Buying a Preforeclosure Home

Can You Profit By Buying a Home in Preforeclosure?

man sitting on house stoop with for sale sign behind him
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Home buyers are very attracted to preforeclosure homes for two main reasons. First, they want to seize an opportunity to be the first buyer to bid on a home, without competition from other buyers that often happens in multiple offers for certain types of very desirable homes. Second, buyers want a good deal, meaning they want to save money by paying less than market value for a home.

Unfortunately, both of those reasons, while valid to a home buyer, are not very realistic.

The word preforeclosure is a hot commodity, though, and that's why buyers are gravitating toward them. Many home buyers do not understand how foreclosures work or what makes a home a preforeclosure. They simply know that they find these homes listed on popular websites, and they want to buy them.

If we were to point the finger of blame at anybody for this misinformation, it would be the popular websites that feature these homes. They intentionally target naive home buyers who are just searching for a home to buy, and these poor buyers get all excited over nothing.

That's not to say that a buyer can't buy a preforeclosure. The investors who specialize in preforeclosures often attempt to make deals on the side with sellers that may or may not be legal in all circumstances. Many states, for example, have laws about what an investor can and cannot do when homeowners are behind on their payments and in the preforeclosure stage.

What Is Preforeclosure?

A preforeclosure home is a home in which foreclosure proceedings may or may not have  commenced. It is not necessary for a formal foreclosure notice to be filed in the public records for a home to be considered as a preforeclosure; however, more often than not, the notice of default will be made a public record.

A preforeclosure means the home is not yet been foreclosed upon and the seller is behind on the mortgage payments. The seller has the option of making up the mortgage payments and bringing the loan current, therefore, the home will no longer be a preforeclosure 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.

Just because a homeowner is behind on the payments, does not mean the homeowner wishes to sell the property nor that the home will go through the foreclosure process and end up in the bank's REO inventory. Preforeclosures homes are not always for sale. If a preforeclosure home is for sale, it will be called a short sale, not a preforeclosure. Most preforeclosure homes are not for sale.

How to Make an Offer on a Preforeclosure Home

The easiest way to buy a preforeclosure home is to help the seller to make up the back payments and then arrange to buy the home directly from the seller. One problem with this scenario is some sellers do not want to sell their home. It is often profitable for an investor who deals directly with the seller. That's because the seller might not have a very good idea of how much her 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 he or she is helping the seller to avoid foreclosure. But the investor is most likely planning to buy the home for much less than it is worth, maybe give the seller a few thousand dollars to move the seller out of the home.

Because so many sellers can 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 Preforeclosure Homes

By the time a preforeclosure 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 BPOs. Some astute buyers would prefer to negotiate with the seller before the home becomes a short sale.

It is interesting, also, to note that not every short sale involves a seller who is behind on her payments. Some sellers can be current and still do a short sale, so sellers who are current would never really fall into the preforeclosure radar to start with.

To find a preforeclosure home, buyers can search popular websites that pick up feeds from an aggregator or they can pay for the feed. Some foreclosure websites publish preforeclosures 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 preforeclosure as a short sale prior to the seller listing with a real estate agent. One 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. These are homeowners who are most likely upside down or have refinanced to an underwater position today.

These homeowners are probably not delinquent, although they might not be able to sell without doing a short sale as they might have no equity. Bear in mind that when the home is listed for sale as a short sale, ethical agents will expose the home to the greatest pool of buyers in the marketplace, which will no longer give you the edge. Although, there are a handful of crooks in the preforeclosure business, just like in any business; it is not recommended that you deal with them.

Most first-time home buyers should not pursue preforeclosures but would do better to concentrate efforts on locating regular sales, foreclosures or short sales, all of which sell for about the same market value. Pick a good real estate agent to help buy a home, an agent who can help you to negotiate.

At the time of writing, Elizabeth Weintraub, BRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.