What are Pre Foreclosures?
Pre foreclosures are properties that are in default, but have not yet been sold at foreclosure auction. When a homeowner misses mortgage payments, the lender will issue a Notice of Default, describing their failure to make payments. The Notice of Default is the first stage of the foreclosure process, and marks the beginning of the pre foreclosure period. The homeowner will then have a certain amount of time to pay off the debt. The length of this per differs from state to state, but is typically anywhere from one to three months, although in some cases it may be much longer. If the homeowner fails to pay off their debt, the property will be scheduled for public sale. On the day of the sale, the pre foreclosure period ends, and the property will be awarded to the highest bidder.
Pre Foreclosure Sales
Often times, one of the main ways homeowners in default look to pay off their mortgage debt before a foreclosure is by selling their property. Selling the home usually raises more than enough to cover the debt owed, and lets the homeowner avoid having a credit-ruining foreclosure on their record. A pre foreclosure sale, also known as a short sale, is often the ideal way for a homeowner to avoid a foreclosure.
For homebuyers, pre foreclosures can be chances to get great values on home purchases while also helping another homeowner avoid a foreclosure. Pre foreclosures require a good deal of negotiation; they are not as simple as just buying a foreclosure at auction. Sometimes during a short sale, you may have to actually work out terms of the deal with the lending bank as well, as the homeowner may have to get approval from their lender to sell the home. However, many buyers enjoy the hands-on negotiation process, which usually avoids the fast pace of an auction. And since the seller only needs to raise enough money from the sale to cover their remaining loan debt, pre foreclosures can be purchased for 20%, 30% or as high as 50% below their market value.
How to Buy Pre Foreclosures and Short Sale Homes
The important thing to remember about buying a pre foreclosure is that it's more like buying a For Sale by Owner (FSBO) property directly from the owner than buying a foreclosure from a bank or at auction. So the first stage in buying pre foreclosures is to secure your financing for the purchase. You need to have the cash ready to make an offer, because if a foreclosure deadline is drawing near, you want to be able to act fast to secure a purchase.
Finding Pre Foreclosures
Often the trickiest part about buying pre foreclosures is actually finding them. Defaults aren't often advertised, and usually you won't find published listings or information about a pre foreclosure in until a foreclosure sale is scheduled. The easiest way to find pre foreclosures as soon as they become available is to use an online foreclosure listings service. It's easy to compare properties and identify the best deals when you have as many foreclosure listings in from of you as possible, and a foreclosure listings service is the fastest way to find everything available in your area.
Make an Effort to Contact the Homeowner
Once you've found listings for properties that meet your general requirements, such as size, location, and general price range, you can begin to try to contact the homeowner. Now, it's important to remember that facing a foreclosure can be difficult, and that the homeowner is likely going through a good deal of stress. That's why it's key to not come on too strong. Often times, buyers will first send a letter to the homeowner inquiring about the opportunity to buy the property. They'll wait a week or so, and then try to contact the homeowner by phone. It's not a good idea to just march directly over to the property and start asking questions. Approach the situation with tact, and you're much more likely to get a positive response. Remember, the homeowner has probably considered selling already, and you want to make this difficult process as easy as possible for them.
Visiting and Inspecting the Property
Once you establish a working relationship with a pre foreclosure seller, you can make arrangements to visit the property and inspect it. Most buyers choose to hire a contractor to bring along with them. The contractor can make assessments of the property's condition, estimate the costs of any repairs the home might need, and check for important factors like a stable foundation and intact roof. You'll also want to arrange for a professional real estate appraiser to look at the property as well. A professional appraiser will give you an accurate assessment of the property's market value, and can also often give you some insight into the property's location. Knowing whether the property is in a growing area with good potential for increasing value in the future is just as important as getting a low price, because it all adds to your investment value.
Before you make an offer, you'll want to arrange for a title search of the property. You can arrange this with a local real estate lawyer, or if you have the expertise to read title documents, through the County records office. A title search will tell you if the property is under any other liens, or if the mortgage in default is the only debt held against it. Additional liens are important to identify, because you could become responsible for them if you buy the property. This could quickly erase any savings you stand to gain on the purchase.
Coming up with a Bid
A great way to decide on a bid is to compare the property with other recent sales in the area. Use the sale price of a similar home in a similar location as a guide. Then be sure to factor in the cost of any repairs or closing costs associated with buying the property. Finally, make an assessment of the property's future value. Will it go up in value? Or is the surrounding neighborhood not an area of increasing property value? Use all of these factors to come up with a bid, and make sure that the total amount you stand to pay for the home (including repairs and additional costs) is less than the appraised market value of the home. Remember, pre foreclosures have to offer savings to be valuable, and don't be afraid to scrap your plans and move on to the next property if you can't get the savings you want to get on a property. If you want to save 25% off market value, don't waste your time on a home that you'll end up paying more to fix up.
Making an Offer
Once you decide on a bid to offer, present it to the homeowner in person. If they approve, the next step is to help the owner negotiate with the lender to allow the sale. This will often involve some level of paperwork, and the more involved you are with helping the homeowner work through the deal with the lender, the more likely it will be that your deal is approved. Once the lender approves the sale, you can close on the property, which involves using your financing to pay the homeowner, as well as any associated closing costs.
The Benefits of Buying Pre Foreclosures
Buying pre foreclosures can be very rewarding not only for the great value and instant equity you get from buying below market price, but because you help another homeowner avoid foreclosure. Instead of letting their home go to the bank, you allow them to sell their property and usually have enough profit left to start over. For this reason, pre foreclosure sellers are often very motivated to get a deal done, and are very willing to work with buyers once you've introduced yourself.
Since pre foreclosures can be difficult to find, buyers often have to deal with less competition. If you're used to buying through an agent or negotiating the deal you want, pre foreclosures might be the best way for you to buy discount foreclosure real estate. And whether you're buying as an investment or to rent the property out, you have the opportunity to earn instant value. Buying below market price gives you an additional margin for profit on all future rentals, appreciation value, or sales.
Pre foreclosures can be a great option for any homebuyer, so be sure to look into what's available in your area if you're interested in buying foreclosures.