Are there benefits in buying a pre-foreclosure home?
Buying a pre-foreclosure home is so different from the process used to buy a property that has been foreclosed; it’s like chalk and cheese. There are risks associated with intervening before the property has been seized by the lender but these can be minimized and the benefits could possibly outweigh any drawbacks.
What is pre-foreclosure purchasing?
For a variety of reasons a certain number of homeowners will begin to default on their mortgage repayments each year. They may have been made redundant, they may have become ill or their may be domestic problems like divorce or death in the family that have caused financial problems. In these circumstances the lender will give the borrower some leeway to remedy the situation. If they fail to make the account current, the lender will then begin foreclosure proceedings against the borrower. Even at this stage the owner will still have two or three months to pay off the amount in default and reinstate the property.
A proportion of defaulting borrowers will still fail to remedy the situation and they will allow the foreclosure process to continue through to completion. However there is nothing to prevent them from selling the property during this time and to use the proceedings from the sale to settle their outstanding debts. It just seems that they believe that this is not a possible outcome and few actually make the decision themselves.
It is more likely that a shrewd investor who has been scanning the legal notices will have picked up the trail of a potential bargain. Rudimentary research will allow this investor to discover just how much cash is necessary to release the owner from their self-made prison. They will have checked the title to find out how many liens and other encumbrances it has. They will also have checked the market value of the property as well as actual selling prices for similar homes in the same area.
Armed with this information, the investor will introduce himself or herself to the home owner and will attempt to persuade them of the benefits of pre-foreclosure selling. Many owners facing foreclosure just don’t want to know, so deep is their depression. Others may be drug addicts or alcoholics who little realize what is happening to them; the negotiation is rarely an easy one.
The Benefits
Far from being a predatory activity, pre-foreclosure buying has benefits for all parties involved. The home-owner is effectively released from their debts and will usually end up with a pocketful of money to help them start a new life. Their credit score is also protected from the significant blow that foreclosure can bring.
The lending organization doesn’t take any delight in the foreclosure processes. They would much rather have clients who pay, on the nose, every month. A pre-foreclosure sale will bring the account current and will halt the foreclosure process in its tracks.
Finally the investor, if he or she has been diligent, will satisfy the owner by negotiating a deal where he takes over the title and the liens in return for a payment equivalent to the owner’s equity or less, depending on the burden that the investor has to carry. In some cases they agree to call it quits if there are also delinquent property taxes to pay.
The property does not stand empty for months while the foreclosure auction is carried out and the investor takes over a property which is minimally “distressed”. With a small investment in repair and redecoration, the property can be on the market in a matter of weeks.