Do you want to know how to buy pre-foreclosure homes? Great. First, let us talk about what a pre-foreclosure is and how it differs from a foreclosure.
Pre-Foreclosure vs Foreclosure
Pre-foreclosure: This refers to the beginning stages of the legal process in which your lender attempts to repossess your property.
In the first step, the lender will file a notice of default stating that the homeowner has defaulted or is in breach of the mortgage contract.
Foreclosure is a process, and it varies by state. A foreclosure can take weeks or up to a year before the home is sold at auction.
Therefore, keep this in mind when you are searching to purchase a home.
During the pre-foreclosure stage, lenders are more willing to negotiate with homeowners to make up overdue payments.
So you might find that homeowners are preoccupied with trying to keep their homes instead of putting them on the market.
Giving them a good offer and a reason to sell their home to you might convince them to sell quickly.
Foreclosure: This is the legal process by which a lender (creditor) with a claim (lien) to your property attempts to collect on a debt owed by taking ownership and selling the property.
There are two types of foreclosures a judicial or non-judicial. However, some states have both options.
If you would like to learn more about the foreclosure process, check out this complete guide.
Benefits of a Pre-Foreclosure
- Motivated Sellers: Homeowners are in the process of losing their homes and all the equity they have spent years building. You can be a saving grace by buying the home while helping the homeowner avoid foreclosure.
- Negotiation: Not to take advantage of someone in a difficult situation, but chances are you will have the upper hand when it comes to negotiating the sale of the home.
- Avoid Auctions: If you are an investor looking to purchase off-market properties before they go to auction. Buying a home that is in pre-foreclosure can be a win-win for all parties.
- Lower Price: This isn’t a guarantee, but chances are you can find homes in pre-foreclosure at 10-20 percent below market value.
- Due Diligence: A buyer can do a standard inspection, including a title search to make sure the title is free and clear.
Cons of a Pre-Foreclosure
- Short Sale: If the terms and prices offered are below what is owed on the home. The lender has the right to refuse the offer of the short sale. The process can then drag on for months.
- Distressed Home: You might find that the home isn’t in tip-top shape or ready to move in. Often times angry homeowners destroy the property before they leave. Also, they neglect basic maintenance of the home because they know they won’t be living there much longer.
- Hidden Liens: Most homeowners won’t be forthcoming with information regarding liens. So make sure you get a title search before buying the home.
Buying a pre-foreclosure isn’t much different from buying a home that isn’t in foreclosure.
When we purchased our first pre-foreclosure, the only difference I noticed was the bank took their time processing and accepting my offer.
Besides that, the process was very similar to buying under traditional circumstances.
Steps for Buying a Pre Foreclosure
Determine the purpose and price of the home
First, you need to know why you are buying the home. Is it going to be a home you live in or an investment property?
If it is a house you plan to live in, a traditional mortgage will work as long as the home is move-in ready.
If it’s an investment property, you will have to pay cash or an alternate way of financing it if the property isn’t move-in ready.
The price will come down to your budget and the amount you can borrow.
Hire an Experienced Real Estate Agent
Having a great real estate agent that understands the market and has experience with buying foreclosures or short sales will go a long way.
An experienced agent will be able to get inside information on the property, which could result in you getting a lower price.
Most lenders and sellers won’t take your offer seriously if you are not represented by an agent.
Get Preapproved for a Mortgage Loan
This one is simple you need to be pre-approved for a mortgage loan before you begin your search.
It doesn’t make sense to run around looking for homes to buy, not knowing what your purchasing power is.
Besides, it’s going to be hard to find a realtor willing to work with you without a pre-approval letter.
Perform due diligence
Basically, due diligence is finding out all the legal, financial, and physical information about the home.
That way you can make an informed purchase that won’t cost you time and money in the near future.
- Physical due diligence: Hire a certified home inspector to overlook the property. You will be given an inspection report, detailing the issues found by the inspector. Pay close attention to the big five, roof, foundation, electrical, plumbing, and HVAC. Overlooking these items can cost you thousands in repairs.
- Legal due diligence: You want to make sure there aren’t any outstanding liens or judgments on the property before you purchase. Consider hiring a professional title company to perform research on the title and ensure it is free and clear.
- Financial due diligence: Make sure there isn’t any taxes, utilities, or other expenses outstanding on the home. Also, hire a certified home appraiser to get the fair market value of the property. Lenders will require an appraisal to be performed to ensure the property is worth what it’s selling for.
Closing on a House Checklist
- Get all your contingencies satisfied and out the way.
- Get your final mortgage approval. The last thing you need is your funding falling apart at closing.
- Review all closing disclosures. This document outlines your mortgage payments, terms, and closing costs.
- Final walkthrough. Go by the property and physically check that all is well and the home is in good standing.
- Bring all necessary documents for closing. Including, home inspection report, government ID, a copy of the contract with the seller, and proof of home insurance.
Get ready to sign a lot of paperwork at closing and getting the keys to your new home.