Is buying a pre-foreclosure a good idea?
Most people have heard about foreclosure properties where owners have defaulted on their mortgage payments and the lender has seized the property as security on what remains of the loan. These properties are then placed on the open market, often at a discount because of their condition and to attract a rapid conversion into cash. A pre-foreclosure is where the mortgagor who is in default and has been served with a notice to foreclose undertakes to sell the property himself or herself and use the proceeds to satisfy the debt.
If you can find pre-foreclosure sellers, the potential to win the sale is far greater than it would be if you were to bid for the same property at a foreclosures auction. The foreclosure auction process is very fair but it allows no scope for influence as it is, in effect, a sealed bid auction. Let’s be clear that influence here does not mean menace. There’s no quicker way to get yourself branded as an unscrupulous real-estate predator than to prey mercilessly on vulnerable homeowners in foreclosure. House-selling is like any other selling practice whether you are selling under duress or not; we all like to sell to people that we like and owners in foreclosure are no different. They would rather deal with a pleasant business-like person than some faceless organization.
Pre-foreclosure purchasing is less straightforward than foreclosure buying but it is not beyond the wit of most people. In effect what you are doing is buying the home owners share of the equity in the property, bringing the loan current by settling the delinquent payments and assuming the mortgage loan. Of course there are legal fees and the issue of any liens that may be on the title and perhaps more detail to be considered but overall pre-foreclosure buying is a better outcome for all parties. The previous owner has an undamaged credit record, the lender has one less distasteful foreclosure to deal with and the new buyer takes possession of a property that will require minimum fixing up as it has not been left vacant to deteriorate or to be vandalized.
Pre-foreclosure investing cannot be done on the cheap, however. At the lower end of the market it requires a modicum of capital, say a few thousand in savings, a reasonable credit score and an annual income in excess of $50,000. If you are planning to get involved higher up in the marketplace, you’ll need more savings and a better annual income to assume the loans on reasonable terms.
Finding appropriate pre-foreclosures is the key to the whole process and it is becoming easier with the internet. Even in pre-internet days you would be expected to pay a few hundred dollars finders fee to the sharp eyed bird-dog who passed you the information, so don’t be amazed that finders fees are still expected. Educate yourself about the pre-foreclosure buying process; there are some well written books on the subject that can help but the rules will vary from state to state, so make sure your background work is thorough.
Turning a pre-foreclosure round for resale should be far more rapid than for most foreclosures, so you’ll see the fruits of your labors very quickly