What is distress value of property and how to calculate it?

Investing in the property is the safest and wisest investment we can opt for. At least that's what we think. We can easily get a good amount of money after selling a property which can help us repay our loan at the same time we can also get some hard cash without much effort. But this is not the case that always happens. The value of the property may fall and it can be lesser than the outstanding loan amount. We can actually witness it with the Covid-19 situation. The value of the property has decreased to 15-16% and although this is good news for buyers, this can be bad bad news for home loan buyers. This is distress value of property means.

How to calculate distress value of property in India?

There is no hard and fast rule to calculate the distress value of property. When the market is down, the distress value of the property accordingly. The value that the house would fetch immediately is called the distress value of property. Suppose you purchased a house in Rs 1 crore the distress value could be 80 lakh. 

If the bank finds that the value of the property is decreasing then you may need to pay the difference as a one time-margin; it provides additional collateral if the loan is taken by keeping the property as a mortgage.

Unable to pay the amount the bank may seize the property or even sell it. 

The bank can also offer leeway to the borrower who has a good track record. So if you pay your EMI on time, you can negotiate with the bank.

I hope you now know about the distress value of property.

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Hi,

While we may feel that decrease in the value of the property is a blessing for potential buyers of a property, I must also tell you that it is a bane for the new buyers of the same property. This is due to the fact that the price of the property for which they have acquired the loan will likewise decrease, possibly dropping below the balance owed on the loan. This is what is distressed value of property. The bank will ask the debtor to make up the shortfall because it is unlikely that it will risk taking on more debt than the house is worth. I will help you understand more about distressed value of property ahead.

Distress value of property meaning

A bank offers a loan up to a specific portion of the value of the property. Banks can offer up to Rs 8.5 lakh (85% of the property value) if the loan amount is less than Rs 10 lakh. This amount includes the stamp duty and registration fees. The banks, however, cut their exposure to between 75 and 80 per cent as the loan balance rises.

In other terms, a bank maintains a specific amount of risk to the property's value, often 75-85%, and preserves the house as security. The bank can recoup the money if the borrower fails to repay the loan by selling the property. In order for this to occur, the market price of the apartment must be greater or equal to the amount still owed on the mortgage.

If the market price is lower, the bank will want more security from the borrower or the immediate payment of the difference. The debtor will be labelled a defaulter if he fails to do so, at which point the bank will confiscate the property and, if necessary, sell it.

Few individuals are aware that when they sign the loan agreement, they give the bank permission to seize the property in the event of a default. The majority of borrowers are not aware of the home loan agreement's "depreciation of security" clause. One of the approximately 15 clauses describing the steps the bank will undertake in the event of a default is this one.

The bank determines three values after evaluating the borrower's property. The builder's asking price for the property is the first, followed by the price of a comparable building in the same area and the distress value. The value that the property would sell for right away is its distress value. Therefore, the distressed value of a property with a Rs 1 crore valuation might be Rs 80 lakh. A sum that is lower than the distress value will be provided by the bank.

How banks react to distress value in valuation

1) You must pay the bank the differential as a one-time margin sum or offer extra security if the price of the housing loan property declines underneath the outstanding loan balance.

2) If you are not able to comply with either of the aforementioned choices, you will be deemed in default and the bank may take possession of or even sell the property.

3) Banks typically give a borrower with a solid history of on-time payments considerable wiggle room. As a result, if you've been repaying your EMIs on time, you can ask the bank for further time to repay the margin.

This is what is

distressed value of property.

Our neighbour sold his house way less than the actual value since he needed to repay his debt to the bank. The distressed house could have been sold at a great price if renovation had been done at the right time but it failed to happen. I hope you know the distress value meaning. It refers to the price at which the owner sells it in order to cope with his/her debts. Let me share more insights about it.

In simple words, a distressed sale is a sale of a property below its actual value. The owner sells the property for less than the market value or price in order to manage his debt immediately. It is the minimum value at which the property gets sold by the owner.

How to calculate the distress value of land?

To be very honest, you won’t be able to get the distress value of a land or property if you are not a pro in it. It will be best to ask a real estate agent to do it. In fact, brokers can too help you out. The calculation is done based on the

• Condition of the property

• Rates of other similar properties in that area

• Noting what repairs or renovations need to be done

• How old the property is and more

The CMA or Comparative Market Analysis is done to know the value of the property.

I hope you have understood the distress value meaning clearly now.

The distress sale value meaning

is the estimated value of a property when it is sold under adverse or distressing circumstances. It includes financial distress, legal issues, urgency, or a need for quick liquidation of the asset.

The distress value is lower than the market value of the property.

Here are some factors to consider for

distress value formula

:

• Evaluate if the prevailing real estate market is a buyer's market where there are more properties for sale than buyers, the distress value may be lower.

• The urgency to sell the property can significantly impact its distress value.

• The physical condition of the property can affect its distress value.

• If the property has legal issues, it will affect the distress value.

To estimate the distress value, you can take the following steps:

• Gather information on recent sales of similar properties in the area.

• Consult from real estate agents who are familiar with the local market. They will provide you the insights into the distress value based on market conditions.

• Examine the property's condition. This will help you assess how much the property's condition will impact its value.

• Understand the seller's motivation that will prompt a distress sale.

This is all about

what is a distressed property

.

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The distress value of a property refers to the amount it would fetch immediately in the market, especially during challenging economic conditions or when property prices are significantly lower. This is the basic meaning of distressed property. 

Let’s explore how to calculate it:

1. Gather Information:

   • Recent Sales

     : Collect data on recent sales of

     similar properties

     in your area. Look for properties that were sold under distress conditions (e.g., urgent sale, financial crisis, etc.).

   • Local Market Insights

     : Consult real estate agents who are familiar with the local market. They can provide insights into the distress value based on current market conditions.

2. Examine Property Condition:

   • Consider the

     physical condition

     of the property. Any issues affecting its value, such as maintenance, repairs, or structural problems, should be factored in.

3. Calculate Distress Value:

   • Unfortunately, there is

     no fixed formula

     to calculate the distress value. It varies based on market dynamics.

   • As an example, suppose you purchased a house for ₹1 crore. During distress conditions, the property’s value could drop to around ₹80 lakh.

   • If the bank observes a decline in property value, you might need to pay the difference as a one-time margin. This additional collateral protects the bank if the property is mortgaged for a loan.

   • Timely EMI payments can help you negotiate with the bank and avoid potential property seizure or sale.

I hope this helps you understand the distress property meaning.

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