Many would-be homebuyers are unaware of how foreclosures work or what constitutes a pre-foreclosure property. They see those homes on popular websites and want to bid on them because they believe they can get a better deal than the market.
Investors in pre-foreclosures may try to negotiate with sellers, but such offers may be illegal. When homeowners fall behind on their mortgage payments and are in the pre-foreclosure stage, many states have laws governing what investors can and cannot do.
Important Points to Remember
- When a homeowner defaults on their mortgage payments, the house is considered to be in pre-foreclosure.
- The majority of pre-foreclosure homes are not for sale because the homeowners may be trying to pay missed mortgage payments.
- When a house is listed as a "short sale," it could be in the process of foreclosure, or the homeowner could be underwater on their mortgage.
- Search for pre-foreclosure homes on foreclosure websites or approach homeowners in communities built during the real estate bubble.
What Is Pre-Foreclosure and How Does It Affect You?
When a homeowner falls behind on their mortgage payments and faces foreclosure, the home is considered in pre-foreclosure. For a home to be considered in pre-foreclosure, no formal foreclosure notice must be filed in the public records. On the other hand, the notice of default is more often than not made public.
The seller has a limited window after receiving written notice to exercise their right of redemption by making up missed mortgage payments and bringing the loan current. The property will no longer be in pre-foreclosure if they are successful. If the seller does not make the mortgage payments, the home will be foreclosed on and seized by the lender or bank.
The homeowner may want to sell their home before the bank seizes it, but this is not always the case. Similarly, just because a home is in pre-foreclosure doesn't mean it will go through the foreclosure process and end up in the bank's real estate-owned (REO) inventory.
What Is a Short Sale, Exactly?
When a pre-foreclosure home is listed for sale, it is classified as a short sale rather than a foreclosure. The majority of pre-foreclosure homes are not for sale. Not every short sale, however, is a pre-foreclosure. A short sale may be possible even if a seller is current on their mortgage payments. Pre-foreclosure would not apply to sellers who are up to date on their payments.
Purchasing a Pre-Foreclosure Property
The simplest way to purchase a pre-foreclosure home is to assist the seller in making up the lender's back payments and then arrange to purchase the home directly from the seller. However, one flaw in this strategy is that some homeowners do not want to sell.
Dealing directly with the seller can be profitable for an investor because the seller may not have a good idea of how much their home is worth. Sellers frequently have no idea how much they could get for their home if they sold it on the open market. This means that an investor could take advantage of this seller, even though the investor would most likely deny it. The investor would like to think that they are assisting the seller in avoiding foreclosure, but the investor is most likely planning to buy the house for much less than it is worth and possibly even pay the seller a few thousand dollars to relocate.
Note: Because so many sellers fall prey to this tactic, some states have enacted legislation to protect homeowners facing foreclosure. Some of these laws give defaulting sellers the right to cancel a transaction after a certain amount of time has passed. The seller may be able to reclaim their home if that right is not provided.
What Are the Best Places to Look for Pre-Foreclosure Homes?
A pre-foreclosure home will most likely be sold at market value by the time it is listed as a short sale by a real estate agent. The banks must approve a short sale. Appraisers and other real estate agents are hired to provide broker price opinions (BPOs) or estimated home values.
For instance, in the case of a pre-foreclosure home, some savvy buyers would prefer to bargain with the seller before the property becomes a short sale.
Buyers can search popular websites that pull feeds from an aggregator or pay for the feed to find a pre-foreclosure home. Pre-foreclosures are also listed on some foreclosure websites.
If you have a lot of time on your hands, you can contact each of the homeowners to see if they are interested in selling.
Another option is to purchase a pre-foreclosure as a short sale before the seller lists the property with a real estate agent. You can also find out how to search for default notices by contacting your local county court.
Communities in Real Estate Bubbles
Another simple way to find these homes is to look for communities that were built during the real estate bubble and still have many of the original owners.
Some of these homes may still be flooded, especially if the area has not fully recovered. These homeowners are most likely not delinquent, but they may be unable to sell without resorting to a short sale due to a lack of equity.
When a house is listed as a short sale, most agents will market it to the largest possible pool of buyers, which means you will lose your advantage. Keep in mind that if you buy a home in pre-foreclosure, you're buying it "as-is." Because you'll have to pay for inspections and repairs, the lender may take longer to approve the sale.
The majority of first-time homebuyers would be better off focusing their efforts on finding regular sales. Choose a good real estate agent to assist you in finding a home and negotiating a deal.
Most Commonly Asked Questions (FAQs)
What happens at a foreclosure auction?
An auction is the lender's first attempt to find a buyer for a home that the previous owner has foreclosed on. The specifics of how these auctions work will vary depending on where you live, so look up auctions in your area on city or county government websites. Before the auction, you will usually have access to information about the house, but you will not be able to tour it. It would be best to bid as much as you're willing to spend on the home once the auction begins, whether in person or online.
What is a foreclosed REO property?
Real-estate owned (REO) foreclosures are those where the house has been through the foreclosure process and is now owned by the lender. A lender, such as a bank, adds a foreclosed property to their REO inventory when they are unable to sell it at auction.