If you’re wondering how to buy a pre-foreclosure home, this is a stage in the home-buying process known for yielding real bargains, but it’s also one of the hardest buying stages to get to actual closure because these homes are not yet listed for sale.
Pre-foreclosure is just one stage prior to foreclosure. That means an owner of a pre-foreclosure home might be working to catch up on their mortgage payments or hoping to find a cash buyer that can help them avoid foreclosure on their credit report. This guide is a great place to start if pre-foreclosure homes interest you.
What is Pre-Foreclosure?
The pre-foreclosure stage is phase one of legal proceedings in reference to a distressed property. If the property is in the foreclosure process, there’s a high likelihood it will ultimately get repossessed by the bank or mortgager. Pre-foreclosure occurs when the lender files against the borrower with a Notice of Default. This notice references the borrower’s contract terms, lets them know they’re in default for non-payment, and that their lender has begun the legal process toward foreclosure.
This is perhaps the most important phase in the foreclosure process. Lenders aren’t in the business of evicting people from their homes if they don’t have to. In many cases, the lender will work with the homeowner to reverse their default status. This can be done by making up missed payments, requesting a modification, or choosing to sell the home before it transitions into full-blown foreclosure.
8 Steps to Find and Buy a Pre Foreclosure Home
Follow these eight easy steps in your search to find a pre-foreclosure home:
#1) Start looking
One of the toughest parts for pre-foreclosure home buyers is actually finding a home. Because property in this stage is not yet technically for sale, it’s most likely not listed in the MLS. So, you can search ProspectNow’s continuously updated off-market listings to start. You can also search public records or flip to the back of a local newspaper where foreclosure notices are usually listed. If you’re an agent or broker looking for pre-foreclosures, consider posting online, creating an email campaign, or putting up flyers in the area letting people know you’re interested.
#2) Go take a look
After you’ve located a pre foreclosure property, go take a look. You can scope out the neighborhood and get a feel for the home’s condition. You might happen to catch the owner outside and strike up a conversation. Remember, since the owner probably still lives here and may not be in the market to sell the property, be judicious. They may or may not be motivated to sell.
#3) Stay updated
Most of the time, owners on the brink of default end up resolving their financial issues. It’s a good idea to stay updated on the status of a property. You can get in touch with the property’s trustee. A foreclosure trustee is responsible for filing the paperwork that initiates a foreclosure, so they’ll always know the status of the properties they’re responsible for.
#4) Know your own budget
Homes in foreclosure often only require the delinquent amount to finalize the purchase, along with other typical fees, like title transfer and other closing costs. As you research homes in pre-foreclosure, check to see the loan balance, potential liens, and any other fines that may have been assessed.
Contact an appraiser in the area to find out the home’s estimated value. Then you’ll do some math – add up the costs from above and subtract them from the estimate. From there, you can determine how much you’re willing to put into a pre-foreclosure purchase.
#5) Make contact
Now that you’ve put in the homework, now’s the time to reach out to the owner. A letter or phone call (not email, as that can be considered too impersonal for this type of sale) is the perfect way to show the owner you’re interested. Keep in mind, in these instances, it’s often not just the property that’s distressed. Facing the possibility of losing a house is beyond stressful, so copious amounts of tact are necessary.
Depending on the temperature of the proverbial water, ask if you can tour the home and its property. This lets you add some more numbers to the above step in case there are any repairs. No matter what, it’s crucial that you remain courteous and considerate at all times.
#6) Negotiation
Supposing contact went well, and the owner is ready to sell you their home, it’s time to negotiate a selling price. A lot of factors figure into the final offer, such as appreciation if you were to do renovations, but your offer should be about 20% lower than your breakeven point.
Really like a property but not sure you can swing it? Consider enlisting the assistance of real estate investors. Negotiations can work in your favor if you give some leeway to the owner. For instance, offer them a couple of months to locate a new home, and they’ll probably be willing to come down on the asking market price a bit. You could even entertain the idea of a short sale.
#7) Get it in writing
After you’ve reached an agreement, draw up a contract. If you’re not experienced with purchase contracts, contact an agent or a real estate attorney for help. Be sure the contract specifies contingency related to a title company’s full title search and a professional home inspection.
#8) Finalize the deal
You should use an escrow company to help manage the transfer of funds and ownership.
Buying a Pre-Foreclosure Home – Final Thoughts
Not every owner in pre-foreclosure welcomes interest in their property, but that’s okay. They realize that selling their home before it becomes a foreclosed home helps them salvage equity and minimizes the damage a foreclosure can exact on their credit report.
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