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Pre-foreclosure is a dramatic phrase, but it has a simple meaning: A homeowner has missed one or more mortgage payments. At this stage, the lender has not yet taken steps to foreclose on the home. They do not have possession of the property and have not put it up for auction — yet.
But pre-foreclosure is a signal that the homeowner may face challenges and want a way out. If you buy a pre-foreclosure home, the seller avoids a foreclosure notice on their credit report. They may also salvage some equity in their home. So it can be a win-win — but it’s also a potentially sticky situation that you must navigate carefully.
Before you learn how to buy a house in pre-foreclosure, it’s important to know what the term means. If a homeowner misses one or more mortgage payments, the lender may issue a notice of default. This is a heads up to the owner that the bank may take possession of the property if payments continue to be in default.
Typically, a notice of default gives the homeowner time. They can bring payments up to date and stay in their homes. If this happens, they will avoid foreclosure proceedings entirely.
But sometimes a homeowner cannot bring the mortgage up-to-date. While the lender may be in communication to try and negotiate payment arrangements, the owner may decide that selling is their best option.
For people looking to buy a home, this presents an opportunity. The seller may let go of their home for less than the market price. Buyers also get to review properties that do not yet appear in real estate listings or at public auction. There may be less competition and more potential for them to acquire the desired property for a decent price.
A typical scenario is this: An owner has a home with a market value of $500,000. They owe $450,000 to the bank. A buyer may offer $475,000. The owner makes enough to pay off the bank and pockets some excess funds. The buyer gets a home for less than the market price. They can then live in the home or turn around and sell it through a regular real estate listing.
Many notices of defaults are publicly available. You can check your county’s recorder office or pre-foreclosure listings on a site like Zillow. This may take some leg work, but there may be more information out there than you realize.
You can also advertise that you want to buy a pre-foreclosure home. Post notices and flyers in neighborhoods where there might be individuals who want to sell. Leave your message everywhere it is legal to do so, from coffee shop community boards to medical waiting rooms. You can also post your intent on real estate listing sites and invite people who have received a notice of default to contact you.
Many people pay cash for a pre-foreclosure home. That doesn’t mean showing up at a doorstep with stacks of bills — it means using existing funds and transferring them through a trusted third party, like a lawyer, investment agent, or escrow company.
However, it is also possible to get a home loan to buy a pre-foreclosure property. If you have a current lender for traditional properties, discuss this option with them. And, if you can get prequalification for a loan, you can better make your case to the seller. Also, if you are competing with another buyer who’s willing to pay cash, you could easily lose out to a cash offer.
Also, remember the hidden costs of getting a mortgage that may apply to a pre-foreclosure purchase. The various fees and insurance may change the amount you want to offer to the current homeowner.
Get an escrow company to handle the transfer of cash and property ownership. You should also consult with a lawyer to review all contracts. This may be a cash proposition, but that doesn’t mean you shouldn’t keep the legalities in order. Doing the sale the right way can make sure you get your title and the seller can fulfill their obligations.
The owner may not want to sell. Notice of default just means the owner is behind on mortgage payments. But they may have a plan to get up-to-date on payments.
The current home occupant may be going through a tough time. Job loss, serious illness, divorce, or other devastating life challenges can all result in missed payments.
The homeowner may not even want to talk to you. If you do want to approach an owner, show courtesy. Start by sending a letter before you take the risk of knocking on their door.
The lender may still be working with the homeowner. Banks who hold the mortgage must work with the homeowner during the pre-foreclosure period. So bear in mind that the owner may still want to make arrangements with their financial institution.
Now you know how to find a house in pre-foreclosure. There are many ways to look for properties that suit your taste and budget. The pre-foreclosure scenario provides an opportunity for sellers who may want to recoup some of their investment to connect with ready buyers. For purchasers, it may take some investigation to find the right property — but the results can be a solid return on investment.
Here is a shortlist of helpful steps: