You’re shopping for a house, and the one you’ve got your eye on as “perfect” is a preforeclosure. This is a great time to leap on it for a potential bargain, along with the chance to get to know the house before you buy.
“If you can get to a home as a preforeclosure before it goes into foreclosure, that’s the best route,” explains Donny Piwowarski, a top-selling agent who works with 84% more single-family homes than the average agent in his region of Tracy, California.
“A foreclosure goes to the courthouse steps, and with such constraint on inventory, it’s going to be very competitive, with well-seasoned investors that have a lot of cash to buy foreclosures,” he says. “Whereas with a preforeclosure, you have the ability to finance that transaction and the benefit of seeing the property. And because you’re working with the homeowners, you’ll have access to the disclosures.”
So you’ve identified the property, know why it could be a great investment — and now you need to know how to buy a preforeclosure. Here, we’ll walk you through the steps from beginning to end.
Step 1: Know the basics — what’s a preforeclosure?
A home is in preforeclosure when the owner has stopped making mortgage payments for several months and their loan is delinquent or in default — so the owner is approaching foreclosure. The lender has started foreclosure proceedings, but the house isn’t owned by the bank yet, and the owner still has a chance to catch up on payments.
At this stage, official notice of default has been issued and is publicly available. This means you might be able to get a discount on the house, but you’re dealing with a homeowner, not a bank — and that owner might not want to sell. (In fact, the homeowner might even have a plan to catch up on the mortgage, and in the end, the home won’t end up in any kind of sale.)
“Preforeclosure is where a homeowner is behind on their mortgage payments and the mortgage lender has recorded a public notice to make everybody aware that that is the situation for that borrower, and also to let the borrower know that if they don’t recover the situation, their home could be potentially sold at the courthouse,” Piwowarski explains.
Step 2: Get preapproved for a loan
You’ll need to know how much you can spend. Getting preapproved is the best way to be as sure as you can.
A preapproval will also help you be as competitive as possible in a hot market. And it shows both that you’re serious about buying and that you have the financial wherewithal to do so.
If you’re going to be buying the preforeclosure with a mortgage, your purchase agreement is contingent on your ability to secure a loan, so getting preapproved is important.
Step 3: Find your house
Maybe you’re like our hypothetical example and you already have your eye on the perfect home. But if you haven’t identified a preforeclosure home yet, then you’ll need to find one. And that prospect can be tricky, as these homes aren’t as easy to find as a house that’s listed on the MLS because they’re not for sale. Working with a knowledgeable agent experienced in preforeclosure properties is a great place to start.
“Preforeclosures get what’s called a notice of default,” Piwowarski explains. “These are recorded in the local county courthouse and their public records, and most of them publish that information online. A lot of different websites will scrape that information and post it on their website as well.”
These usually aren’t listed on an MLS, but you might find them on certain real estate portals that specialize in preforeclosure and foreclosure properties, like RealtyTrac, Foreclosure.com, HomePath, and HomeSteps. (These often require paid access.)
Step 4: Learn everything you can about the house
From the neighborhood to the school district to who built the house and the development, this is your opportunity to dig into your new digs and make sure it’s right for you. What intelligence can you gather?
The current owners may let you walk through the home to gather data — but they might not.
Try to get as much info as you can on the current market, too.
Step 5: Reach out to the current owners
If you’re interested in a preforeclosure, reach out to the home’s current owner. But know that this can be a sensitive situation: The owner might be upset, embarrassed, or not even know their home is listed on real estate sites as a preforeclosure. The owner’s missed payments may result from a traumatic circumstance, such as a death, job loss, or divorce. So tread lightly.
“I think it all just begins with compassion,” Piwowarski says. “We never know what the situation is and why the owner fell behind on their mortgage payments. They might be bombarded or receive many notices in the mail regarding this situation. The best approach is to just come from a compassionate standpoint and say, ‘How can I help if you want to sell your home?’”
An experienced agent can give you some insight into how to approach homeowners so that they are receptive to your overtures.
Step 6: Make your offer
In preparation for making your offer, talk to your agent about what seems fair. You want the house, and you want a good deal, but you don’t want to upset the current owner in a potentially emotionally charged scenario.
Ideally, your offer will achieve a good balance between getting you a bargain and getting a fair deal for the seller, who also now has a path to avoid foreclosure.
Your agent can help you investigate the amount the seller still owes on the mortgage to help you make your best offer.
What makes one offer better than another? Offers with fewer or no contingencies are stronger, “and also understand that there’s not going to be any repairs whatsoever, or any kind of credit or concession,” Piwowarski says. “It’s a distressed property, and that means that there’s no one around to give any money at all.”
Step 7: Submit your earnest money
Earnest money, a deposit with your offer as a way to demonstrate you’re a serious buyer, can help you close the deal. Typically, earnest money comes in between 1% and 3% of the purchase price.
Look to your agent for guidance, and remember that earnest money can help you be more competitive. If you’re offering earnest money as part of the deal, get a cashier’s check or wire it to the escrow company to complete this step.
Step 8: Submit your mortgage application
Preapproval was only the first step: Now you have to actually apply for that mortgage. Mortgage approval can be a drawn-out process, so if the seller really wants a fast closing, you may want to consider going with a lender that offers pre-underwriting or any other steps you can take to speed it up.
Step 9: Get an inspection
With a preforeclosure “you can definitely ask for an inspection,” Piwowarski says. “Since you are working directly with the homeowner, you’re going to have access and you can arrange it. Whereas with a foreclosure, you’re buying the courthouse steps and you don’t have the ability to inspect the property.”
Even if you are waiving the right to ask the seller for repairs, you should get an inspection so you understand exactly what condition the home is in and what will be involved to repair it, if anything.
Step 10: Get the home appraised
Your lender will likely require this as part of the mortgage process. Be aware that appraisal issues could come up, depending on the condition of the home. If you doubt the property will appraise, make sure you write an appraisal contingency into the contract to protect your earnest money.
Step 11: Title review
This will uncover any unknown liens or other possible encumbrances with the title. Tax and mortgage liens are potential obstacles, and liens can arise from disputes with homeowner’s associations, contractors, repair services, and other events.
You should also strongly consider getting title insurance to protect yourself as the buyer.
Step 12: Final walkthrough
Don’t skip this step: You need to know what condition the house is in before you take possession, and the final walkthrough is your last chance to check it out and avoid any surprises that violate terms of your contract.
Step 13: Closing time
Unlike a foreclosure sale, closing on a preforeclosure property looks a lot like it does with any other type of real estate transaction. “With preforeclosure, you’re going to take this process through your typical escrow — all the typical steps you get when you’re buying normally,” Piwowarski says.
So once you complete the escrow and sign those closing documents, the home is yours. Congratulations, homeowner!
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