A distress sale refers to the forced sale of assets due to circumstances that have put a financial strain on the owner. More often than not, these circumstances are beyond the control of the owner. As the name implies, the owner is under distress, hence the need to sell assets in return for money. In a distress sale, the aim is to sell the assets as soon as possible. As a result, the assets are usually sold below the market value.
Distress sales are held in practically any sector. Businesses which need a quick infusion of cash may hold a distress sale to get rid of some assets. In the securities market, distress sales may also be held. A common example is selling stocks and bonds when a margin call is issued. The stocks and bonds related to the call then need to be sold below the amount that the investor may have expected.
Another very common example of a distress sale is when a homeowner faces the need to sell his property. Usually, this happens when the homeowner does not have the means to pay for the mortgage. After a while, this situation can become bad and result in a foreclosure. In order to avoid foreclosure, the homeowner can then find a buyer for the property so that the mortgage can be dealt with.
In more informal situations, distress sales are also common. Let’s say a person is facing financial difficulty but has some items that he can sell for cash. Electronics, cars, and even furniture can be sold in a distress sale.