You’re home shopping on all the biggest listing sites and dreaming about what could be. As you click around, you notice a listing labeled as “preforeclosure,” but there’s only minimal information available about the property.
“Huh,” you think, “I wonder why there are no pictures.” Yet you find yourself intrigued. The home is just the right size at the right price, and it’s located in the neighborhood you’ve been dreaming of — a neighborhood that doesn’t have a lot of homes available for sale.
There’s only one problem: This preforeclosure home likely isn’t for sale at all, and the owner may have no idea it’s even listed on major real estate sites (more on that soon).
But that doesn’t mean you can’t buy a preforeclosure. With a little patience and a lot of tact, that perfect preforeclosure could be yours. But you have to know how to take the right approach.
We talked to top experts with years of experience buying preforeclosures to get the rundown on how the process works, plus their best tips for buyers. Here’s what you need to know.
What’s a preforeclosure?
When a homeowner stops making mortgage payments for at least three months, their home loan typically goes into default, and the lender initiates the foreclosure process. Preforeclosure is the first stage of foreclosure, so the home isn’t being sent to auction — yet.
The preforeclosure period usually lasts anywhere between three and ten months. During this period, the homeowner can catch up on their missed payments and end the foreclosure process, or they can choose to sell their home to avoid foreclosure.
If the owner decides to sell and owes more on the home than it’s worth, they’ll have to get the lender to agree to a short sale (meaning the lender comes up “short” on the sale). If they’re in a good place with their equity, they can sell the home just like any other typical home sale.
However, if the homeowner doesn’t sell and remains in preforeclosure, it’s a waiting game while the lender finalizes the foreclosure proceedings, and then the home is typically sold at auction.
Unless, of course, you get in there first.
Are preforeclosure homes on listing sites really for sale?
Preforeclosure homes aren’t technically for sale. Only homes listed for sale are for sale.
So if you’re interested in purchasing a preforeclosure, understand that it’s not for the faint of heart. You’ll have to convince the homeowner to sell their home to you rather than go through foreclosure proceedings.
You might be wondering why someone would prefer to go through a foreclosure — and accept all of the damage it does to their credit — rather than sell their home. You’d be surprised to learn how many homeowners take this route!
“Just because somebody’s in foreclosure doesn’t mean they want to sell their house,” reveals William Tingle, a real estate investor who’s been buying preforeclosures for more than a decade.
In fact, most people in preforeclosure don’t want to sell.
Tingle says he’s talked to hundreds of homeowners in varying stages of foreclosure, and roughly 80% have no interest in selling, even if selling means avoiding foreclosure.
The pros and cons of buying a preforeclosure
Okay, so let’s say you can convince this homeowner to sell you their home before they hit foreclosure. You probably want to know whether buying a preforeclosure is a good idea. Here are a few pros and cons to consider.
Benefits of preforeclosures
- You can sometimes get a good deal on the price since you’re not facing as much market competition for the home.
- A preforeclosure may make a neighborhood accessible to you that wasn’t before.
- Preforeclosures tend to be in better shape than foreclosures because they’re typically still occupied by the homeowner and haven’t been sitting vacant.
- You’ll be helping the homeowner get out of a bad situation and salvage their credit from the longstanding consequences of a foreclosure.
- Because preforeclosure takes a while, the buyer usually has time to finance the home (unlike with foreclosure auctions, which tend to be cash only).
Drawbacks of preforeclosures
- Preforeclosures can have title issues because the homeowner is in financial distress and may have taken out other loans on the property.
- Since the owners are facing economic hardship, preforeclosure homes may have deferred maintenance and need some repairs.
- Preforeclosure homes aren’t for sale, so you may never hear back from the owner — or they could react poorly to your approach.
- Negotiations tend to be more sensitive with preforeclosures, and those will likely involve the owner’s lender and attorney.
- How much the seller is able to accept for the home may depend on what they owe their lender, so you might not get that great of a deal.
- Depending on what stage of the foreclosure process the home is in, it might be too late to get out in front of the foreclosure.
6 top tips to buy a preforeclosure like an investor
Investors buy the majority of preforeclosures, and there’s a good reason for that. They’ve got lots of specialized knowledge in buying distressed properties: They know which deals to jump on and which to avoid.
“There are some pitfalls if you don’t know what you’re doing,” Tingle warns.
Yet he still enthusiastically believes anyone can buy a preforeclosure — with the right guidance, of course. Here are six top tips to help you avoid major preforeclosure pitfalls and buy like an investor.
1. Hire the right real estate agent (and team!)
When it comes to preforeclosures, all real estate agents are not equal. You’re going to need the right agent, one with the specialized knowledge and skills required to deal with a sensitive transaction.
“Definitely look for someone who specializes in foreclosures and short sales and understands title and lien issues, and knows how to negotiate in those scenarios,” advises top Florida agent Cinthia Ane’ McGreevy, who works with 80% more single-family homes than the average area agent.
Ane’ McGreevy says to confirm that the agent has special certifications for distressed properties. A few of the major certifications include:
Another way to check the agent’s credentials is a question you can ask during the interview process: How many buyers do they help purchase distressed properties each year? And how does that compare with how many buyers they help with more typical purchases?
Their answer can give you an idea of how much of their business is devoted to understanding the complex issues that can come up with foreclosure proceedings.
An agent who devotes 75% of their business to distressed properties is going to have a lot more expertise than an agent who helps one or two buyers purchase foreclosures each year.
All of that is to say, the right agent is your secret weapon when buying a preforeclosure.
But you’ll also need a few other key members on your real estate team.
“Make sure you’ve got a good title company or attorney on your team,” Tingle shares.
He says most issues with preforeclosures come up on the title report, so a great title search team is an absolute must for protecting your investment (we will get into that soon).
2. Know where to look for properties
When he first started buying preforeclosures about 11 years ago, Tingle was living in Georgia. He says back then it wasn’t so easy to get preforeclosure information, and investors would show up to the courthouse each day to research the latest filings.
Thankfully, technology has made it a lot easier today.
“Nowadays, a lot of that stuff’s online,” Tingle explains. “For example, I’m in Colorado Springs right now, and I can just go to the courthouse website and see what was filed since yesterday. So if a lender files an official notice, it’ll be there, and I’ll know immediately.”
Check your county’s courthouse website to see if preforeclosure information is readily available.
Another way of finding preforeclosures is to buy lists of homeowners in your area that are 30, 60, or 90 days late on their mortgage payments.
Tingle says these lists are popular with investors. They’re easy to come by, and there’s no reason regular homebuyers can’t take advantage of them, too. Your agent can help you locate them if you’re having trouble tracking them down.
3. And know where not to look
What about the preforeclosures you see on major listing sites like Zillow? According to Tingle, investors and agents in the business tend to avoid these so-called listings because they frequently contain outdated or inaccurate information.
“You call or you try to inquire and they’re off-market, and they’re not updated very regularly. So I never use them as a source,” he shares.
If you’re looking for the most accurate information available, stick with the courthouse filings and late payment lists.
4. Use every online research tool at your disposal
Since the home isn’t for sale, you’re not going to have the advantage of asking a listing agent about the specifics of the property. You’ll want to learn everything you can about the home before you send your agent to a distressed homeowner’s door to make an offer.
So how can you figure out if this is the right property for you?
Court listings don’t tend to give a ton of information about preforeclosure properties, but Tingle says there are plenty of tools online you can use to do your research.
For example, the county’s tax assessor website likely has information on the home’s square footage, the number of bedrooms and bathrooms, its buy and sell history, and sometimes it will even have photos of the property. Some counties even include past land surveys, which map out the property and all its land features.
You can also try to find the home’s past listings on major real estate websites. This is a great way to find interior photos and learn more about the home and its features.
5. Be mindful of how you approach the seller
As you’ve probably gathered by now, the process for buying a preforeclosure is a bit more delicate than a typical home sale. You can’t simply make an offer to the listing agent, and the homeowner may be downright hostile to any approach about selling.
So first, you have to find out if they’re even interested in taking offers at all.
Tingle’s strategy is to start with a soft approach.
“I don’t typically call them. I’ll mail them a card and let them know about my interest,” he says.
A few homeowners do reach out to him this way. For those that don’t respond, as it gets closer to the auction, Tingle will often go knock on the door and offer to buy the property. Still, he says, the majority turn him down — even days out from auction.
This soft approach works well for investors like Tingle, who are casting a wide net. But if you’re a buyer interested in a specific preforeclosure property, you probably don’t want to take quite this soft of an approach. If you’re in the market for a home, you probably don’t have months to wait around to maybe never hear back from a homeowner.
For the typical homebuyer, Ane’ McGreevy says a personalized note can go a long way.
“Get with your agent and have your agent reach out to the owner,” Ane’ McGreevy says.
“I would send a letter. A nice, handwritten letter I find works really, really well.”
She says this tactic has helped her land dream homes for buyers — and it helps out a struggling homeowner in the process.
No matter how you decide to approach the property owner, it’s probably best to let your real estate agent make contact on your behalf.
A foreclosure is often a sensitive and devastating time in a person’s life, so having a strong and compassionate communicator on your team can make all the difference.
6. Never skip out on due diligence
The reality is, when a homeowner is in financial distress and not able to make their mortgage payments, they’re usually forced to defer maintenance on the home, as well. This can cause problems for buyers, especially when small problems — like minor roof leaks — spread and turn into bigger problems.
When it comes to buying a distressed property, due diligence is your best friend.
“There’s a lot that has to be checked out with foreclosures,” Tingle shares.
Enter the home inspection and the title report.
A home inspection is technically optional, but you don’t want to skip it, especially with a distressed property.
Including an inspection contingency with your offer gives you the option to walk away from the deal if something major comes up — like, say, it turns out that minor roof leak is actually a major leak, and the whole roof needs to be replaced.
Title report and insurance
Tingle says clearing the title report (and having a title contingency!) is also particularly important for preforeclosures because many have second or even third liens on them — money you could be on the hook for if you don’t protect yourself with a proper title search and insurance.
“Most of the issues with preforeclosures are hidden in the title report. Do they have junior liens or judgments against them?” Tingle says.
Without knowing the extent of what’s owed on the property, and to whom, you can’t know what you’ll end up paying for it.
In today’s seller-friendly market, it can be tempting to waive your inspection and title contingencies, but Tingle says it’s seldom advisable to do so with a preforeclosure.
For example, one of his investor students was recently buying a distressed property and had no idea it was in foreclosure. She just thought she’d found a motivated seller.
After talking to the lender and getting some more information, she learned that the house was in foreclosure. The owner had filed bankruptcy the year prior and hadn’t made payments in quite some time.
“So it’s going to cost some money to pay up the back payments,” Tingle adds.
Hiring a great title company is one of the best ways to protect your investment and make sure you don’t end up footing the bill. And a real estate agent who works regularly with foreclosures is going to be your best line to find the title company that’s a great fit for you.
Header Image Source: (diann boehm/ Unsplash)