Define: Distress Sale

A distress sale refers to the sale of property or assets under urgent or unfavourable circumstances, often motivated by financial distress or the need to quickly liquidate assets to alleviate financial burdens. Distress sales may occur when individuals or businesses are facing financial difficulties, such as bankruptcy, foreclosure, insolvency, or urgent cash needs. In these situations, sellers may be willing to accept lower prices or unfavorable terms to expedite the sale and generate immediate funds. Distress sales can present opportunities for buyers to acquire properties or assets at discounted prices, but they may also involve risks and challenges, such as limited due diligence, undisclosed defects, or legal complications. Additionally, distressed sellers may have limited negotiating power or be subject to pressure from creditors or other parties, affecting the terms and conditions of the sale. Overall, distress sales are characterised by urgency, financial pressures, and the need for swift resolution of financial challenges.

A distress sale occurs when, despite non-favourable selling conditions, an asset is forced to be sold quickly due to extraneous conditions. For example, the sale of a foreclosed home is a distress sale. Other examples of a distress sale include the sale of stocks, futures contracts, or other investment products. In any of those cases, the distress sale can be due to a margin call or a bankruptcy situation. Stocks that are sold in a distress sale are sometimes referred to as distressed securities. Purchasing stocks from a company going thru a distress sale is sometimes used as an investment strategy. When purchasing distressed securities, an investor is betting on the chance that the company going thru the distress sale will recover. In a distress sale, liquidation value is used to estimate the value of the assets to be sold.

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This glossary post was last updated: 29th March, 2024.