When searching for that perfect investment deal, you will inevitably find properties in pre foreclosure. We developed this guide to help you understand how you can leverage these deals.
Answering What Pre Foreclosure Means
Pre-foreclosure refers to the starting point for foreclosure or in other words, the legal steps required to repossess a property when a borrower stops making mortgage payments. The proceedings begin when the lender submits a notice of default. The notice is intended to inform the borrower that the lender will pursue legal action and foreclosure if the mortgage isn’t made current. To become current, the owner can make up the late payments, come up with a forbearance agreement, or sell the property before it ends up in foreclosure.
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How Pre Foreclosure Works
When a borrower gets a loan to buy property, they sign a contract to pay the mortgage per the loan terms, usually via monthly installments. A borrower is in default if or when they do not make payments for more than three months.
The lender will send a copy of the default notice and will also become public record, beginning the pre foreclosure process. This process can take a week or even over a year and can vary from state to state.
Moving on in the process, if the borrower does not become current with past-due payments or does not make arrangements to sell the property while it is in the pre-foreclosure period, this forces the lender to continue with the foreclosure process. Once the foreclosure is complete, the bank owns the property and will likely sell the property at a lower price, even at a loss, to get it off their books and avoid future liabilities.
If you are facing foreclosure, contact the people at the “Making Home Affordable Program.”
You can reach them at 888-995-HOPE.
Who Benefits from Pre Foreclosure Sales
A home in the pre-foreclosure phase can get sold before it goes into foreclosure, which can be a win for all parties involved. By selling, the homeowner can avoid further damage to their credit, and the buyer can scoop up the property below market valuation. The lender is happy because they don’t have to go through the foreclosure process with all of its expenses.
Watch Out as an Investor
If you buy a pre-foreclosed property, you need to be aware of the potential of liens or unpaid property tax. Both of these issues can be damning for a deal as they can become the buyer’s responsibility after the sale is complete. If the property is in disrepair, you may end up with excess costs that break down or eliminate the possibility of making a profit.
Pre-foreclosure sales are also known as a “short sale.” The bank will require approval when the outstanding loan balance exceeds the sale price, hence the word “short sale.”
Tips to Buy Property Through Pre Foreclosure Investing
Search for Pre Foreclosed Homes For Sale
It is not easy to find these properties, it will take work. A bit of luck sometimes helps as many of these deals will not be on the market yet. You can search online, looking at various properties that may say short sale or pre foreclosure. You should also check foreclosure notices in the local paper. You can also market yourself online and place signs around and send or give out flyers or postcards. You have seen them before, “We Pay Cash for your home.”
Check Out Pre Foreclosure Properties
You found it, now get out there and check it out. You can even get lucky and strike up a casual meeting with the owner, or even a next-door neighbor. The owner is likely to be living in the home, so this can be muddy, so use your judgment.
Get a status update
It would be best if you did your homework to confirm the property is still in arrears. You can contact the trustee who initiated the foreclosure to help with this information.
Research Pre Foreclosure Value
You can likely check public records to get a close idea of the outstanding balance as well as other liens on the property. A good local real estate agent can also be a huge help in this effort.
Do The Math
Take the estimated value and subtract costs you will likely encounter such as loan balances, liens, taxes, repair estimates, and insurance. Negotiations are much easier when you know where you breakeven.
Get in Touch
Now is a great time to contact the property owner, either through the mail or, better yet, over a phone call. You should always remember that anyone facing foreclosure is under duress, so use tact when arranging a meeting. Once you set it up, you will be able to look at the property in more detail and maybe even discuss a deal.
Arrange for a Walk-Through
If your meeting or phone call goes well, ask the owner if they would give you a tour. You will find that this will help with a lot of things, including understanding how much repair is needed. You might want to take your contractor, but make sure they consider the owner’s sensitivity level.
Negotiate The Best Deal
Your ideal offer should be perhaps 20 percent below where you breakeven. Keep in mind that you can be creative here. Thinking about the owner and making allowances, such as allowing the owner to stay an additional 30 days, may make the difference in making a deal or not.
Always Get Everything in Writing
After a deal is made, you should draft a purchase agreement. You may want to have your real estate agent help you out here to ensure the deal is legit. You should always ensure any sale is contingent upon a title search and inspection of the property.
Close the Deal
A Title Company can act as a third party to manage the transfer of the money and ownership of the property.
Owners & Pre Foreclosure Deals
You will find that some owners will not welcome your interest or appreciate you digging around about their pre-foreclosure. That’s fine; there will be others that realize selling is their only way out, and their only hope to possibly salvage equity and minimize the impact on their credit.