Whether a market is a buyer’s market, seller’s market, or balanced market there are always foreclosures available, And where there are foreclosures there are pre-foreclosures. But first, you need to understand the differences between pre-foreclosures, foreclosures, and real estate owned by the lender (REO).
The actual foreclosure is a very short process that typically takes place as an auction on the court house steps. This is when the public has the opportunity to bid on the property before the lender takes possession. Regardless of what you may have seen on TV shows, most houses don’t receive any bids or the bids are lower than the outstanding loan balance. These houses then become REO. Eventually, most lenders list REO with real estate agents and they are offered for sale in the same manner most other houses are. Although often at below market prices.
What is significantly different about pre-foreclosures is that the owner is still in control. In fact, pre-foreclosures can be difficult to identify. If the owner has little hope of becoming current on the mortgage payments, he/she may list it with a real estate agent. But it isn’t necessarily identified as a distressed house being offered at a discounted price.
However, there is a way to identify pre-foreclosures. A house enters the pre-foreclosure process after the owner misses one or more mortgage payments and the lender sends a Notice of Default (NOD). In states requiring a judicial foreclosure, the formal paperwork is known as a Lis Pendens. Just because a lender gives formal notice of default does not mean the house will be foreclosed on. If an owner wants to and has the money to bring the loan current, the house is brought out of default and the homeowner returns to making payments according to the original loan agreement. However, the NOD is the beginning of the pre-foreclosure process.
It’s intuitive that people being foreclosed on are having financial difficulties and are more willing to sell the house at a discount. Of course, that is why investors are interested in finding pre-foreclosures.
There are generally three ways you can find these notices. NOD and Lis Pendens are public records. These are found at the county recorder’s office. Digging through county records can take hours and hours of your time. Fortunately, there is an easier way. The NOD and Lis Pendens are also published in the legal notices section of a local newspaper. The legal notices section is typically part of the classifieds. There are also websites and businesses that gather this information into lists that you can purchase.
Pre-foreclosures in today’s market are relatively rare when purchase offers are made days or weeks after being listed on the market. Places you may find clusters of pre-foreclosures are in developments built near the beginning or height of the last recession. Some of the mortgages on these houses are still underwater. People with underwater mortgages have little incentive to bring the mortgage current. However, they need to sell the house for more than it is worth. A short sale is one of the few options available in these cases.
Seller financing, wrap around mortgages, and land contracts (also known by other names) can be purchase options. These generally work best when the house is worth more than the loan but the owner simply can’t keep up with the payments. In this case, the buyer often might give the seller a few thousand dollars as motivation to sign over the house. The buyer still must pay off the overdue balances and assume the loan or otherwise payoff the loan.
The pre-foreclosure process varies by state and even by lender. Commonly, the homeowner has 2-3 months to “reinstate” the loan and stop the foreclosure process. Otherwise, it goes to foreclosure. Many homeowners use most of this time either trying to come up with the money to reinstate the loan or doing nothing at all. The bottom line is there is usually a very short period of time between when the seller agrees to make a sale and before the house is foreclosed. Investors help both themselves and the seller when they can close the deal fast.
Anyone can buy a pre-foreclosure. However, these mostly aren’t of interest to first time buyers because homeowners in financial distress don’t perform routine maintenance and can’t afford major repairs. Neither do most first time buyers have the money to make repairs. These are expenses that investors calculate into discount offers. Both long and short term investors will find profitable opportunities with pre-foreclosures.
Banks and other lenders are willing to give loans on properties even when not listed for sale. But keep in mind that once the house goes on the auction block you will have to pay cash or wait until the lender later offers it as REO on the open market.
Please comment below with your pre-foreclosure insights. Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].