For one unavoidable reason or another, a homeowner may miss their monthly mortgage payment and face potential default on their property. Often, the borrower’s failure to make the required mortgage payments will prompt the lender to issue a notice of default to initiate foreclosure of the home. However, before the start of the actual foreclosure process, owners of pre foreclosure homes can still take action in order to save their property, such as negotiating with the lender for more favorable loan terms.
Many real estate investors find pre foreclosure homes a profitable venture. Such types of properties are usually sold below their actual market value, allowing the buyers to make a few thousands of dollars more in profit if they decide to fix and flip or resell them later.
To be able to make money from them yourself, you need to learn how to find pre foreclosure homes for sale. In this blog post, we give you several helpful tips on locating and buying pre foreclosure properties. Read on!
What Are Pre Foreclosure Homes?
A pre foreclosure happens when a property owner fails to honor their mortgage payments and is therefore in danger of being foreclosed upon. During the said period, the homeowner could choose to pay off the outstanding balance owed or sell the property. Real estate investors love buying pre foreclosure properties for two main reasons:
- Pre foreclosure homes are not listed, meaning less competition from other buyers.
- Since pre foreclosures are usually sold below market rates, they are great real estate deals.
However, potential buyers should keep in mind that they will be purchasing the property as-is. They may need to cover the cost of inspections and repairs, potentially increasing the overall financial requirement for such investments. Also, on a few occasions, the bank or lender will impose additional conditions on the proposed sale, which can delay the deal’s closing.
How to Find Homes in Pre Foreclosure
Many property buyers interested in pre foreclosure investing don’t quite understand exactly how to buy a pre foreclosure home. Often, they see pre foreclosure properties listed on a number of popular websites and try to bid on them at once, attracted by the below-market price of the homes.
However, the process can be time-consuming and full of pitfalls for the uninitiated. Interested buyers may try to reach out to the seller and try to make a deal themselves. However, such offers might be illegal in some states that limit impose restrictions on what the buyers can and cannot do during the pre foreclosure stage.
Below, we’ve outlined the seven steps for anyone that wants to know how to find and buy a pre foreclosure home.
1. Comprehend the Pre Foreclosure Process
While you, as the buyer, may not be personally affected by the pre foreclosure, it’s key to understand the circumstances surrounding the sale. Here’s what you need to know:
When it comes to the foreclosure process, pre foreclosure is the first step. Though it varies from one state to the next, the process usually starts when the homeowner defaults on three mortgage payments consecutively. The bank will then issue a pre foreclosure notice indicating that it is getting ready to foreclose on the property.
Once the default notice is served, the property owner will be given about 2-3 months to act in order to block the foreclosure process. It could mean paying the outstanding loan balance entirely or renegotiating a new payment agreement.
Alternatively, the homeowner could choose to sell the real estate investment himself/herself in order to avoid foreclosure. The property is usually sold at a discount since the owner is highly motivated. However, it is not always true that pre foreclosure homes are distressed or located in poor neighborhoods.
2. Find Leads
Learning how to find pre foreclosure leads is very important when it comes to how to find a pre foreclosure. The best way to find pre foreclosure homes for sale or pre foreclosure auctions is by consulting an experienced real estate agent. Licensed agents are able to access the Multiple Listing Service (MLS), where pre foreclosure homes near me are often listed.
Such agents are usually paid at the end of the sale from the seller’s proceeds. You can also find such types of off market property through county public records, local newspapers, and referrals from real estate wholesalers or local attorneys. Another great source of pre foreclosure leads is websites such as Zillow, RedX, Mashvisor, or Foreclosure.com.
To learn more about finding pre foreclosures in the Mashvisor Property Marketplace, click here.
3. Analyze the Neighborhoods
Once you’ve found some leads on pre foreclosure homes for sale by owner, take time to conduct a real estate market analysis of the neighborhoods you are targeting. Whether you are targeting future buyers or tenants, make sure the neighborhood is a convenient place to work and live in. Here are some of the specific things you need to take note of in a neighborhood analysis:
- Walkability score (the ability to get around on foot)
- Attractions and amenities such as local businesses, restaurants, malls, and parks
- Reputable schools
- Condition of nearby homes and buildings
- The state of roads, street lamps, and sidewalks
- Days on market
- Average rental income
- Average occupancy rates
- Average return on investment
Mashvisor is one of the best tools for carrying out a neighborhood analysis to determine the local ROI (return on investment). Check out our heatmap analysis tool. You can also use our real estate investment calculator to conduct an investment property analysis and even a comparative market analysis for pre foreclosure homes!
4. Look for a Lender
Before you buy a house in pre foreclosure, you need to get a pre-approval letter from a lender. This letter will show you what your maximum borrowing amount is. You can then focus on investment properties that fall within your budget. A pre-
approval letter also gives the seller an indication that you are a qualified, serious buyer. Some agents will not even want to associate with you if you don’t have this letter.
Here are some of the documents you need to get a pre-approval letter:
- An identification document such as your passport or driver’s license
- Credit report
- Tax return records
- Bank statements
- Recent payslips
Please note that the specific documents required will vary depending on the kind of mortgage option you want for financing a pre foreclosure investment.
Related: How to Get a Mortgage for Investment Property: A Beginner’s Guide
5. Make an Offer
With the pre-approval letter in place, you can now make an offer on your preferred pre foreclosure home. Generally, it takes 30-60 days to complete the closing process on the property. The period can be much shorter if you are working with a hard money lender or paying cash.
When making an offer, it is advisable to work with a real estate agent since they are more conversant with the process. The agent will negotiate with the homeowner or bank on your behalf. Once the seller accepts the offer, you can then deliver the purchase contract to the bank so they can start underwriting the loan.
Related: How Much to Offer on a House: Investor’s Guide
6. Obtain a Financing Commitment
A financing commitment means that the lender is promising to loan you the cash based on the information you provide. The commitment is given once the lender is satisfied that you and the pre foreclosure meet their underwriting requirements. Here are some of the things a lender will require before issuing a financing commitment:
- Complete mortgage application
- Application fee
- Property details
- Documentation showing the source of down payment
- Property appraisal
- List of current assets and liabilities
- Purchase contract
7. Close on the Investment Property
Closing is the last step in the process of how to buy a pre foreclosure. It is where the deed of ownership is transferred to the new owner’s name. The transfer usually occurs at a title company and takes 1-2 hours. You will then be required to pay the closing costs, which include lender fees, title insurance, transfer taxes, and property taxes. The costs could add up to about 2%-5% of the purchase price. Once the closing step in buying a pre foreclosure is done, the income property is yours.
Final Tips
After completing all the steps of how to buy a pre foreclosure house, make sure that the utilities are transferred to your name. Find a locksmith and get all the locks in the condos, multi family homes, or single family homes changed. If the pre foreclosure home needs some renovation, start working on it right away. Once the property is in good condition, advertise it for sale or rent it out!
Conclusion
Pre foreclosure homes can be a lucrative investment for any real estate investor if you know how and where to find one. You also need to keep in mind a few things in order to be successful in investing. We hope you find the tips we’ve listed above helpful.
For your real estate investment journey, Mashvisor is here to help you with its comprehensive data analytics and useful tools for finding and analyzing investment properties. Make sure to sign up for a trial or schedule a demo to access and learn more about Mashvisor’s various offerings.