In this post, you’ll learn the ins and outs of one of real estate’s most lucrative markets. Pre-foreclosure properties are diverse and appeal to a range of real estate buyers. We’ll start with the pre-foreclosure meaning and wrap up with the easy way to buy a pre-foreclosure property.
Here’s what we’ll cover:
- What is Pre-Foreclosure?
- The Pre-Foreclosure Timeline
- Pros and Cons of Buying a Pre-Foreclosure
- How to Buy a Pre-Foreclosure Home or Property
- Pre-Foreclosure Buying Tips
- The Easy Way to Buy Pre-Foreclosures
What is Pre-Foreclosure?
By definition, pre-foreclosure is the stage leading up to a lender foreclosing or repossessing a property. After several months of late mortgage payments from a homeowner, the lender will issue a default notice initiating legal action, and the real estate will enter the early stages of being repossessed. This period is called “pre-foreclosure.”
When a property hits the pre-foreclosure phase, the lender can choose to sell the non-performing note (the defaulted mortgage) to another investor rather than foreclose. This status presents investors with the opportunity to purchase property at below market price, making the purchase of foreclosure properties a great investment opportunity.
The Pre-Foreclosure Timeline
- Notice of Default
Lenders start tracking delinquencies after the homeowner’s first missed payment. Official documents are usually filed when the note is 90 days overdue. A Notice of Default is typically sent to the homeowner via certified mail. This public document includes details on the loan balance, incurred fees, and back payments. Grace periods and deadlines are often outlined, too.
- Legal Filing
If the homeowner doesn’t satisfy the lender’s requirements by the stated deadline, the foreclosure process begins. Requirements vary by state and property foreclosure type.
Judicial foreclosure: The lender files a court order allowing them to sell the property at auction.
Non-judicial foreclosure: The lender follows mortgage contract procedures without obtaining the court’s permission.
Generally, lenders aren’t allowed to start foreclosure proceedings until the loan is 90 days overdue. Though foreclosure is imminent, homeowners in most states can “make good” on the loan until the scheduled auction.
- Notice of Auction Sale
Once the loan is past due, typically 120 days, lenders issue a Notice of Sale. This document cites the property’s public auction date and foreclosure sale details. The notice may be sent to the homeowner via certified mail and published in the local newspaper or posted at the county courthouse.
- Public Sale
The property passes from pre-foreclosure to foreclosure when the bank repossesses the property. The lender sells the property to the highest bidder at public auction or purchases the property by submitting a credit bid on the approximate mortgage balance. The bank may elect to sell this real estate owned (REO) property at a later date.
Pros and Cons of Buying a Pre-Foreclosure
Pre-foreclosure properties can be excellent real estate investment opportunities. With great gain potential comes some risk, though; it’s important to consider the pros and cons of pre-foreclosure investing before you buy.
Pro: Discounted prices
Buying a pre-foreclosure means you may be able to acquire it for less than its market value, especially if you find a short sale property. Whether these low-dollar price tags present opportunities for a larger property, a better location, or instant equity gains, pre-foreclosures are packed with potential.
Pro: Opportunity for renovation
When you invest in a pre-foreclosure, renovations can boost equity fast. With a little market research, you can zone in on the area’s most popular home improvements. Whether it’s a kitchen update or a new addition, fixing up a foreclosure property should increase profits.
Con: Poor property condition and hidden liabilities
Pre-foreclosure conditions aren’t always pristine. Fixes are often apparent, though some issues inevitably go undetected until after the property sale. Pre-foreclosure investors risk footing the bill for unexpected repairs that can quickly narrow profit margins.
DIY buyers should be able to keep surprise repair and liability prices down, but if the pros have to get involved, costs can skyrocket.
Con: Financial risk
Legislation designed to protect homeowners in default also gives some sellers the right to rescind on a real estate transaction. In short, until the pre-foreclosure purchase process is complete, the homeowner can reverse the transaction.
Property inspections, legal fees, and other pre-purchase expenses can add up. If the homeowner accepts a loan modification, rescinds the transaction, or makes their back payments before you buy the property, all money invested is lost.
Bottom line: Property investors can mitigate risk and limit hidden costs by following the pre-foreclosure buying process.
How to Buy a Pre-Foreclosure Home or Property
Pre-foreclosures present an exciting opportunity for real estate investors to purchase discounted property at foreclosed property prices — without competing in real estate auctions. Buyers can approach the purchase a couple of different ways.
Method 1 – Buying a Pre-Foreclosure from the Homeowner
Method 2 – Buying a Pre-Foreclosure from the Bank
Buying a Pre-Foreclosure From the Homeowner
Homeowners retain property ownership while in pre-foreclosure status. Buying pre-foreclosures directly from property owners offers excellent profit potential, though the traditional buying process can be complicated.
Research and due diligence go a long way in the process. Each step helps investors determine a property’s risk and profit potential.
Step 1 – Find Pre-Foreclosure Properties
Finding pre-foreclosures requires time, energy, and top-notch researching skills. Various web platforms host pre-foreclosure listings, though sometimes you can source info locally.
Top Sites for Pre-Foreclosure Listings:
Newspapers, Craigslist, and county and bank websites are also good places to look for pre-foreclosure listings and Notice of Default documents.
Step 2 – Learn about the Properties
Dig into property details and figures to determine the best pre-foreclosure properties to pursue.
Property Information Sources:
- County websites for public land records, sale history, and tax assessments
- GIS maps for parcel information like lot lines, property size, and topography
- Public legal records for Notice of Default document
Step 3 – Visit Properties
Once you’ve narrowed down the pre-foreclosure property list to the ones with the most potential, it’s time for on-site visits. You probably won’t be able to go on the property during your first visit, but you can still learn a lot by assessing its exterior and surroundings.
Pre-Foreclosure Visit Checklist:
- Neighborhood – Pay attention to area property conditions, desirable features relevant to the property type, and other variables that could impact property values
- Property Exterior – Note neighboring property positions, terrain, and structures
- Property Distress – Check for obvious signs of damage and debris. Also note potential repair or maintenance needs, including roof and siding conditions, water features, landscaping, and presence of excess debris or refuse
Step 4 – Run the Numbers
You can determine whether a pre-foreclosure is worth buying by running a real estate breakeven analysis. By calculating all potential costs and profits, you can estimate the property’s return on investment (ROI).
You can simplify the breakeven calculation process by using a spreadsheet template to track each property.
What to Include in a Real Estate Breakeven Sheet:
- Purchase price
- Closing costs
- Realtor fees
- Lender costs (if financing purchase)
- Repair expenses
- Down payment
- Tax bills
- Estimated value after repairs
- Appraised value
Step 5 – Contact the Homeowner
Once you’ve found a pre-foreclosure property worth pursuing, it’s time to contact the property owners. Buyers have a couple of options:
- Pre-foreclosure mailers: Pre-foreclosure postcards and flyers are cost-effective and should include a brief message and the buyer’s phone number, email address, and mailing address.
- By Phone: Calling a pre-foreclosure property owner could be effective, though not all homeowners in default are open to discussing the property sale.
Negotiating A Pre-Foreclosure Deal with the Homeowner
Once you’ve made contact with the homeowner, you can begin sale negotiations. Empathy is a must when you’re making a pre-foreclosure deal directly with a homeowner in default. Losing a property to foreclosure is difficult in many ways, and racks up unexpected expenses like moving costs, legal fees, and rental lease deposits.
Look for the “win-win” when making a pre-foreclosure deal with a homeowner. Help out by handling bank negotiations, and determine how the sale can benefit everyone involved.
Homeowner Pre-Foreclosure: The Short-Sale Scenario
When a homeowner in pre-foreclosure owes more than a property’s worth, lenders may agree to a short sale. In this scenario, the owner gets lender approval to sell the property for less than the loan balance. Since the legal process can be complicated with a short sale, hiring a real estate agent could be crucial.
Buying a Pre-Foreclosure From the Bank
Investors can bypass homeowner negotiations and lengthy property search sessions by starting with the lender. Buyers “upstream” a pre-foreclosure by dealing directly with the bank.
Lenders have more negotiation flexibility than most pre-foreclosure property owners, giving buyers a chance to cut a better deal.
Contacting the Bank
Establishing contact with a pre-foreclosure property lender may be challenging. Bank foreclosure tracking methods vary and most employees who handle foreclosures are working in other roles, too.
Once you’ve found the appropriate contact, have all property details ready to make the inquiry as simple as possible. Be prepared to make follow-up calls, and streamline negotiations by limiting contingencies.
Distressed Pro’s BankProspector makes the lender-contact process easy. Our software cuts down on research by tracking up-to-date pre-foreclosures and contact details for lenders across the US. Learn how to upstream with Distressed Pro and you can fast-track your pre-foreclosure purchases and increase profit margins.
Negotiating A Pre-Foreclosure Deal with the Bank
During pre-foreclosure, the bank owns the loan note, aka the mortgage. Notes are negotiable, meaning they can be traded (bought and sold) just like real estate.
Banks are usually willing to work with investors during the pre-foreclosure stage to avoid the time, legal costs, and risks associated with the foreclosure process. Property condition vs. value, estimated cost of repairs, and liabilities are all ways to justify a reasonable, though possibly lower, offer.
What Happens When You Buy a Mortgage Note
When you buy the note, and it’s in default, you have the right to collect what’s owed according to the note’s terms. You can then set up mortgage arrangements with the property owner.
Buying a pre-foreclosure note means you may be able to do loan modifications or workouts that an institutional lender can’t do. Because you bought the note at a discount, the deal will still be profitable.
Or, you can foreclose on the defaulted note to retain ownership of the property instead. Complete the foreclosure process, and you’ll own the real estate.
Pre-Foreclosure Buying Tips
Whether you buy a pre-foreclosure from a lender or homeowner, there are a few ways to limit risk and protect your investment.
Due diligence is critical.
Pre-foreclosure due diligence should start early in the purchase process. Buyers should first establish funding, which may require some non-conventional means. Once finances are secured, it’s time to research property values, previous and potential repairs, and deed and tax histories.
Other property aspects to consider:
- Average utility costs
- Existing liens
Hire experts to handle the legal process.
Hiring professionals for the legal process can ensure most important aspects are covered. Title companies can check the property’s existing title for liens (legal claims made on the property), and real estate lawyers can assist in negotiations, contract write-ups, and other issues that come up.
Determine repair costs before you buy.
Pre-foreclosure property owners often leave distressed properties in disrepair. Assess exterior and interior property conditions carefully and record any defects or repairs.
A professional home inspection may be the best approach, especially for investors who are unfamiliar with home mechanics. A home inspector’s report and repair recommendations can aid in the pre-foreclosure price negotiation process.
Get the deal in writing.
Make sure all negotiated prices and expectations are in writing. All purchase-related documents should be in legal, written format complete with dates, figures, and signatures. Without a valid paper trail, investors risk losing the property and financing at any point of the purchase process.
The Easy Way to Buy Pre-Foreclosures
Pre-foreclosure is a period of limbo for both lenders and delinquent homeowners. Whether a mortgage note’s “underwater” or has some equity, the need to sell is urgent. The lender prefers to allow a sale because selling the home is less costly than allowing things to progress to foreclosure.
Real estate investors should consider pre-foreclosure one of the best ways to expand a portfolio. Finding pre-foreclosures is one thing; establishing a profitable pre-foreclosure and entering a successful negotiation with the lender or the seller is where investors get ahead.
Don’t waste time and resources on your next pre-foreclosure purchase. Learn how to invest in pre-foreclosures with Distressed Pro’s expert training courses and free BankProspector webinars. You’ll benefit from our experts’ years of experience and walk away with the tools you need to accelerate your investments.
BankProspector software is the ultimate pre-foreclosure buying tool. Our program streamlines the process by unlocking access to mortgage note information and lender contacts. Investors can bypass some of the traditional steps by getting property details and communicating directly with lenders long before the property hits pre-foreclosure status.
When it’s time to enter the pre-foreclosure-buying market, it’s time for Distressed Pro.