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Pre-foreclosure homes are houses that have not yet been foreclosed on. They are typically sold at a discount because the homeowner is unable to pay their mortgage. Pre-foreclosures may be purchased by individuals or investors.
When a borrower fails on their mortgage, the bank forecloses and sells the property at auction, this is known as a pre-foreclosure. During pre-foreclosure, the homeowner has the option of selling the property or paying off the loan debt. A pre-foreclosure may usually be purchased for less than market value.
It might be difficult to locate pre-foreclosures. You’ll need to go through newspaper ads, phone lenders, and contact troubled homeowners. Knowing a house is in pre-foreclosure isn’t enough even then.
You’ll also need the current postal address and phone number of the homeowner. This information is readily gathered using REDX, a real estate lead generation program.
1. Gain a thorough understanding of the pre-foreclosure procedure
Pre-foreclosures differ depending on the state and lender. The bank sends a notice of default and pre-foreclosure commences if the homeowner misses three mortgage payments. When a lender sends a default notice, the homeowner usually has two or three months to “reinstate” the loan and avoid foreclosure by coming up with an acceptable payment plan or bringing the outstanding sum current and paying any late penalties.
If the homeowner is unable to do either, they may try to sell the house. Not all pre-foreclosures are in run-down areas or in unattractive areas. Financial setbacks may come to anybody, at any time. Pre-foreclosures are often discovered by investors in areas where they would otherwise be unable to buy a home. However, if the homeowner has fallen behind on her mortgage payments, they will most likely be unable to keep up with repairs.
Who Should Consider Pre-Foreclosures?
Pre-foreclosure homeowners are often facing financial difficulties and may decide to sell the property rather than risk a foreclosure on their credit record. Pre-foreclosures are often available at a discount to market value for investors.
Fix-and-flippers use a hard money loan to acquire pre-foreclosures that need extensive renovations and then sell the home for a profit, paying off the debt. Long-term investors purchase pre-foreclosures, fix the property, and stabilize it before refinancing to a long-term loan.
2. Locate Pre-Foreclosure Prospects
Because there are fewer pre-foreclosure listings than regular listings, the available pre-foreclosure leads will influence which neighborhoods to search in. While pre-foreclosure leads may be scarce, it’s easier to conduct site inspections and meet contractors if you can identify a house close to your existing location.
Pre-foreclosure Leads Off the Market
Public records at your local county clerk’s or recorder’s office might help you find pre-foreclosure leads. You may also look for public announcements in local publications, contact real estate lawyers, or inquire about references from real estate wholesalers.
Off-market pre-foreclosure leads are a little harder to come by, but not impossible if you know where to search. You may be able to obtain a better price if you purchase a pre-foreclosure before it reaches the market since there is often no real estate commission and less competition from other buyers.
Pre-foreclosure Listings on the Internet
Some pre-foreclosures are available via real estate brokers and are offered for sale on the multiple listing service (MLS). Terms like “short sale,” “third-party permission necessary,” and “motivated sellers” are often used. You may locate pre-foreclosure leads on sites like REDX, Zillow, and Foreclosure.com in addition to dealing with a real estate agent.
Zillow gives information on the number of properties in various stages of foreclosure as well as a map with the pin locations. Click on foreclosures in the menu while searching for properties for sale. On the left, you can view a map with pinned places, and on the right, you can see homes that are now under pre-foreclosure.
3. Investigate the Areas
You can fix up a house, but you can’t alter the neighborhood, so do your homework before making a purchase. It’s most convenient if you can drive about the area and have a look around.
Examine similar properties for sale, do an internet search for crime statistics, and consult the national sex offender register. Examine internet maps to determine if the area is urban, suburban, or rural, as well as the accessibility of public transit and key highways. Look online for available rentals to assess market rates if you intend to rent the home.
What to Look for
The general market circumstances, cost, the availability of public transit or parking, and the quality of the educational system are all factors to consider. Additionally, renters and purchasers choose places that have the following characteristics:
- Parks, shops, restaurants, and businesses that are easily accessible
- Walkability
- Schools with a good reputation
- Sidewalks, street lighting, and well-maintained roadways
- Buildings and residences in excellent repair
- How long do homes stay on the market before they are sold?
You may reduce your search to a number of strong possibilities once you’ve chosen a few houses to assess and completed your real estate due diligence.
4. Find a Lender & Get a Preapproval Letter
It’s advisable to contact a lender and receive a preapproval letter before placing an offer on a property if you want to purchase a pre-foreclosure house. This demonstrates your seriousness to the seller and alleviates concerns about your ability to get finance to acquire the home. Preapproval does not imply that you will be approved for a loan. It indicates the lender has done a preliminary assessment of your creditworthiness for a loan and decided how much you are eligible to borrow.
The lender you pick is determined by the property’s condition and kind. Traditional lenders expect houses to be in excellent shape or just require modest repairs, however hard money lenders may finance pre-foreclosures in practically any condition. Apartment buildings with more than five units normally need a commercial loan from a lender that specializes in commercial lending.
5. Make a proposal
Your offer to purchase the pre-foreclosure house must be conditional on receiving a loan commitment. This protects you from losing your deposit if your financing goes through.
When making an offer, working with a real estate agent is beneficial since they are aware of purchase contracts and contingency dates. You or your real estate agent will deal directly with the bank if the bank agrees to a short sale.
6. Obtain a Loan Commitment
The lender will need more specific paperwork than the preapproval materials you supplied to secure a bank commitment. They’ll want your purchase contract as well as extra property details. If you haven’t already, you’ll need to submit a full mortgage application, pay any necessary fees, and produce evidence of down payment and any extra cash reserves they demand. They’ll get an appraisal to figure out how much the house is worth now.
7. Complete the transaction on the property
You’ll get a commitment letter after the buyer and the property pass the lender’s underwriting clearance. A closing date will be set by the closing attorney or title firm. The time it takes from accepting an offer to closing varies depending on the property. The pre-foreclosure property will be yours after the closing. If you want to close in the name of your limited liability company (LLC) rather than your personal name, Make sure the lender enables you to do so before applying for a loan.
Steps to Take After the Closing
There are a couple more actions to take after closing on the property to secure it and begin repairs:
- Because you don’t know who has keys, change the locks.
- Transfer or have the utilities switched back on in your name.
- If the property needs repairs, go to work immediately.
Your total carrying expenses will be reduced as a result of this. You may list it for sale or rent once it’s move-in ready.
The Benefits and Drawbacks of Purchasing a Pre-Foreclosure
Purchasing a pre-foreclosure is not the same as purchasing a typical house. There are benefits to purchasing a pre-foreclosure, such as reduced competition since the property may not yet be on the market. However, there are also drawbacks, such as dealing with difficult homeowners and a long closing timeframe.
Most Commonly Asked Questions (FAQs)
Is it possible to halt a pre-foreclosure?
In general, you may halt a pre-foreclosure up to the sale date if the owner pays the remaining sum plus any late fines and/or legal costs, or sells the property. It does, however, differ from state to state.
I’m looking for pre-foreclosure leads, but I’m not sure where to look.
Pre-foreclosure leads may be found on websites like REDX. Local real estate agents, lawyers, and wholesalers can also assist you to obtain leads, as can the public notices section of local newspapers.
What exactly is the difference between a foreclosure and a pre-foreclosure?
From the moment the owner fails on the mortgage until it is sold at auction or listed as a real estate owned (REO) property, a property is in foreclosure. When the lender reclaims possession of the property, it is called a foreclosure. When a borrower defaults on a mortgage by missing payments, a pre-foreclosure occurs. It’s the first step towards foreclosure.
Conclusion
Follow the seven steps explained in this article to discover how to purchase a pre-foreclosure house. You’ll need to know where to look for pre-foreclosure leads since a pre-foreclosure may not be advertised for sale. A pre-foreclosure may be a wonderful bargain, but the procedure to close on the home might be lengthy.
