How to Buy a Pre-Foreclosure Property
How to Buy a Pre-Foreclosure Property
Whether you work as a real estate investor full-time or are simply looking for a new property, everyone should be aware of how to buy a pre-foreclosure home. Buying a pre-foreclosure house can offer a variety of significant advantages, such as the ability to get a house below market price.
We’ve put together this article to explain how to buy a house in pre-foreclosure, so you can secure a property in a way that saves and can potentially make you a lot of money.
Before digesting the process of buying a pre-foreclosure house, it’s important that you have a better understanding of the foreclosure process as a whole. Pre-foreclosure is the stage that occurs after homeowners default (fall behind) on their mortgage payments but prior to the homes being auctioned off or becoming bank-owned properties. This means that the lender of the mortgage has made it public that the default has taken place, but the homeowner still technically owns the property.
How Long Is the Pre-Foreclosure Process?
The period of pre-foreclosure usually lasts a few months to give the homeowner some time to get their affairs in order. It’s during this period that the savviest of investors or home-seekers can swoop in to try and snap up the property.
The Stages of Foreclosure
The entire foreclosure process consists of three main stages: pre-foreclosure, auction, and bank ownership of properties.
This stage begins when a homeowner falls behind on their mortgage payments, after which the moneylender will issue a notice of default. This notice of default is intended to warn the homeowner that their account could be closed and their home repossessed should they not make the necessary payments.
If the default isn’t addressed and the mortgage isn’t caught up on, the home then goes to public auction. As an alternative to being shown on multiple listing services, auctions are more private affairs where potential buyers can bid on a home. Like with any other auction, the highest bidder leaves with the spoils.
If the auction is unsuccessful and no one buys the property, then it becomes a “bank-owned property” controlled by the bank that first provided the mortgage loan. At this stage, it can also be known as real estate owned (REO).
Reasons for Pre-Foreclosure
A home can go into pre-foreclosure for a variety of reasons, mostly related to financial difficulties faced by the current homeowner. These can stem from the loss of a job, high medical expenses, divorces, or increases in living costs. In other cases, the homeowner might simply find the maintenance and upkeep of the home to be too taxing, opting to default on payments to make the process of getting out faster.
It’s vital that you do your best to understand these circumstances before you enter negotiations to purchase a house at pre-foreclosure, as an empathetic approach will make your negotiations all that much smoother. What’s more, it’s important to try and provide a solution that’s beneficial to everyone involved.
10 Tips for Buying a Pre-Foreclosure Home
If you’re interested in buying a pre-foreclosure home or property, knowing the process inside out will streamline the experience. We’ve collated our top 10 tips to make buying smoother than ever.
1. Do Your Research
Make sure to understand your local real estate market in detail, gathering all the necessary information about trends in the area. Aspects like the after-repair value (ARV) are vital to comprehensive research.
2. Find Pre-Foreclosure Properties
The search for pre-foreclosure properties can be carried out by looking through public records, speaking with local real estate agents, and even browsing online foreclosure listing sites.
3. Get Pre-Approved for a Loan
If you’re a leveraging investor or looking for a new home, it’s important to get pre-approved for your loan before going into the deal. This shows the previous owner that you’re serious about the purchase while also laying out your budget in advance.
4. Inspect the Property
Once you’ve found the right property, you should hire a pro inspector to assess any damages or issues with the property, giving you a better idea of the actual value.
5. Estimate Repair Costs
If your inspection reveals any issues, you need to get an estimate for repair costs. This is vital for determining what your overall ROI could end up being, making it clear if the purchase is worth it.
6. Negotiate a Deal Empathetically
While this is an opportunity for you, it’s likely to be a crisis for the homeowner. Approach the situation with compassion and understanding while also showcasing your value to them. Creating a strong script can be useful in this step.
7. Check for Liens
Existing liens, or additional debts, can cause problems for new homeowners. Verify that the property is free from anything like this before you put your money down.
8. Work with a Real Estate Attorney
Even if you’re a seasoned professional in investment, pre-foreclosure purchases are more complex than typical deals. An attorney can guide you through the process, aiding with all the red tape and paperwork.
9. Plan Your Exit Strategy
Know exactly what it is that you want for the property. Are you going to flip it, rent it out, or live in it yourself? Knowing this is key before making your purchase.
10. Be Patient
As stated, the process can take months, often defined by some lengthy navigation through mountains of bureaucracy. Be patient and let the process work itself out—it won’t happen overnight.
Risks and Considerations
Buying a pre-foreclosure home might sound like an easy way to save and make money, but it’s still a risky business. As stated before, the people you’re buying from aren’t in a good situation, meaning they could approach the idea of selling with hesitation and even hostility. Similarly, pre-foreclosure homes aren’t generally in the best condition, which means you could end up increasing your budget significantly when accounting for repairs.
In terms of market considerations, you need to think about the competition you might face from other buyers. Going for a pre-foreclosure home may feel like beating the system, but plenty of investors and buyers will be looking for a good deal, so don’t think that you’re always going to get there first.
Be sure to seek professional advice on each specific property you approach, especially if you lack experience working in the industry.
Buying a pre-foreclosure home is an alternative way to approach real estate investment, whether you’re looking for somewhere to live or a property to make a profit on.
However, it’s a sensitive game that requires a more nuanced understanding of real estate as a whole. Check that you are accounting for all the risks we’ve expanded on in this blog while also using our advice whenever you take an active interest in pre-foreclosure properties.
Looking to expand your knowledge of the market? We recommend digging deep into podcasts, blogs, forums, and more before entering into negotiations as unique as buying a pre-foreclosure property.
For more information on real estate as a whole, visit our blog today.