A pre-foreclosure can create the opportunity for good deals on properties, but most people agree it’s the most difficult way to purchase a home in distress. This is because a pre-foreclosure property is not actually for sale, but is in a process of becoming owned by a bank again. It requires speaking with the owner and seeing if there is opportunity to cure the potential default that they have found themselves in.

With that said, there is a difference between a pre-foreclosure and an actual foreclosure. It is still possible to purchase a home in the pre-foreclosure stage and below are some steps to follow to increase the chances.

Understand how the pre-foreclosure process works

Pre-foreclosures vary by state but usually if a homeowner misses three mortgage payments, then the bank will issue a notice of default which starts the process of foreclosing on the home. Pre-foreclosure is unique because the homeowner has a few months to reinstate the loan by making payment arrangements with a lender in an effort to catch up on what is owed.

If a homeowner can’t catch up on their payments, then they can attempt to sell the property to pay back the mortgage. Homeowners find themselves in the situations due to setbacks that happen in their personal finances. Maybe they didn’t have adequate savings, lost a job, or a spouse passed away.

Finding pre-foreclosures

Pre-foreclosure listings can be found, free of charge at the county recorder’s office, in the public records section. Simply search for notice of default, lis pendens, and notices of sale which are issued to homeowners in the pre-foreclosure process – they are publicly recorded. Additionally, contacting real estate attorneys for leads on pre-foreclosures is a good way to get access before they hit the market.

Neighborhoods

It’s important to find a good neighborhood in which to buy a pre-foreclosure, otherwise profits might be negated if the area is not desirable.

Consider overall market conditions similarly with purchasing a primary residence. Things that make a neighborhood good are schools, vicinity to parks, shopping, restaurants, walkability, etc. Additionally, check out the crime data, sex offender registry and see if the area in question is urban, suburban, or rural. 

It’s also best to look at the neighborhood’s comparable properties and see if the home that is in pre-foreclosure is actually a good deal or not.

Pre-approval from a lender

Before buying any home, it’s best to get pre-approved from a lender before making an offer on a property. This holds true for pre-foreclosures as well. Pre-approval shows sellers that a buyer is serious and can mitigate some of the concerns that a deal might fall through due to lack of financing.

Choosing a lender will depend on the properties that are being sought after. Sometimes, a hard money lender will finance pre-foreclosure in nearly any condition. However, a more traditional lender, like a bank will want the property to be in better condition and easily repaired.

Make an offer on the home

Pre-foreclosures are difficult to obtain because once the list has been acquired, the buyer usually needs to reach out to the homeowners directly to let them know they are interested in buying the property. This may pose a challenge because there will certainly be many other people reaching out to the same list of owners trying to get a good deal on a property.

Additionally, homeowners that are facing foreclosure are usually distressed so being empathetic to their situation is necessary.

The offer to buy a pre-foreclosure home needs to contain a financing contingency. This will protect home buyers from losing earnest or deposit money incase the financing falls through for whatever reason.

For this reason, it’s helpful to work with real estate agents that are familiar with the pre-foreclosure process and can help with writing strong contracts or offers.

From here, there will need to be a financing commitment in which the lender will require more details to secure a loan. A complete mortgage application will need to be filled out, fees paid, and proof of down payment will be required as well. The lender will also order an appraisal to ensure the property is worth to lend the money on.

Close on the property

Once everything goes through with the lender and contracts have been negotiated/accepted, a real estate attorney or title company will schedule a closing date. At closing, the rights to the property will transfer ownership.

Start working on the property

Usually, the purpose of buying a pre-foreclosure is to get a property that presents an opportunity to make a significantly better profit margin when sold than buying a traditional home. This is because pre-foreclosures often have some work that needs to be done on them in which the buyer can earn some sweat equity on.

Some people will buy a pre-foreclosure property, fix it up, and then simply rent it out to tenants as a long term investment property.

Regardless if the property is a fix and flip or a rental property, It’s imperative that work is started immediately because the longer the home sits, the more payments the new owner has to make on the loan. This will quickly eat away from any profits that were factored into the equation before the purchase of the property.