foreclosure filing, 2019 to 2025
Show the data as a table
| Year | Properties |
|---|---|
| 2019 | 493,066 |
| 2020 | 214,323 |
| 2021 | 151,153 |
| 2022 | 324,237 |
| 2023 | 357,062 |
| 2024 | 322,103 |
| 2025 | 367,460 |
The yearly figures come from ATTOM’s year-end reports for each year.[1][2][3][4][5][6][7] ATTOM’s chief executive described the 2025 increase as the market normalizing after historically low levels, not a sign of widespread distress.[1]
The process depends on where the property is
Foreclosure rules are set by each province or state, and the timeline shapes every decision an owner or investor makes. UBU Financial works in Nova Scotia and California, which handle it very differently.
Nova Scotia uses a court process. The lender applies to the Supreme Court of Nova Scotia for an order for foreclosure, sale and possession, and the property is then sold to the highest bidder at a public auction, normally run by the sheriff. The court’s practice memorandum requires the auction to be advertised twice in a newspaper sold in the county, the first time at least 15 days before the sale.[9]
California mostly uses a non-judicial process for homes secured by a deed of trust, with no court involved. The California courts’ self-help guide sets out the key steps:[10]
California non-judicial foreclosure, simplified
Day 0
Notice of Default recorded[10]
Recording it in the county starts the formal, public foreclosure process. The owner has 90 days to cure the default, usually by paying what is overdue.
After day 90
Notice of Sale recorded[10]
If the default is not cured, the lender can record a Notice of Sale stating that the trustee will sell the home at auction in 21 days.
Up to 5 days before the sale
Last chance to reinstate[10]
The owner can still stop the sale by paying the past-due amounts and fees, or by reaching an agreement with the lender.
Sale date
Trustee’s auction
The home is sold to the highest bidder. If nobody bids enough, it usually becomes bank-owned (REO).
Options for owners who are falling behind
An owner usually has more room to negotiate before a formal notice is filed than after. These are the main routes, roughly from least to most drastic:
- Talk to the lender early. Lenders can sometimes defer payments, extend the amortization or add arrears to the balance. None of these is guaranteed, but all of them depend on the conversation happening early.
- Refinance or bring in a private lender. If the property has enough equity, a new loan can repay the arrears. Private and alternative lenders, including family offices like UBU Financial, can fund properties or borrowers that banks will not, usually at a higher cost and for a shorter term.
- Sell on the open market. Selling before enforcement lets the owner keep any equity left after the mortgage, fees and costs are paid. An as-is sale to an investor is faster but usually at a lower price.
- Short sale. If the property is worth less than the loan, the lender may accept a lower payoff. The lender must agree, and the owner may still owe the shortfall unless the lender agrees to waive it in writing.
- Hand the property back. Some lenders will accept the property in place of foreclosure, a “deed in lieu” in the United States. The terms, including any remaining debt, need to be in writing.
Mistakes sellers make
Owners who do decide to sell tend to lose money in the same few ways:
- Waiting for the auction date to concentrate minds. By then buyers know the deadline, and a sale that needs lender approval or proper due diligence may not close in time. List while you still control the timing.
- Pricing as if the property were not distressed. An as-is buyer prices in the repairs, the risk and their own financing cost. An asking price based on a fully repaired building simply delays the sale while arrears and interest grow.
- Not having the paperwork ready. Buyers of income property want rent rolls, leases, operating statements, tax bills, permits and any inspection or environmental reports. Gaps slow the sale and lower offers.
- Hiding known problems. Defects buyers find late tend to kill deals or reopen the price, and concealing them can lead to legal claims after closing.
- Accepting an offer without checking the net. Work out what is left after the mortgage, arrears, legal fees, commissions and any penalty. If it does not cover the debt, the lender’s agreement is needed, and any release of the shortfall must be in writing.
The guide to financing options for distressed owners covers the alternatives to selling, from a lender workout to bridge or mezzanine money.
What investors should check before buying
Distressed properties are discounted because they carry risks that a normal sale does not. Buying at a sheriff’s or trustee’s auction can mean limited or no access to the inside of the property before bidding, so the checks below matter even more.
Due diligence on a distressed property
Search the title and registered charges
Confirm who owns the property and what is registered against it: mortgages, liens, judgments and unpaid taxes. Some charges survive a sale. In Nova Scotia, ownership records and maps are available to subscribers through the province’s Property Online service (see source 11).
Check property taxes, utilities and municipal orders
Unpaid taxes, water bills and outstanding orders to repair can follow the property to the new owner.
Inspect the building
Look for water damage, mould, roof, foundation, electrical and plumbing problems, and work done without permits. Vacant buildings often hide frozen pipes and break-in damage.
Price the repairs, then add a contingency
Get quotes from contractors rather than estimating. Hidden problems are the norm in distressed buildings, so budget for them.
Confirm occupancy and leases
Find out who lives there and on what terms. Tenancies generally survive a change of owner, and ending one lawfully can take months.
Line up financing before you bid
Many lenders will not lend on a property that cannot be insured or occupied, and auction deposits and closing deadlines are short.
Sources
- U.S. Foreclosure Activity Increases in 2025 (Year-End 2025 U.S. Foreclosure Market Report) — ATTOM, January 15, 2026. Checked 2026-10-12.
- Foreclosure Activity Declines in 2024 (Year-End 2024 U.S. Foreclosure Market Report) — ATTOM, January 16, 2025. Checked 2026-10-12.
- Foreclosure Activity Up From 2022, But Down From Pre-Pandemic Levels (ATTOM year-end 2023 figures) — RISMedia, January 12, 2024. Checked 2026-10-12.
- U.S. Foreclosure Activity Doubles Annually in 2022 — ATTOM, January 12, 2023. Checked 2026-10-12.
- U.S. Foreclosure Activity Drops to an All-Time Low in 2021 (ATTOM year-end 2021 figures) — RISMedia, January 13, 2022. Checked 2026-10-12.
- U.S. Foreclosure Activity Drops to 16-Year Low (2020 Year-End U.S. Foreclosure Market Report) — ATTOM, January 14, 2021. Checked 2026-10-12.
- U.S. Foreclosure Activity Drops to 15-Year Low In 2019 — ATTOM, January 2020. Checked 2026-10-12.
- Mortgages in arrears in Canada: what the numbers mean — Canadian Bankers Association, September 25, 2026. Checked 2026-10-12.
- Practice Memorandum No. 1: Foreclosure Procedures — Supreme Court of Nova Scotia, amended December 11, 2020. Checked 2026-10-12.
- Your rights in a nonjudicial foreclosure — California Courts Self-Help Guide. Checked 2026-10-12.
- Property Online (Land and property) — Government of Nova Scotia. Checked 2026-10-12.
