Real estate investors are always looking for ways to find profitable real estate deals. One common strategy is buying preforeclosure properties. However, many investors don’t understand the potential of pre foreclosure investing and how to buy a pre foreclosure. Read on to understand the meaning of pre foreclosure in real estate, the pros and cons of buying one, and how to find them.
What Does Pre Foreclosure Mean?
Pre foreclosure is the stage where a homeowner is in default of their mortgage payments for three or more months and the lender files a notice of default (NOD). After receiving a written notice, the property owner will have a certain amount of time to pay off the outstanding debt or sell the home to pay off the loan. If the homeowner pays off the outstanding debt during the pre foreclosure period, they will be able to reverse the default status and the home will no longer be in pre foreclosure. If the seller remains in default and doesn’t make the mortgage payments, the home will eventually be foreclosed upon and repossessed by the lender or bank.
So, how long is the pre foreclosure process? The pre foreclosure process begins when the mortgage lender files a default notice, which will usually be public record. This notifies the homeowner that the lender will take legal action to foreclose if they don’t pay the debt. Depending on the procedure of the state, the pre foreclosure period can last a few months to years. At the end of this period, a public pre foreclosure auction or trustee sale is arranged by the lender.
Pre Foreclosure vs Short Sale
If the defaulted borrower fails to work out a repayment plan with the lender, they have the option of selling the home as a short sale but with the approval of the lender. The bank has to establish whether the sales price is acceptable. This is usually the last resort for the borrower as they try to recoup as much of the loan amount as possible. The sale price may be less than the outstanding loan balance. This is the reason the sale is said to be “short”.
The lender will usually allow a short sale since it is generally more efficient and cheaper for them rather than bearing the expense of foreclosing. In a short sale, the homeowner lists the home and remains in possession of it. However, it is important to note that not every short sale is a pre foreclosure. A borrower may still do a short sale even when they are current on their mortgage payments. Homeowners sometimes choose to sell their homes before their defaults reach the pre foreclosure stage. Such sellers don’t fall into the pre foreclosure category.
Related: What Does a Short Sale Mean for the Buyer?
Pre Foreclosure vs Foreclosure
There is a difference between pre foreclosure and foreclosure. Pre foreclosure describes the period leading up to foreclosure. When the borrower does not cover the due mortgage payments or sell the home during this period, the lender will try to recover the balance of the loan by forcing the sale of the home used as collateral, typically at a public auction. This legal process is referred to as foreclosure. At this point, the lender will take possession of the property. They are likely to sell it at an even lower price to avoid its ongoing expenses like insurance and taxes.
Related: What Is a Foreclosure? How Can You Invest in One?
Should You Buy a Pre Foreclosure?
It’s important to note that pre foreclosure homes are not necessarily put up for sale before officially reaching the foreclosure stage. It is possible that the property owner is yet to take active steps to list the pre foreclosure home for sale or even conclusively decided to sell it. Making an offer to them might, however, tip the scales. If you identify homeowners who are in the pre-foreclosure stage, you will be able to negotiate a better deal before the property is listed.
As a real estate investor, you may be wondering whether buying a pre foreclosure house is a good investment. Well, before you dive into the world of pre foreclosure investing, you should first be aware of the pros and cons of buying a pre foreclosure property.
Pros
1. Discounted Prices
Pre foreclosure properties typically sell for below market value. Since the property sellers are usually going through financial hardship, they would rather sell their home at a discount than get foreclosed upon and lose the home. Purchasing such an investment property can increase your profit and help you build equity.
2. Rehab Potential
Most pre foreclosures need renovations and repairs. If you can renovate the investment property without spending too much money, you can substantially increase the property’s value.
Cons
1. Poor Property Condition
Many pre foreclosure homes are in poor condition and in need of repairs and renovations. If the property is in a poor state, you should factor in the cost of these repairs and renovations. Otherwise, you risk ending up with costs that exceed your budget.
2. Hidden Liens and Liabilities
Buyers of pre foreclosure homes should know that the homes may carry liens and unpaid taxes that they will have to pay if they purchase the properties. Sometimes the seller or the homeowner may not reveal them to you. To find this information, make sure you do a title search and complete your due diligence.
3. Learning Curve
Buying a pre foreclosure is not as straightforward as buying regular investment properties. First, you need to understand the pre foreclosure process. You should also know how to find a pre foreclosure property, preferably when they enter the first stage of the process.
Where to Find Pre Foreclosure Listings
The biggest challenge in pre foreclosure investing is usually finding pre foreclosure leads. Where can you buy a pre foreclosure home? Here are some ways to find them:
1. Real Estate Agent
A real estate agent can be a good source of pre foreclosure leads. They have a good understanding of the real estate market and have access to the MLS. Moreover, an agent will do most of the legwork for you, including negotiating offers.
2. County Court Office
Notices of Default are typically recorded in local county courts, depending on state laws and regulations. You can contact your local county court office and enquire about if and how you can search through their NOD filings.
3. Legal Notices
Searching for legal notices in the newspaper is also a good way to find pre foreclosure properties that will be going up for auction. You can use this data to search for the title company that recorded the NOD. You can then contact them to get their list of leads.
4. Online Records
Some counties may provide pre foreclosure data online. You can visit your county website to check if this service is available in your area.
5. Mashvisor Property Marketplace
To quickly and easily find pre foreclosure properties, you can visit the Mashvisor Property Marketplace. The tool is centered around off market real estate in the US housing market.
Related: 10 Easy Ways to Find Off Market Homes for Investment
The Bottom Line
Although buying a pre foreclosure property can be challenging, it is well worth the effort. Provided you understand what buying pre foreclosures involves and are prepared for the risks, they are generally a great real estate investment.
