Key Takeaways:
Foreclosure property investing is a common strategy in real estate, yet many investors have yet to uncover the benefits of pre-foreclosure listings. Read on to gain an understanding of the pre-foreclosure definition, how pre-foreclosures are different from foreclosures, and how to buy a house in pre-foreclosure.
What Does Pre-Foreclosure Mean?
Pre-foreclosure is the stage in which a Notice of Default has been issued to the property owner, but before the property has been listed to be sold through a pre-foreclosure auction. Although buying a pre-foreclosure can be challenging, investors often find that pursuing pre-foreclosure homes is well worth the effort, as they can usually be acquired below market value.
Pre-Foreclosure Vs Foreclosure
There is a distinct difference between a pre-foreclosure listing and a property that has entered foreclosure. A property enters foreclosure when the owner has failed to make mortgage payments. The lending institution takes possession of the property as collateral. Once the property is in foreclosure, the lender will re-list the property for sale, usually at a discounted price.
As mentioned in the section above, a pre-foreclosure process is usually in the stage in which the owner has already been given a default notice but has not been foreclosed upon yet. In line with this, pre-foreclosure properties are not necessarily up for sale until they are officially in the foreclosure stage.
Investors who identify owners in the pre-foreclosure stage have the benefit of negotiating a deal before the property has been listed. Daniel Chan from Marketplace Fairness suggests “pre-foreclosures can be a great investment opportunity, as they are often available at a discount, and the seller may be more motivated to sell than a homeowner who is in foreclosure”.
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Pros and Cons of Pre-Foreclosure Listings
Pre-foreclosure leads often bring opportunity for great profit, but they do come with some risks and hurdles that need to be taken into account. Here are some of the pros and cons of investing in these properties.
Pros
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Eager To Sell Those facing foreclosure are often eager to sell their property, as selling will help them avoid many of the hardships that come with a foreclosed home.
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Happy Homeowners The emotional toll that foreclosure can take on a homeowner is immense, and by purchasing their property you can help relieve stress, financial hardships, and legal issues.
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Less Competition Many agents stay away from foreclosed properties, so by becoming an expert in this type of investing you can have a massive advantage and a lot of market share.
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Profit Homes in foreclosure usually sell for below their market value, so by investing in these properties you are almost guaranteeing yourself equity both in the long run and in the short run. The profit potential on a foreclosed home is huge for a savvy investor.
Cons
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Poor Condition Of Property Many homes facing pre-foreclosure aren’t in great shape, as their owners didn’t have the resources to take care of them. This means that some homes will require a lot of work before being sold or rented.
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Extended Sales Process There are many more hurdles involved when closing on a foreclosed property. The sales process on a foreclosed home could take anywhere from a few weeks to a few years!
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Research & Extensive Knowledge Required Finding pre-foreclosure leads requires a lot of research. First you need to actually find the lead, and then you have to find a way to contact them. You also need to make sure that the investment will be a profitable one, which will require knowledge and research.
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Complex Situations The final con involves the homeowners and their many struggles. Contacting the homeowner can be difficult enough, but once you do you also need to be aware of their complex legal and financial issues. This is not as straight-forward of a process as a regular home sale due to these circumstances.
Where To Find Pre-Foreclosure Listings
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County court office: Laws and regulations differ from state to state, but oftentimes Notices of Default (NOD) are recorded with your local county court. Contact your local county court office and ask if and how you can search through their NOD filings.
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Online records: In some cases, counties provide property databases online. To check whether this service is available in your locale, you can visit your county website or search your county’s name followed by search terms such as “property data.” From there, you should be able to find any online records that are provided. Most county databases will provide the option to filter searches by property or document type, thus helping to create your pre-foreclosure list.
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Legal notices: You can also find properties that are up for pre-foreclosure auction by searching the legal notice section of the newspaper. This section will publish pre-foreclosure listings that will be going up for sale at a foreclosure auction. You can use the property data to search for the title company that recorded the NOD and then reach out to that company to obtain their list of pre-closure leads. However, note that this company may expect you to use them for your pre-foreclosure sale closing in exchange for their lists.
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Real Estate Agents: Since real estate agents have access to the MLS, they are a viable source for finding pre-foreclosure lists. They can narrow down their search in the MLS to only provide pre-foreclosure listings. Using a real estate agent means you will be getting professional help, and all the heavy lifting will be done for you. You will have peace of mind knowing they will handle any paperwork efficiently and correctly. They will be able to find a pre-foreclosure listing, schedule any appointments, and professionally negotiate in your place. You will have to compensate your agent, meaning the pre-foreclosure listing will technically be at a higher price to cover your agent’s commission. Also, you will have to work according to your agent’s schedule most of the time.
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Attorneys and Wholesalers: These professionals are familiar with working with pre-foreclosures, so they may be a valuable source for leads if they are willing to share them with you. Network and build relationships with attorneys who specialize in real estate, bankruptcy, foreclosure and probate, as well as any wholesalers in your area who have established buyers lsits.
How To Buy Pre-foreclosure Homes in 8 Steps
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Start your search. Part of what is pre-foreclosure real estate is the trickiness of finding properties. Those wondering how to buy a pre-foreclosure home and find pre-foreclosure listings for free should be prepared to spend a significant amount of time in the research and marketing phases. First, you can search through online pre-foreclosure listing sites, including those published in the county records. In addition, some general real estate listing sites, such as Zillow, offer a pre-foreclosure specific search filter. You can also start marketing yourself as a buyer through the use of bandit signs or on Craigslist.
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Get in your car. Once you have identified a property or two of interest, it is time to hop in your car and drive by the property to get an idea of its condition. However, keep in mind that the owner may still occupy the property, so be respectful.
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Get status updates. When identifying pre-foreclosure listings, also make sure to write down the name of the trustee or attorney, which will often be the title company. You should contact the trustee to get status updates on the property, for it is not uncommon for homeowners to resolve their financial issues not to lose their property.
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Know your numbers. If the data is provided, note the property’s outstanding loan balance and liens. You can use available data points to get a rough estimate of the would-be foreclosure sale price. Then, subtract the amount it will cost you to acquire the property to come up with the figure at which you would break even.
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Launch your campaign. Once you feel prepared, it is time to launch your campaign to the owner of the property. You may be able to reach out to them directly by phone call, but most likely, you will need to design a direct mail marketing campaign. During this step, keep in mind that the owners are in a state of distress, so tailor your messaging in such a way that highlights the solutions you can provide while remaining tactful. Some homeowners may be in a state of denial, so you be prepared to follow up as necessary.
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Make an offer. If the homeowner is receptive, you may venture to ask for a tour of the property to help you get better estimates on the cost of repairs or renovations. The estimated figure should be factored into your break-even number before making your offer to the homeowner and entering negotiations.
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Compose a purchase agreement. Once you and the owner have reached a deal, it is time to put it into writing. It may be in your best interest to work with a real estate attorney or an agent specializing in foreclosures to help you compose a purchase agreement. Be sure to include any applicable contingencies, such as one for an inspection or title search.
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Enter escrow and close. Once both parties have signed the purchase agreement, an escrow company will serve as the neutral third party to transfer funds and ownership before closing. Once all contingencies have been lifted and the closing date has been reached, the property should now be officially yours.
How To Make An Offer On Pre-Foreclosure Homes
Making an offer on a pre-foreclosure home is an art, and investors need to pay close attention to the cues from the current owner to determine their strategy. Some owners may be readily willing to sell, while others may be in a state of denial and completely unwilling to sell. Regardless, the easiest way to make an offer is to buy the property directly from the homeowner and offer to make up the back payments on their mortgage. Experts at Bombing Science suggest that “if you’re looking to buy a pre-foreclosure, it’s important to make sure that you have the time and money to make the offer, as well as being in touch with the seller before the foreclosure starts”. Investors should note that sellers are often in a state of distress; tactfully providing a fair solution so that the current owner can avoid foreclosure can help yield positive results.
What To Do After Closing
Investors should always take a few steps after closing on a foreclosure property, though they can often fall through the cracks. Start by changing all of the locks. After all, you don’t know who has a key to the property. Family members and friends may not be aware of the change in ownership, and if the property will be vacant temporarily, you don’t want anyone checking out your new investment. You can also set up the utilities in your name during this time. This will stop the old owners from receiving any more bills.
It’s important to survey the property for any issues and start your repairs as soon as possible. With a foreclosure, you may not always know what you are getting into before the closing. Have an inspector come out and note any areas you need to improve as part of the rehab. In many cases, time is of the essence, and you can save yourself money in the long run by making repairs sooner. It can be easy to skip over these steps after closing, but take time to protect your new investment.
Buying A Pre-Foreclosure vs. Foreclosure
Buying a pre-foreclosure is usually the better option when compared to a foreclosed home. A pre-foreclosure offers less competition from other buyers, as well as a chance to view and inspect the property before the sale. A foreclosure will often times have more competition to purchase the home, as well as no opportunity to view the property before purchasing it. One issue that may come up when buying a pre-foreclosure is that you are dealing with the seller directly, and there usually isn’t an agent to negotiate with. The seller is oftentimes more emotionally invested in the property and the entire process, so it may be more challenging than buying from an agent.
Finally, while there is less competition for a pre-foreclosure, you are not actually bidding on the property but buying it outright, so you may end up paying more than you would have at an auction. This is a disadvantage, but the advantage of the pre-foreclosed property is that you will know what you’re buying before you buy it, whereas with the foreclosure you may get a better price, but you are also going in with much less information. Both purchase types offer distinct advantages and disadvantages for investors, and it’s up to you to decide which path is right for you.
Summary
Investing in pre-foreclosure listings is a popular strategy amongst investors for multiple reasons. The main motivators include creating deals that offer deep discounts for the investor while helping the homeowner avoid foreclosure. Also, negotiating property deals before they even hit foreclosure auctions and lists often helps investors obtain an even bigger discount. Although finding pre-foreclosure homes and negotiating with the owner can be tricky, many investors find the payoff well worth the effort.
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