Many prospective homebuyers do not understand how foreclosures work or what makes a home a pre-foreclosure. They see these homes listed on popular websites and want to bid on them because they think they can get a good deal at a below-market price.
Investors in pre-foreclosures may attempt to make deals with sellers, but those offers may not be legal. Many states have laws about what an investor can and cannot do when homeowners are behind on their mortgage payments and in the pre-foreclosure stage.
- A home is considered pre-foreclosure when the owner is in default on their mortgage payments.
- Most pre-foreclosure homes are not listed for sale, as homeowners may try to make up missed mortgage payments.
- When a home is listed as a “short sale,” it may be in pre-foreclosure or the homeowner may be underwater on the loan.
- To find pre-foreclosure homes, search sites that specialize in foreclosures, or approach owners in communities built during the real estate bubble.
What Is Pre-Foreclosure?
A pre-foreclosure home is when the owner is in default on their mortgage payments and is at risk of being foreclosed upon. It is not necessary for a formal foreclosure notice to be filed in the public records for a home to be considered a pre-foreclosure. However, more often than not, the notice of default will be made a public record.
After receiving written notice, the seller has a certain window in which they can claim a right of redemption by making up the mortgage payments and bringing the loan current. If they successfully do so, the home will no longer be a pre-foreclosure home. If the seller remains in default and continues to stop making the mortgage payments, eventually the home will be foreclosed upon and seized by the lender or bank.
In some cases, this means the homeowner will want to sell their property before it's seized by the bank—but not necessarily. Similarly, being in pre-foreclosure doesn't necessarily mean the home will go through the foreclosure process and end up in the bank's real estate owned (REO) inventory.
What Is a Short Sale?
If a pre-foreclosure home is listed for sale, it will be called a short sale, not a pre-foreclosure. Most pre-foreclosure homes are not for sale.
However, not every short sale is a pre-foreclosure. Some sellers can be current on their mortgage payments and still do a short sale. Sellers who are current on their payments would not fall into the pre-foreclosure category.
Buying a Pre-Foreclosure Home
The easiest way to buy a pre-foreclosure home is to help the seller make up the back payments to the lender and then arrange to buy the home directly from the seller. One problem with this plan, however, is that some sellers do not want to sell their homes.
It can be profitable for an investor to deal directly with the seller because the seller may not have a very good idea of how much their home is worth. Sellers often do not know how much they could get by selling their home in an open marketplace.
This means an investor can take advantage of this seller, although the investor would probably not admit to it. The investor would prefer to believe they are helping the seller to avoid foreclosure. But the investor is most likely planning to buy the home for much less than it is worth and maybe give the seller a few thousand dollars to relocate.
Because so many sellers fall victim to this strategy, some states have passed laws in an attempt to protect vulnerable homeowners who are facing foreclosure proceedings. Some of these laws give sellers in default the right to rescind a transaction after a certain period of time and, if that right is not provided to the sellers, the sellers might be able to get the home back.
Where to Find Pre-Foreclosure Homes
By the time a pre-foreclosure home is listed by a real estate agent as a short sale, the home will most likely be sold at market value. Banks must approve a short sale for a short sale to take place, and banks hire appraisers and other real estate agents to perform broker price opinions (BPOs), or estimated values of the home.
Some astute buyers would prefer to negotiate with the seller before the home becomes a short sale—for example, in the case of a pre-foreclosure home.
To find a pre-foreclosure home, buyers can search popular websites that pick up feeds from an aggregator, or they can pay for the feed. Some foreclosure websites publish pre-foreclosures as well. If you have a lot of time, you can contact each of the homeowners to find out if any of them are interested in selling.
Another angle is to try to buy a pre-foreclosure as a short sale prior to the seller listing with a real estate agent. You can also contact your county court to see how you can search for notices of default.
Real Estate Bubble Communities
Another easy way to find these types of homes is to target communities that were built during the real estate bubble, where many original owners remain.
Some of these homes might still be underwater, especially if there was no full recovery in that area. These homeowners are probably not delinquent, although they might not be able to sell without doing a short sale because they may have no equity.
When a home is listed as a short sale, most agents will expose the property to the greatest pool of buyers in the marketplace, which will no longer give you the edge. If you're buying a home in pre-foreclosure, keep in mind you're buying it as-is. You'll need to cover inspections and repairs, so it may take more time for the lender to approve the sale.
Most first-time homebuyers would do better to concentrate efforts on locating regular sales. Pick a good real estate agent to help you buy a home and can help you negotiate.