What it is:
A distressed sale occurs when a sale must be made under unfavorable conditions for the seller.
How it works (Example):
In a distressed sale, the seller is affected by unfavorable conditions that force the sale. For example, a seller of a piece of real estate might have to sell because they need cash to cover another debt. In that case, the seller does not have many options, so they are "forced" to take a loss on the sale.
Why it Matters:
It is important to know the conditions of a sale of an asset, particularly when trying to value the asset or to use it as comparable on the basis of the sales transaction. In a distressed sale, the valuation of the asset is artificial because it was not sold under open and competitive market conditions. If the real estate is sold under distressed conditions, the sales price cannot be used to establish the true value of the asset. Rather, an appraisal that is based on competitive comparables or the income potential of the real estate should be used. From the buyer's perspective, however, property that is sold in a distressed sale can present an opportunity to purchase the asset at a substantial discount to market prices.