Buying Mortgagee and Deceased Estate Properties.

A distressed property is any property that is under foreclosure or being sold by the lender. Normally, a distressed property is a result of a homeowner who was unable to keep up with the mortgage payments and/or tax bill on the property. It is common for a distressed property to be sold below market value.

Deeper definition
Not all distressed properties have been repossessed due to late payments. On occasion, lenders, banks and credit unions seek to repossess a property to protect their investment. Lenders may take this action due to other claims being made on the property or due to a discovery of mortgage fraud.

There are at least two good reasons to buy a distressed property:

Price. The below market value price on a distressed home allows those who might not otherwise be able to afford a particular neighborhood to buy there.
Potential Profit. If you buy a distressed property at a good price and know which repairs and updates will add the most value, it is possible to build equity and sell at a profit.

Distressed property examples
It may be tempting for a first-time buyer or investor to purchase a distressed property without fully considering the ramifications. As great a deal as it might seem, there are two red flags to look out for:

You have to compromise on location. Not all, but many distressed properties are located in low-income neighborhoods. Buying in such a neighborhood severely limits how much you can invest in upgrades, without making your home too valuable for the area.
You are not sure you can make repairs. It is common for distressed properties to be in less-than-pristine condition and need a number of repairs, immediately and in the near future. If you are not certain that you can make the repairs yourself or have it done at a price you can afford, that is a red flag.

Terryw wrote:

Mortgagees have fiduciary duties to get the best possible price and so do executors. They are also more difficult to negotiate with so I think this will be a hard way to find an undermarket value property.

This is true, sometimes better deal is the private vendor in the final few months prior to handing the house over to the mortgagee (if they have equity but are otherwise in financial stress).

Occasionally if unfinished, ugly or requiring work mortgagee properties can pass in at auction (as they didn’t quite hit the sworn valuation figure at bidding) and the banks are usually then more realistic afterwards so decent deals can occur but don’t get your hopes up of buying half price houses.