5 Types of DISTRESSED Sellers & How To Find Them!

Are you looking for motivated seller leads that actually turn into real deals? Whether it’s wholesaling, flipping, or rentals, it all starts with understanding the different types of distressed sellers and knowing how to genuinely help them.

Hi, I’m Ryan Zomorodi, Co-Founder and COO of Real Estate Skills. In this article, we’re breaking down the main types of distressed sellers that investors and agents run into, how to find them, and how to turn tough situations into ethical win-win opportunities.

From foreclosures and tax lien properties to probate and bank-owned homes, you’ll learn how to work with these sellers strategically and compassionately while building a stronger, more profitable business. To help unpack this topic, I sat down with my friend Henish Pulikal, a real estate pro with nearly two decades of flipping experience and the founder of one of San Diego’s top construction and investment firms. Together, we’ll walk through proven strategies to serve distressed sellers the right way and grow your real estate business in the process.

Pre-Foreclosures Explained

Let’s dive into pre-foreclosures and what they really mean—the process homeowners face and how to find these deals. Many investors are curious about this, so let’s start with the basics.

A pre-foreclosure varies by state, depending on foreclosure laws and whether the property is owner-occupied or an investment. For owner-occupied homes, if you’re 120 days late on your mortgage—about four months—the lender can refer the loan to a trustee. Usually, a third-party law firm files a Notice of Default (NOD) with public records. The homeowner receives a notice on the door or in person stating the amount needed to cure the default and warning that the property could be sold if not resolved.

About 30 days after the NOD, if the homeowner hasn’t set up a repayment plan or resolved the debt, they receive a Notice of Trustee Sale (NTS). This sets an auction date—typically 21 to 30 days later—where the property will be sold at the courthouse. If the homeowner can’t fix the issue or postpone the sale by getting a modification or reinstatement, the house will go to the highest bidder. If no one bids, it reverts to the bank, which then sells the property to recoup its losses. Any remaining funds may be returned to the seller.

Distressed Sellers vs. Distressed Properties

In real estate, many new investors confuse pre-foreclosures, foreclosures, REOs, and auctions, lumping them together. But these are different stages of a process. Missing a mortgage payment is just the beginning. The public only learns about a delinquent loan once a Notice of Default is recorded—120 days or so after the first missed payment. That’s when it officially becomes a pre-foreclosure.

Because the NOD is public, investors and agents can find these leads. Tools like PropertyRadar make it easy to create targeted lists by ZIP code, equity, property value, or neighborhood, and then reach out to homeowners.

The key difference between a pre-foreclosure and an REO (real estate owned) is who you’re negotiating with. In a pre-foreclosure, you deal directly with the homeowner, allowing for creative, win-win solutions. Once a property becomes an REO, you’re dealing with the bank, an asset manager, and often a listing agent. That extra layer usually limits your ability to strike flexible deals.

Distressed Sellers vs. Motivated Sellers

Working directly with sellers can benefit everyone. For example, one client of mine felt my offer was too low and decided to test the market. Now she’s juggling multiple showings, accommodating buyers, and coordinating with tenants and pets—an exhausting process. A quick cash sale may net less, but it saves time and stress.

Selling before foreclosure is almost always better. While missing payments hurts credit, an actual foreclosure stays on a record for seven years. By contrast, bad credit without foreclosure can often be repaired in one to three years, giving sellers another chance to buy. If the property sells at auction for more than the debt, the surplus technically belongs to the seller—but only if the bank can find them. Many people lose out because they never claim the funds.

What Is a Short Sale?

A short sale happens when the debt against a property exceeds its market value. There’s no equity left for the seller because home values have dropped or loan balances have ballooned—sometimes due to deferred maintenance or rising interest.

For instance, a house might be worth $900,000 in perfect condition but only $700,000 as-is. If the mortgage balance is $650,000 and late fees push it higher, selling for $700,000 minus commissions and closing costs might leave only $650,000 to the bank. If the payoff is short by $50,000, that’s a short sale.

Often, banks will even offer sellers a relocation allowance—typically $3,000 to $5,000—to vacate quickly. Depending on the type of loan (purchase vs. cash-out refinance), the bank may or may not pursue a deficiency judgment for the unpaid balance.

Behind the Scenes of Short Sale Approval

Short sales usually take longer to close because banks need to approve the loss. The process depends on how efficient the bank is at crunching numbers and getting approvals.

Back in the last recession, I worked in a bank’s REO department. As a manager, I could approve write-offs up to $150,000. Larger losses had to go up the chain—to directors or even the president for sign-off. In those days, paper files were shipped between offices, and broker price opinions (BPOs) had to be verified, slowing everything down. Digital systems have sped things up, but some banks still process approvals slowly because it’s not their highest priority.

How Banks Handle Short Sales

Banks rely on listing agents and third-party BPOs to estimate a property’s value. If the numbers align, they review offers. For example, if one BPO says $400,000 and another $420,000, an offer around $395,000 might work. But if there’s a big gap, they’ll investigate further.

Banks aren’t in the business of owning or selling homes; they’re in the business of lending. That’s why an asset manager, like I was, oversees the process. After analysis, the bank issues an approval letter setting the minimum net proceeds. The deal can’t include extra concessions or credits beyond what’s approved.

Finding Short Sale Opportunities

Short sale leads often come from data platforms such as PropertyRadar. You can filter for properties with negative equity and contact owners directly. Many distressed homeowners know they’re underwater but avoid dealing with it due to stress or denial. That’s where proactive outreach helps.

Some short sales involve reverse mortgages, especially if the loan balance grows faster than the property’s value—common in markets like San Diego where prices have recently leveled off. Banks usually understand when a home’s condition or loan type justifies a short sale and will adjust expectations accordingly.

Short sales can also appear on the MLS. In that case, a listing agent has already guided the seller through the decision, and the bank often requires at least a 7- to 10-day marketing period to ensure the highest offer. Fully off-market short sales are rare.

What Is a Foreclosure?

A foreclosure occurs after the homeowner fails to resolve default issues and the property is auctioned. If no investor meets the bank’s minimum bid, ownership reverts to the bank. The property then becomes “real estate owned” (REO).

At this point, the bank handles evictions or cash-for-keys agreements, may make repairs, and then lists the property to recover losses. Importantly, a property isn’t truly a foreclosure until the bank repossesses it. Pre-foreclosures, by contrast, are still traditional sales handled by the homeowner.

How to Find and Buy Foreclosures

So, how do you find foreclosures and pursue them as an investor — whether you want to flip houses or buy them for other purposes?

Typically, MLS listings will have a disclosure box checked when a property is bank-owned, often marked as an REO (Real Estate Owned). You may need to sign paperwork stating that the seller — in this case, the bank — doesn’t know anything about the property’s condition. Since they’ve never lived there, they can’t disclose issues like a leaking sink or roof damage.

Foreclosures are usually exempt from certain disclosures, such as the Transfer Disclosure Statement required in California and similar forms in other states. Banks may have done an appraisal years earlier, but that doesn’t reflect the current condition of the home.

Just because a property is a foreclosure doesn’t mean it’s automatically a good deal. Banks aim to recover as much of their loss as possible, so they’ll often try to sell close to market value.

Back in the day, banks held thousands of foreclosed homes, but now the inventory is much lower. For example, there may only be about 40 foreclosures available in a large market like San Diego.

You’ll usually find foreclosures listed on the MLS, but for pre-foreclosure opportunities, tools like PropertyRadar can help you locate homeowners who are behind on payments. In those cases, you’ll need to talk directly to the seller since the bank doesn’t yet control the asset.

Buying Foreclosures the Right Way

When buying a foreclosure, you’re typically dealing with a bank rather than an individual seller. In most cases, you can’t purchase the property until it’s officially listed for sale. MLS searches for “REO” or “bank-owned” properties are the most common way to locate them.

If the property is in livable condition — with working bathrooms, a functional kitchen, and no major structural damage — you may be able to finance it through a traditional mortgage. Many buyers, especially in competitive markets like San Diego, are willing to pay a premium for a move-in-ready home, even if it needs cosmetic updates.

Some foreclosures are also listed on specialized sites like Fannie Mae’s HomePath, though inventory there is often limited.

Because many homeowners today have significant equity, fewer homes go all the way through foreclosure. Many are sold at auction or before the bank takes possession.

Code Compliance & City Liens

Another source of distressed properties involves code compliance issues and city liens. Municipalities may step in when homes are overgrown, uninhabitable, or otherwise in violation of local ordinances.

For example, a property might become so overgrown that trees are literally growing through the roof or pool. In one case, six dumpsters were needed just to clear vegetation from a 10,000-square-foot lot. The city planned to foreclose on the property for unpaid code violation liens, but family members intervened and sold the home instead — resulting in a highly profitable flip.

Code compliance issues often affect elderly or isolated homeowners. These situations can lead to excellent investment opportunities, but they also require sensitivity and an understanding of local regulations.

Finding Properties with Code Violations

Code violations themselves aren’t usually listed on the MLS. You may find some information on city websites, but often, the most serious cases will have liens recorded on the property’s title.

Working with a title company can help you uncover recorded code compliance issues. When sellers attempt to transfer ownership, outstanding city fees or liens must be cleared before closing. Partnering with a good title officer can make the process much smoother.

Some properties with code issues overlap with pre-foreclosures, making them easier to locate through title searches or platforms like PropertyRadar.

Probate and Inherited Property Challenges

Probate and inherited properties present another type of opportunity, though they can come with unique challenges. While these homes are often dated, they’re usually better maintained than other distressed properties.

In probate cases, a court-appointed attorney or executor oversees the sale. The property often can’t be sold for less than 90% of its appraised value, which can limit an investor’s ability to negotiate. Additionally, multiple heirs may complicate the process, as each has their own opinion about the property’s worth.

Investors should carefully evaluate repair costs, holding expenses, and after-repair value (ARV) before making an offer on a probate property.

What Is Probate and Why It Matters

Probate is a legal process that occurs when someone passes away without placing their property in a trust. The court ensures that all heirs and potential claimants are notified, and an attorney oversees the estate’s distribution.

Without a trust, families can face tens of thousands of dollars in legal fees, months of paperwork, and, unfortunately, disputes among relatives. For real estate agents, encouraging clients to place their homes in a trust is a valuable way to protect them — and their heirs — from unnecessary stress.

Real-Life Example: No Heirs, Only Property

One example involved a woman who owned a three-unit property in San Diego’s Hillcrest neighborhood. She lived in one unit and rented out the other two. When one tenant stopped paying rent, she discovered the unit was a hoarder’s nightmare.

The property also had structural issues, including broken steps and a deteriorating retaining wall. Initially, the numbers didn’t work for a cash purchase due to its landlocked nature, so the investor helped her make minor repairs and list it on the market.

After spending around $15,000 on cleanup and small fixes, they sold the home for significantly more than she expected. She was then able to purchase a condo in her dream building — a win-win outcome for both parties.

Absentee Owner Case Study

One memorable deal involved an absentee owner who had no idea there was money sitting in a neglected property. I called every contact I could find — friends, relatives, and anyone connected to the owner. Eventually, I reached a woman who said, “My family from all over the U.S. is calling me, saying you’re bugging them. What’s going on?”

I explained, “It looks like your family might own property here in San Diego. Even if there’s no money in it, I could probably get you at least $5,000. Would that be worth an hour of your time?” That pitch worked, and she agreed to meet.

After reviewing the situation, we signed paperwork and secured her $5,000. The buyer purchased the home as a short sale, even though it had major issues — a broken foundation, retaining wall problems, and drainage concerns. In an unexpected twist, the buyer ended up moving in with the late owner’s boyfriend, creating a unique “inherited roommate” situation!

For the absentee seller, though, it was a win. She had been ready to let the house go, thinking there was no value. Instead, she walked away with cash for just an hour of effort.

How to Find Absentee Owners

So, how do you track down absentee owners and turn them into motivated seller leads?

Platforms like PropertyRadar make it easy. These tools compare the mailing address on tax records with the property address. If they don’t match, you know the owner doesn’t live there. Most of these will be rental properties, so they may not all be distressed — but absentee owners are often less emotionally tied to a home, which can work in your favor.

Layering additional data helps identify those most likely to sell. Look for properties with:

Deferred maintenance or outdated features

High equity or ownership over 20–25 years (past depreciation schedules)

Pre-foreclosure filings, tax liens, or judgments

Rents that haven’t been adjusted for years, creating low cash flow.

When the market is hot or the property isn’t performing, absentee owners may be open to selling — sometimes even completing a 1031 exchange to reinvest profits into a better asset.

Using Data to Target Motivated Absentee Sellers

Advanced search tools allow you to combine absentee ownership with other signs of distress. For example, you can filter for:

Absentee owners with tax liens or multiple mortgages

Owners who’ve had a Notice of Default or Trustee Sale filed

Properties with expired depreciation benefits

These layered lists give you a focused pool of potential sellers. Some platforms even integrate direct mail or digital marketing, letting you reach prospects with targeted campaigns.

Best Seller List: Pre-Foreclosure Leads

While absentee owners are valuable, pre-foreclosure sellers remain one of the best lists for investors and agents. Notices of Default (NOD) and Notices of Trustee Sale (NTS) provide a clear signal that action is needed.

By building trust and rapport with these sellers, you can create a win-win outcome: purchase the property, list it for sale, or even help them keep their home through loan modifications, forbearance programs, or reinstatement plans.

Sometimes, there’s no immediate profit, but helping someone save their house earns lasting goodwill — and often referrals from friends and family. When those homeowners eventually decide to sell, they’ll remember the professional who supported them in tough times.

“The hope is that if I do a good job for you, you’ll share my information with people you know, so I can help them too.”

Final Thoughts

Distressed sellers come in many forms — pre-foreclosures, short sales, foreclosures, probate situations, and absentee owners. By understanding their needs and pairing the right data with ethical outreach, you can create opportunities that benefit everyone involved.

Whether you’re flipping houses, wholesaling, or building a rental portfolio, motivated seller leads are the lifeblood of your business. Use the right tools, approach conversations with empathy, and focus on win-win solutions.

To learn more about starting and scaling a successful real estate investing business, visit RealEstateSkills.com.

*Disclosure: Real Estate Skills is not a law firm, and the information contained here does not constitute legal advice. You should consult with an attorney before making any legal conclusions. The information presented here is educational in nature. All investments involve risks, and the past performance of an investment, industry, sector, and/or market does not guarantee future returns or results. Investors are responsible for any investment decision they make. Such decisions should be based on an evaluation of their financial situation, investment objectives, risk tolerance, and liquidity needs.