HOW TO BUY A PRE FORECLOSURE: 7-STEP GUIDE
A homeowner may miss a monthly mortgage payment for one unavoidable cause or another, thereby putting their house at risk of default. The lender will frequently send a notice of default to start the foreclosure process if the borrower doesn’t make the required mortgage payments. Owners of pre-foreclosure properties can still take action to save their homes before the official foreclosure process begins, such as negotiating with the lender for more advantageous loan terms.
Many real estate investors find pre foreclosure homes a profitable venture. Such types of properties are usually sold below their actual market value, allowing the buyers to make a few thousands of dollars more in profit if they decide to fix and flip or resell them later.
To be able to make money from them yourself, you need to learn how to find pre foreclosure homes for sale. In this blog post, we give you several helpful tips on locating and buying pre foreclosure properties. Read on!
What Are Pre Foreclosure Homes?
The term “pre foreclosure” refers to a situation when a homeowner is at risk of having their property foreclosed upon because they have fallen behind on their mortgage payments. The homeowner had the option of either making a full payment on the debt owing during that time or selling the house. Two primary factors influence why real estate investors like to purchase pre-foreclosure properties:
- Considering that pre-foreclosure houses are not posted, there is less competition from other purchasers.
- They are excellent real estate deals since pre foreclosures are typically offered for less than market value.
However, prospective purchasers need to keep in mind that they are buying the house “as is.” They could have to pay for repairs and inspections, which might raise the total amount of money needed to make such expenditures. Additionally, the bank or lender may occasionally set extra restrictions on the planned sale, which may cause a delay in the transaction’s completion.
How to Find Homes in Pre Foreclosure
Many purchasers who are interested in investing in pre-foreclosure properties are unsure of just how to purchase a pre-foreclosure home. They frequently attempt to place simultaneous bids on pre foreclosure houses that are featured on several well-known websites because they are drawn by the homes’ below-market prices.
But for those without experience, the procedure may be time-consuming and fraught with difficulties. The seller may be contacted directly by interested bidders who want to attempt to negotiate a bargain. However, certain jurisdictions that have limits on what purchasers can and cannot do during the pre-foreclosure period may consider such bids to be unlawful.
Below, we’ve outlined the seven steps for anyone that wants to know how to find and buy a pre foreclosure home.
1. Comprehend the Pre Foreclosure Process
Even if the pre foreclosure may not directly affect you as the buyer, it’s important to comprehend the conditions of the transaction. What you need to know is as follows:
Pre-foreclosure is the initial stage of the foreclosure process. Although it differs from state to state, the procedure typically begins when the homeowner misses three consecutive mortgage payments. The bank will then send a pre-foreclosure notice to the property’s owner to let them know that a foreclosure is imminent.
The owner of the property will have around two to three months from the day the default notice is sent to take action to stop the foreclosure process. It can include making a whole new payment arrangement or paying off the remaining loan sum in full.
As an alternative, the property owner might decide to prevent foreclosure by selling the real estate investment themselves. Due to the owner’s high level of motivation, properties are frequently sold at a discount. But it’s not always true that pre-foreclosure houses are in hardship or in undesirable areas.
2. Find Leads
When figuring out how to discover a pre foreclosure, learning how to get pre foreclosure leads is crucial. Consulting a knowledgeable real estate agent is the best approach to locate pre foreclosure properties for sale or pre foreclosure auctions. The Multiple Listing Service (MLS), where pre foreclosure houses near me are frequently featured, is accessible to licensed agents.
Usually, the seller’s revenues are used to pay such agents at the conclusion of the transaction. Such off-market properties can also be found through county public records, regional media, and recommendations from local real estate wholesalers or attorneys. Websites like Zillow, RedX, Mashvisor, or Foreclosure.com are fantastic sources of pre foreclosure leads.
3. Analyze the Neighborhoods
Take the time to undertake a real estate market research of the communities you are targeting once you have obtained some leads on pre foreclosure houses for sale by owner. Make sure the area is handy for both working and living, regardless of whether you are aiming to attract prospective tenants or purchasers. The following are some particulars you should consider while conducting a neighborhood analysis:
- Walkability score (the ability to get around on foot)
- Attractions and amenities such as local businesses, restaurants, malls, and parks
- Reputable schools
- Condition of nearby homes and buildings
- The state of roads, street lamps, and sidewalks
- Days on market
- Average rental income
- Average occupancy rates
- Average return on investment
One of the greatest tools for doing a neighborhood study to ascertain the regional ROI (return on investment) is Mashvisor. Please have a look at our heatmap analysis tool. Our real estate investment calculator also allows you to perform a comparative market study for pre-foreclosure houses as well as an analysis of an investment property!
4. Look for a Lender
A pre-approval letter from a lender is required before you may purchase a home that is in the pre-foreclosure stage. You may see your maximum borrowing capacity in this letter. After that, you may concentrate on investment homes that are within your price range. A pre-
Permission letter also shows the seller that you are a capable, committed buyer. In certain cases, if you don’t have this letter, agencies won’t even want to work with you.
Here are some of the documents you need to get a pre-approval letter:
- An identification document such as your passport or driver’s license
- Credit report
- Tax return records
- Bank statements
- Recent pay slips
Please note that the specific documents required will vary depending on the kind of mortgage option you want for financing a pre foreclosure investment.
5. Make an Offer
With the pre-approval letter in place, you can now make an offer on your preferred pre foreclosure home. Generally, it takes 30-60 days to complete the closing process on the property. The period can be much shorter if you are working with a hard money lender or paying cash.
When making an offer, it is advisable to work with a real estate agent since they are more conversant with the process. The agent will negotiate with the homeowner or bank on your behalf. Once the seller accepts the offer, you can then deliver the purchase contract to the bank so they can start underwriting the loan.
6. Obtain a Financing Commitment
A finance commitment is a promise from the lender to grant you the money based on the details you supply. Once the lender is happy that you and the prior foreclosure match their underwriting standards, the commitment is granted. Before granting a finance commitment, a lender will need the following factors, among others:
- Complete mortgage application
- Application fee
- Property details
- Documentation showing the source of down payment
- Property appraisal
- List of current assets and liabilities
- Purchase contract
7. Close on the Investment Property
The final stage of the pre foreclosure buying process is closing. It is the point at which the ownership deed is changed to the new owner’s name. The transfer typically takes 1-2 hours and takes place in a title firm. The closing charges, which include lender fees, title insurance, transfer taxes, and property taxes, will then be due from you. The expenses could amount to 2% to 5% of the buying price. The income property is yours after the closing process for purchasing a pre-foreclosure is complete.
Make sure the utilities are changed over to your name once you’ve followed all the instructions for purchasing a pre-foreclosure home. Get all the locks in the condominiums, multi-family houses, or single-family homes replaced by finding a locksmith. If the pre-foreclosure home need renovations, go to work on them as soon as possible. Promote the sale or rental of the property once it is in good shape!
If you know where to look and how to locate one, buying pre-foreclosure properties may be a profitable investment for any real estate investor. To succeed in investing, there are a few more factors you should bear in mind. We sincerely hope the advice we’ve provided above is useful.
Mashvisor is ready to support you on your real estate investing journey with its thorough data analyses and helpful tools for identifying and analyzing investment properties. For access to and more information on Mashvisor’s many offers, be sure to register for a trial or arrange a demo.