Buying a pre-foreclosure house can be a good deal. But many people agree it’s a difficult way to purchase a home in distress. This is because a pre-foreclosure property is not actually listed for sale. But it is in the process of becoming a bank owned property again. This requires speaking with the owner to see if there is an opportunity to cure the potential default in which the homeowner has found themselves.
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.
Learn how pre-foreclosures work
First things first, pre-foreclosures can 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. This is done 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.
Get pre-approval from a lender
Get approved by a lender before you head further along the trail to buying a pre-foreclosure house. 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.
Find the right neighborhood
After you’ve been pre-approved but before you begin your actual search to buying a pre-foreclosure house, it’s important to find the right neighborhoods to buy a pre-foreclosure in. Otherwise profits might be negated if the area is not desirable.
Consider overall market conditions similarly as to 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.
Discover the pre-foreclosure houses
After you’ve found the right neighborhood, then there are several avenues you can choose to find pre-foreclosures.
Many pre-foreclosure listings can be found, free of charge at the county recorder’s office, in the public records section. Simply search for notices of default and lis pendens (pending legal action). Also, notices of sale are issued to homeowners in the pre-foreclosure process. And they are publicly recorded.
Public records include the property address and the homeowner’s name. Generally, they include the bank’s name that is doing the foreclosing and how much is owed on the property. They will not however include what other liens are owned on the house. You will need to get a title search for this information. Public records don’t provide photos or a detailed property description either.
Local newspapers also publish the addresses of homes that are in any stage of the foreclosure process. Once the pre-foreclosure process begins, the homeowner will receive notices of foreclosure. These will include lis pendens which are also published in the local newspaper in the legal section. This is how the court gives public notice of foreclosures.
Most local newspapers also have an online edition where the same information is published. Look for newspapers that serve the county you are looking for properties in. Check out the legal section and make notes of the addresses of any properties that have litigation pending.
Real estate agents
Real estate agents can help investors find pre foreclosure homes. They can access the local Multiple Listing Service (MLS). And real estate agents will be able to narrow down the MLS search to identify only pre-foreclosure listings.
By using a real estate agent, you are enlisting the services of a professional who will do most of the legwork for you. A real estate agent will find pre-foreclosure listings, schedule appointments, and negotiate offers on your behalf. They will provide detailed property information and photos including how much the property last sold for, the square footage, and the yearly taxes.
Make an offer on the home
Buying a pre-foreclosure house can be difficult, 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, again, it’s helpful to work with real estate agents that are familiar with the pre-foreclosure process. And they 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 house
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.
Mike is the Market Director for Colorado at TRELORA. He is personally responsible for closing over 600 successful real estate transactions and has played a role in closing hundreds more. He started at TRELORA in August of 2016 and began his real estate career in Jacksonville, FL in February of 2011. In his tenure at TRELORA he has been a Buy Manager, Buy Agent, Listing Agent, and Field Agent before accepting his current position as Market Director in January of 2021. Mike has a Bachelor of Science in Finance and a Master of Science in Entrepreneurship both from the University of Florida. Go Gators!