Pre-foreclosure is a crucial time in the foreclosure process. It is during this period that investors can typically make the largest profits and can negotiate a deal that may be favorable for all parties involved including the buyer, homeowner, and lender. The steps below will help guide you through the process.
Find and file properties
It's important to get up-to-date pre-foreclosure information and act on it as quickly as possible.
Develop a system to keep track of properties that interest you. A good tracking system is important since most pre-foreclosure buyers pursue many properties sometimes over a period of several months.
After you find a property online, it's a good idea to drive by the property to get a better idea of the property's condition and the type of neighborhood. For some buyers and investors, driving by the property has also facilitated a casual meeting with the owner or yielded a wealth of unexpected information from a talkative neighbor.
Confirm pre-foreclosure status
When a property enters pre-foreclosure, the owner usually has at least 2-3 months to reinstate the property by paying off the amount in default. The reinstatement stops the foreclosure process, so it's important to find out if a property has been reinstated before proceeding. The best way to check if the property has been reinstated is to call the trustee or attorney assigned to the foreclosure. The trustee cannot typically answer other questions about the property; they can just let you know if the property is still in foreclosure or not.
Check potential bargain
You need to find out as much as you can about the estimated market value of the property, how much is owed on the property and if the owner has any other liens against the property. This is all public information and you can research on your own with the county recorder or you can use online property reports and tools to help. This process should not take more than a day or two, because you don't want to delay long before contacting the owner in default.
Contact the owner in default
You or your real estate agent should initiate contact with the owner to express your interest in the property. Before you expend the time and effort to contact the owner, make sure you're fully prepared to buy.
If the owner has decided to list the property for sale, you can simply contact the listing agent. Once the property is listed with an agent there may not be as much bargain potential, but you can still possibly negotiate a good deal because you know the owner has a limited amount of time to sell before the bank repossess the property or sells the property at public auction.
In most cases, the owner has not listed the property for sale, so you will need to pro-actively contact them. In this case, contacting the owner can be tough, but the potential bargain is greater because there will be no listing agent.s commission.
We recommend contacting the owner by mail to start. The basic message you want to communicate to the owner is that you're interested in buying the property and you want to work out a purchase agreement that benefits both parties. If you send a postcard, we would suggest not mentioning the word foreclosure as this could be embarrassing to the owner if someone else saw the postcard.
Don't be surprised if the owner does not respond to the postcard immediately. In most states, the owner has several months between the initial foreclosure notice and the public auction. During this time the owner will consider all the options available, including refinancing or selling. An owner's first reaction is usually not to sell. But if no other options work out, selling is a better option than losing the property at public auction.
Many successful pre-foreclosure buyers and investors send out quite a few postcards to properties in their area before they find an owner who is interested. It's not uncommon to send out several postcards to the same owner during the foreclosure process. The owner may be more interested to sell as the auction date looms closer. If the owner doesn't respond to postcards, some buyers and investors will try to reach the owner by phone or in person. If you do this, be prepared for a possible rude response as these methods of contact are more inherently confrontational. And always keep in mind that the owner in default retains ownership rights to the property during the pre-foreclosure period. If they are not interested in talking with you, it's time to leave.
If the owner rejects all of your contact attempts, you may still have a chance to purchase the property at public auction, which occurs if the owner doesn't sell or pay off the amount owed during the pre-foreclosure period. You could also call the trustee periodically to check if an auction has been scheduled.
Negotiate a purchase agreement
Once you have made contact with the owner, you should meet with them for further discussion about the property. As part of this meeting, or a later one, you should arrange to walk through the property to make sure it meets your criteria as a buyer.
Because owners in foreclosure may not have the money to make repairs to their property, you might be willing to buy the property as is, but you still want to keep a tab of estimated repair costs and subtract them from your purchase offer. Your willingness to put some "sweat equity" in the property after you purchase it will increase the chances of realizing a good bargain.
If you and the owner both agree to proceed, you need to negotiate the terms of a purchase. These negotiations will involve you, the owner and the foreclosing lender. A real estate agent can be a valuable resource during the negotiating process.
If the loan in default is assumable, you may be able to pay off the amount in default and take over payments under the current terms of that loan. If not, you will need to pay off the full amount owed on the loan. If the property has other liens placed on it, you'll need to make sure those are cleared out as part of the purchase agreement. If the owner has equity in the property above and beyond the liens, then you can offer to split the equity with them, allowing them to walk away with cash and you to acquire a property below market value.
Owners might be more willing to work with you if you are flexible to help them out in creative ways that address their situation. You could offer to let them stay in the house for a certain amount of time (possibly paying rent) until they find a new place to stay. You could offer to pay their housing costs for the first month or more after they leave the property. If you're purchasing the property as an investment, you may let them stay and pay rent until you decide to resell the house. There are myriad ways to work out an agreement that benefits both parties. Remember, just selling the property during pre-foreclosure allows owners to avoid a foreclosure-marred credit history, making it easier for them to find a new place to live.
While negotiating the purchase agreement with the owner, you should also contact the foreclosing lender and any other lien holders. You want them to know you plan to purchase the property and satisfy any liens against the property. You also may be able to negotiate a lower payoff amount to satisfy the debts owed. Since you're saving them the trouble of pursuing and collecting the debt owed them, some foreclosing lenders and lien holders will clear liens on a property for less than 100 percent of the amount owed. This is another way to realize a bargain during pre-foreclosure.
The goal for you as a buyer is to purchase a property at least 20 percent below full market value, although better deals are often possible. When determining the final purchase offer, you should also take into account the rate of real estate appreciation in the area and the potential for increasing the house's value by making repairs and improvements.
Close the deal
Once you've arrived at an agreement with the owner in default, the foreclosing lender and any other lien holders, you can put the agreement in writing. If you're not familiar with how to draw up a purchase agreement, you should have a local real estate agent or real estate attorney help.
Any purchase agreement should make closing the deal contingent on a full title search conducted by a title company or attorney. The purchase agreement should also allow for a professional inspection of the property before closing the deal.
An escrow company, who acts as a third party, can manage the transfer of money and property ownership. Assuming that you have your financing secured, this should be a fairly smooth process.