For new real estate investors or individual buyers in search of a bargain, a pre-foreclosure property may seem like a good deal. And it may be… if they can get one. After all, there is no guarantee that a homeowner will commit to selling their property at this stage. Even if he or she is willing to do so, this type of transaction can be tricky.
What is Pre-Foreclosure?
Before anyone tries to buy a home in pre-foreclosure, it is helpful to have at least a rudimentary understanding of what pre-foreclosure is.
In plain English, this is the time at which a lender — usually a bank — puts a delinquent homeowner on notice that it intends to reclaim the property if outstanding mortgage debt is not remedied. The lender does this by filing a notice of default, or NOD on the property after the homeowner has missed a specified number of mortgage payments.
An NOD in real estate includes the deadline by which the homeowner must get caught up on his or her mortgage payments. The homeowner can avoid bank foreclosure homes by meeting this deadline. He or she will be able to keep his or her home as long as she continues to make regular mortgage payments from this point forward.
Even if the homeowner cannot meet the deadline for payment stipulated in the NOD and needs foreclosure help, he or she may still be able to avoid it. His or her options for doing so generally include:
- Negotiating another arrangement with the lender
- Having the loan modified
- Selling the home — either independently or through a real estate agent
As a prospective buyer, here are a few things to keep in mind. First, it is true that you may be able to get a good deal. You may be able to get the property in question for less than its market value. Second, it is important to have relevant due diligence done prior to finalizing the purchase. Generally this means enlisting a qualified professional to research: a) whether anyone other than the lender has legal claim on the property; and b) whether there is any outstanding tax debt attached to the property. Taking these steps reduces the likelihood that you have to take over payments for pre-foreclosure homes.
Finding Pre-Foreclosure Leads
If you are serious about buying a pre-foreclosure property, you’ll have to find some leads. There are a couple of ways to do so.
As we have already noted, a lenger starts the pre-foreclosure process by filing an NOD. Luckily, an NOD in real estate is a matter of public record. You can look for this type of document at your county courthouse. If you are not sure exactly where to look, start with the county clerk or recorder.
If your community still has a local or regional newspaper, you can also check the section called “public notices” for relevant information. Local or regional real estate agents may be another viable source for pre-notice of default leads.
Of course, there is always the Internet. Check websites such as Zillow, REDX, or foreclosure.com for information about homes in pre-foreclosure.
Pinpoint Your Preferred Neighborhoods
Remember one rule in real estate: “location, location, location.” For optimal results, target pre-foreclosure homes in neighborhoods with:
- Areas for outdoor recreation
- Good places to shop, eat and do business
- Good schools
- Pedestrian-friendly infrastructure
- Well-kept commercial and residential properties
- Properties that sell quickly
The Search for a Lender
If you are determined to buy a pre-foreclosure home, you’ll definitely need a lender and formal assessment of how much you can borrow prior to making an offer. To the homeowner, this demonstrates that you mean business.
So which lender is best for you? The answer depends on a few things. One is whether you are buying the pre-foreclosure home as an investment or for yourself. The second is the type of property you are buying and whether or not it is in good shape.
A real estate investor looks to “flip” a pre-foreclosure home that needs a lot of work can usually secure funding from an individual or company specializing in “hard money” loans. This is because this type of lender is more likely to finance a pre-foreclosure home regardless of its condition.
On the other hand, a buyer who is looking for his or her next home can probably secure a traditional loan for a pre-foreclosure home that doesn’t need much work.
In the unlikely event that you are considering a large property with several units, your best bet is usually to secure financing from a lender that engages in commercial transactions.
Identifying a Pre-Foreclosure Property
By now, you know what a pre-foreclosure is. You understand the difference between foreclosure and pre-foreclosure. You know where to look for pre-foreclosure leads. You know which neighborhoods to target, and you know which lender is most likely to provide financing. Perhaps you have even been pre-approved for a loan. Now the question is, how to find pre-foreclosures.
Assuming you’ve found a pre-foreclosure listing online or elsewhere and confirmed the property is in a good neighborhood, you must be prepared to act quickly. This is because the rules governing foreclosure differ from state to state. In some cases you may have just a few weeks to close the deal before the lender forecloses on the property in question.
Look at Comps Before Making an Offer
In some ways, trying to buy a home in pre-foreclosure is no different from any other real estate transaction. A buyer always needs a frame of reference before making an offer. A seller also needs context to gauge whether the offer is “fair.”
A comparable, or “comp” is a real estate term used for the purchase or sale price of a similar home in the same or a similar neighborhood. The homes are usually — but not always — in similar condition. Comps are key metrics that both parties use in negotiations, so be sure to look at them before approaching a homeowner about a pre-foreclosure sale.
Confirm the Pre-Foreclosure Status
Next, contact the lender or homeowner to verify that the home is in pre-foreclosure. If it is, this is your chance to ask if the homeowner is willing to sell. Even though he or she still owns the property at this point, remember to tread carefully if you are contacting the homeowner directly. A homeowner in this situation is probably under a great deal of stress and may be leery of any such inquiries.
Evaluate the Property
Along with looking at comps, evaluating the property helps you decide how much to offer for a home in pre-foreclosure. Ideally this evaluation will include a home tour and inspection to identify any cosmetic and/or structural issues. As we have already mentioned, the condition of a pre-foreclosure home may also determine whether a traditional lender provides financing.
Make an Offer
A general rule in real estate is that buyers want a bargain and sellers want as much as possible. In a pre-foreclosure home transaction, the buyer’s goal is to get a property that is worth more than the amount of the homeowner’s total mortgage debt. That way, he or she can get a good deal (at less than market value) and free the homeowners from their financial burden.
When making your offer, take the comps, the home assessment, the seller’s plight and your goals as an investor or homebuyer into account. As long as you offer enough to eliminate the seller’s mortgage debt, it will probably be accepted.
In Summary
The chance to buy a pre-foreclosure home is often tempting for real estate investors and individual buyers in search of bargains. Of course, struggling homeowners at risk of losing their homes also stand to benefit. However, these transactions are notoriously difficult for everyone involved. If you have interest to learn about buying pre-foreclosure homes or you need help with this type of transaction, contact us today.
