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Distressed Property in Australia

A distressed property can look like a cheap purchase for a savvy investor, but it requires diligent research and an understanding of the risks.

Updated

Distressed properties can be cheaper than the market average in Australia, which makes them tempting for bargain-hungry property investors. But there's often a reason why a property is distressed in the first place. If you don't do careful research your bargain buy could turn into a loss.

What is considered a distressed property?

A property can become distressed for many reasons, from financial misfortune to environmental damage to market decline or even relationship breakdown. Here are some common situations in which a property may become distressed:

  • Mortgagee-in-possession sales. If a borrower cannot repay their mortgage then the bank can step in and sell the property in order to recoup their losses. This is called a mortgagee-in-possession sale.
  • Property damage. Severe damage to a property by fire, flood or accident can drastically lower the value of a property, causing the owner to sell it in a hurry.
  • Falling value. A declining property market can see investors rushing to sell. This is especially common in "one industry" towns, such as mining towns in Western Australia, where prices rose and then fell dramatically as the mining boom slowed down.
  • Relationship breakdown. Divorce or relationship breakdown can often lead to the sudden sale of an investment or family home.
  • Deceased estates. The death of a property owner often results in a hurried sale by the estate's trustee.

What are the risks involved with buying a distressed property?

Sometimes a distressed property can result from the seller's circumstances alone and can present an opportunity for an organised buyer to snap up a bargain. But if the property is in poor condition or located in a struggling neighbourhood then the discounted price matters less than your ability to make a profit from the purchase.

This is why you need to look beyond the purchase price, examine as much data as you can and consult the professionals. You need to know if the property requires serious repairs, estimate how much they will cost and then factor that into your decision.

If the property is in serious disrepair, is very small in size or has some other factor dragging its value down then you may also struggle to get finance. Lenders may reject your application or require a much larger deposit.

How to buy a distressed property

Following these general tips will help you make a decision that's right for you:

  • Do your due diligence. Research the market so that you know you're paying a good price. Look at comparable, recent sales from various sources (not just what the agent provides).
  • Get expert help. Paying for an independent property valuation is a must. You should also have a building inspection conducted to assess the condition of the property in detail. Consider consulting a buyer's agent to help you negotiate a good price. A professional buyer's agent can also help you
  • Check if the property itself is distressed or if it's the area it's located in (for example, a post-boom mining town). A struggling property in an otherwise thriving area could represent better value than a nice house on a bad street in a struggling town.
  • Balance risk and reward. Try to weigh the savings that come from a (hopefully) discounted price with the potential profit. If the risks are too high and the reward seems too small then it might be better to buy an investment-grade property at a higher price.
  • Get your finance organised in advance. Distressed properties can be competitive, especially if they represent a good deal. Getting pre-approved by a lender will give you an advantage and give you some confidence that you can get finance. But your lender will ultimately make their decision based on the strength of the property as security as well as your ability to repay the loan. A mortgage broker can help you find a lender in more challenging circumstances.

Where can I find distressed properties for sale?

You can find distressed properties for sale on various listing sites and on individual real estate agents' websites.

Some places to look include:

  • Trovit
  • ForcedSale.com.au
  • SQM Research also publishes regular reports on distressed properties, but you have to pay for them.

Compare investment loans to fund your property purchase

Data indicated here is updated regularly
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Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
UBank UHomeLoan Variable Rate - Discount Offer for Investor Variable P&I Rate
2.89%
2.89%
$0
$0 p.a.
80%
Get a discounted, low-fee investor loan from a convenient online lender. 20% deposit required.
Newcastle Permanent Building Society Fixed Rate Home Loan - 1 Year Fixed (Owner Occupier, P&I)
2.49%
4.12%
$595
$0 p.a.
90%
Investors can take advantage of a short term fixed rate with no ongoing fees. $2,000 cashback for eligible refinancers borrowing $250,000 or more.
Athena Variable Home Loan - Investor, P&I
2.99%
2.95%
$0
$0 p.a.
80%
Athena offers a competitive variable rate for investors. No ongoing fees and no application fee. Principal and interest repayments.
UBank UHomeLoan - 1 Year Fixed Rate (Investor, P&I)
2.29%
2.84%
$395
$0 p.a.
80%
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.
CUA Fixed Rate Home Loan - 3 Year Fixed (Investor, P&I)
2.69%
4.44%
$600
$0 p.a.
90%
Competitive rates for fixed for 3 years with redraw facility.
Pepper Money Essential Prime Full Doc Home Loan - LVR >75% up to 80%
3.09%
3.29%
$599
$10 monthly ($120 p.a.)
80%
This is a competitive, flexible variable rate suitable for borrowers with a good credit history. Borrow up to 80%.
Hunter United No Regrets Home Loan - Investment
2.99%
2.99%
$0
$0 p.a.
80%
Variable rate mortgage with 100% offset account.
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Athena Variable Home Loan - Owner Occupier, P&I

Owner-occupiers with 20% deposits can get this competitive variable rate mortgage. $0 application fee and $0 ongoing fees.

Logo for UBank UHomeLoan Variable Rate - Discount Offer for Owner Occupiers, Variable P&I Rate
UBank UHomeLoan Variable Rate - Discount Offer for Owner Occupiers, Variable P&I Rate

Take advantage of a low-fee mortgage with a special interest rate of just 2.49% p.a. and a 2.49% p.a. comparison rate.

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HSBC Home Value Loan - Promotional Offer (Owner Occupier P&I)

Get a low interest rate loan with no ongoing fees. Plus you can make extra repayments and free redraw online.

Logo for Suncorp Back to Basics Home Loan - Better Together Special Offer $150k+ LVR<=90% Incl. LMI (Owner Occupier, P&I)
Suncorp Back to Basics Home Loan - Better Together Special Offer $150k+ LVR<=90% Incl. LMI (Owner Occupier, P&I)

Get one free online redraw per month and pay no ongoing fees. Application fees are waived for loans above $150,000. Refinance to an eligible Suncorp loan and get a cashback of $2,000 or $3,000, depending on your loan amount. Other conditions apply.

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