One man’s misery is another’s opportunity. That, in a nutshell, sums up the foreclosure process. While the homeowner is typically labeled as “distressed,” the buyer, whether auction, short sale or in a pre-foreclosure sale, is a “savvy investor.” There’s only one winner here, and it isn’t the homeowner.
Pre-foreclosures generally offer the buyer less competition and lower prices than when purchasing at auction or a short sale.
When a homeowner stops making mortgage payments, the lender sends a Notice of Default (NOD), informing her that the house will go to auction if payments aren’t brought current. The day she receives the NOD begins the pre-foreclosure period, which, if the homeowner can’t come up with the money to cure the default, typically ends when one of three events occurs:
- The homeowner sells the house to a third party.
- The house is successfully auctioned to a third party.
- The house doesn’t bring any buyers and the bank retains ownership. This type of house is commonly known as REO, or “real estate owned” by the bank.
Advantages of Purchasing a Home in Pre-Foreclosure
Pre-foreclosures generally offer the buyer less competition and lower prices than when purchasing at auction or a short sale. Additional advantages of pursuing pre-foreclosure properties include:
- Fewer Mysteries: When you purchase a home at auction you generally have no idea about its condition and typically haven’t viewed the interior. When a house is purchased during the pre-foreclosure period, you have the opportunity to view it and perform inspections.
- Flexibility: Dealing with a homeowner is always easier than dealing with a homeowner and a lender. Buying a pre-foreclosure also does away with the need to pay huge chunks of cash upfront or pay cash for the purchase.
- Bargain Prices: A distressed homeowner willing to sell the home during the pre-foreclosure process typically just wants out from under the mortgage payment, to avoid foreclosure and to move on with his or her life. Houses sold during this time period usually go for what the homeowner owes on the loan, not current market value.
The challenge for the buyer lies in locating these properties. Pre-foreclosure buying opportunities aren’t “listed” in the traditional manner, such as in the Multiple Listing Service (MLS). To find these homes requires a search, and there are a number of places to look.
Public Records of Pre-Foreclosure Listings
Foreclosure communications from the lender are considered public information and you can find the documents on file at the county recorder’s or clerk’s office. Although poring over county records is time-consuming, it is one way to find free real estate pre-foreclosure listings, sometimes before anyone else knows about them. Types of records to search for include:
- Notice of Default: the NOD discussed earlier
- Lis Pendens: If you live in a state that requires judicial foreclosures, the lender files a lis pendens instead of a NOD.
- Notice of Sale: This is the final notice to the homeowner. It includes the date and time that the house will go on the auction block and provides the homeowner with one last chance to bring the loan current.
Check the Newspaper and Online for Listings
Lenders must publish the NOD in the local newspaper. Many investors use this method to locate distressed homeowners, so you’ll have more competition than you will if you research county records. Many larger cities have business journals, so check those as well as the web.
If you have your heart set on pre-foreclosure investing, set yourself up to succeed. The most important step in the process occurs before looking for pre-foreclosure listings: getting your financing in order. Not only does this allow you to shop only those listings that you can afford, it also gives you leverage with the seller.