Distressed properties tend to be a mystery for many beginner real estate investors. Finding these investment properties is often quite tricky, and this fact alone stops a lot of would-be investors in their tracks. But familiarizing yourself with the ins and outs of distressed properties can be hugely rewarding, as it opens you up to a whole new category of real estate. One important distinction that eludes many beginners is the difference between pre foreclosure and foreclosure. Fear not; this guide will run you through everything you need to know about pre foreclosure vs foreclosure.
What Is a Pre Foreclosure?
In a majority of cases, property buyers will take out home loans from a financial institution to make their purchase. The mortgage lender will have a number of stipulations about how much is to be repaid every month. If a homeowner defaults on three or more mortgage payments, the lender issues a notice of default. At this point, the property becomes a pre foreclosure, as the financial lender may reclaim it if payment trends don’t resolve.
What Is a Foreclosure?
Foreclosed properties are those that have been reclaimed by their financial lenders. If a borrower is unable to keep up with their mortgage obligations for several months, the lender will eventually begin the foreclosure process to reclaim the property. Once it is back in the lender’s possession, it will most often be listed for sale. Quite often, foreclosed homes will be available to investors via real estate auctions.
The primary difference between pre foreclosure and foreclosure properties is, therefore, their owner. The former will still be within the legal possession of the borrower, while the mortgage lender legally owns the latter.
Pre Foreclosure vs Foreclosure: Price
When it comes to the price of a pre foreclosure vs foreclosure, the latter definitely has an edge. These properties are legally within the possession of financial lenders who have a highly vested interest in selling the property quickly. As such, they will be listed for generally low prices. As well, when making an offer on a foreclosure, real estate investors can negotiate the price down quite a bit.
Pre foreclosures, on the other hand, will be listed at somewhat higher prices. This is because they will be listed for sale by the owner who has not yet been through the process of foreclosure. In a bid to avoid that financial burden, the seller will be very motivated to sell at a lower-than-average price. Real estate investors are at an advantage when making an offer on a pre foreclosure since motivated sellers will often be willing to negotiate. It’s therefore very likely that you can reach a price point that satisfies both parties. But still, this won’t be quite as low as the cost of a foreclosed home. When it comes to pre foreclosure vs foreclosure price, the latter will always have the advantage.
Pre Foreclosure vs Foreclosure: Condition
With regards to pre foreclosure vs foreclosure livability and condition, the former is usually a clear winner. The individual selling will still be living within their pre foreclosure. Foreclosures, on the other hand, might be abandoned and in the process of deteriorating. Since the foreclosure process may take months, properties won’t be inhabited or maintained for long periods. As such, there’s a good chance that it won’t be in top condition.
That being said, the stigma about the condition of foreclosures may sometimes prove false. Although the general trend is that foreclosure investment properties will be declining in quality, keen investors will be able to find a sizable selection of properties in excellent condition. Fantastic options abound, and it’s up to the real estate investor’s wit to find them.
Related: The Ultimate Guide to Rental Property Maintainance
Pre Foreclosure vs Foreclosure: Real Estate Investment Strategy
The decision of investing in a pre foreclosure vs foreclosure depends quite heavily on your real estate investment strategy. As previously mentioned, foreclosures come in all shapes, sizes, and conditions. While one may be highly attractive to future tenants, others may be deteriorating. As such, foreclosures are often a favored source of property for investors who fix and flip real estate. Since these investment properties can be purchased for cheap, investors can use a chunk of the money saved to budget for repairs and upgrades. Thereafter, the property can be resold for a substantially higher price and make the real estate investor a sizeable profit.
Conversely, pre foreclosures could often be great options for those who intend to buy rental properties or even Airbnb investment properties. As mentioned, since pre foreclosures will have tenants within them until the moment of purchase, they will often be very well maintained. As such, investors often won’t need to pursue a lot of maintenance, repairs or upgrades when purchasing a pre foreclosure. They will be livable and attractive from the moment of purchase.
Related: 8 Best Real Estate Investment Strategies for Beginners
Buying a Pre Foreclosure vs Foreclosure
The decision of buying a pre foreclosure vs foreclosure might feel a bit irrelevant to some beginner investors: either way, they’re both quite hard to find. Since these types of investment properties won’t make their way to multiple listing services, they often remain just beyond the sight of the general public. But savvy real estate investors know where to look.
The process of finding these types of property is becoming a lot easier with the advent of some advanced online tools. For example, the Mashvisor Property Marketplace is a one-stop-shop for every listing you could hope for in this category. You’ll find a vast selection of bank owned homes, REO property, and pre foreclosures with just a handful of clicks.
Related: How to Find Foreclosures: The 9 Best Ways
What gives this specific platform an edge is the advanced real estate analytics that it will provide for each property for sale. Not only will you have listings obscured from MLSs, but you’ll also have a detailed breakdown of the investment potential of each one. Crucial figures like rental income, cash flow, cash on cash return, and cap rate will be readily available, saving investors the trouble (and time) of crunching the numbers. If you’re wondering how to buy a foreclosure or how to buy a pre foreclosure, the trick is knowing about the right tools.
Buying a foreclosure or a pre foreclosure can be hugely rewarding. By knowing the right real estate investment tools and the right strategies, both can be great investments. The head-to-head battle of pre foreclosure vs foreclosure ultimately comes down to your priorities as an investor and finding the right property.