The Basics of Buying Pre-Foreclosure Properties

Want to avoid the auction process? You can, if you contact the owner of a property before the bank starts foreclosure proceedings. Once the bank starts foreclosure proceedings it starts tacking on late fees and interest penalties, and once they turn it over to lawyers they add on their own fees. If you can reach the owner beforehand there can be more equity in the owner's property than if it goes to auction. "Pre-foreclosure" is the term used to describe buying a house during the foreclosure process but before the actual auction takes place.

Pre-foreclosure purchases are in many ways similar to a normal real estate purchase you negotiate with the homeowner, sign a contract, and proceed with the transaction. The main difference is that instead of the homeowner listing the house for sale (and thereby being willing to sell), you're the one finding potential homeowners to contact in order to try to buy their house... and often when they're under a great deal of stress.

You can easily find homeowners in the early stages of foreclosure by checking public notices. You can also go to the county clerk's office and read the postings.

A public notice in the newspaper will list the bank's attorney. You can contact the lawyer for information, but don't be surprised if they're not particularly cooperative. The law office exists to provide legal services, and acting as a receiver for the property is just one of those services.

Remember, the lawyer has no vested interest in helping you purchase the property or in helping the homeowner get a better price for their home. The lawyer is simply interested in handling the transaction. The law office is paid to prepare paperwork and conduct the sale, not to act as a real estate information hotline. Unless you have a personal or business relationship with the lawyer involved you're unlikely to get any more information than is already printed in the public notice.

If you choose to, you can contact the homeowner directly to attempt to purchase the property. Keep in mind, though, that in all likelihood the homeowner has already been contacted by real estate agents and other investors. If you're interested in buying the home to live in, you may stand a better chance because homeowners in financial difficulty are likely to feel that investors and agents are out to "steal" their home. (Remember, the homeowner is already under a considerable amount of pressure, and is not likely to respond positively to your approach, no matter what your motivation or how good your intentions are.)

If you actively search, you may find a homeowner willing to sell their home at a bargain price. Just make sure you understand some of the dynamics involved.

The first is strictly emotional. Even if it's in their best interest, most homeowners don't want to give up their homes. They still desperately hold out hope that things will somehow magically work out. Most are also very upset they're facing foreclosure even if they find themselves in that position through their own mistakes or lack of judgment. Even if it's in their best interest, the typical homeowner won't want to offer you a bargain on their property to avoid foreclosure. If nothing else, they don't want to see anyone else profit from their loss... and you can't really blame them. You'll need to work through their emotional issues.

Another issue to keep in mind is a potential lack of existing equity in the house. If a judgment has been entered, the homeowner most likely will have to come up with the total amount of money required to satisfy the judgment, which at the very least will require the loan to be paid off in full. The homeowner needs to get the whole loan amount from the sale in order to pay off the loan. So unless the homeowner has a great deal of equity in the property, you're unlikely to be able to negotiate a price a lot lower than the home's value. The likelihood of significant equity existing is slim... or else the homeowner probably wouldn't be facing foreclosure in the first place. When you find a potential seller, one of the first things you should do is try to determine how much equity they have in the home - that will help you quickly determine if the deal is worth pursuing.

There are as many reasons for foreclosure as there are individuals, but people facing foreclosure fall into several broad categories. Let's take a look at a few of them so you'll understand the situations you can be dealing with in the pre-foreclosure stage.

• Absentee husband or wife if one or the other party has left the relationship (and possibly the area), a transfer of property requiring both signatures simply won't happen. You'll never get both owners to sign the papers. Banks facing situations like this know the foreclosure process will take a long time, making them even more eager to sell the property if it eventually does become bank-owned. If you choose to, you can keep in touch with the bank and monitor the progress of the foreclosure. Eventually all formalities will take place, and a sale will take place... but not at the pre-foreclosure stage. Instead it will occur at the auction or bank-owned stage.
• Businessperson facing business collapse if a business owner's once-promising venture is failing, your offer to buy the property may be of interest. After all, you're offering the individual a way out that is more socially acceptable than foreclosure. Business owners typically are more realistic about cutting losses, selling assets, and making other rational business decisions, no matter how personally painful those decisions might be. You won't know, of course, whether you're dealing with this type of person until you call and they offer the reason why they're in foreclosure proceedings... and the average homeowner probably won't be forthcoming. But you can certainly try.
• Fiscally irresponsible homeowner easy credit has made many individuals ever hungry consumers... as long as people will permit them to keep consuming by giving them more credit. At some point the parties that extended easy credit want to be repaid and the homeowners find themselves in financial trouble. If they've gotten themselves in over their heads, you may be able to help them - and profit from the transaction, too.

The main difficulty in buying pre-foreclosure properties is identifying all the possible obstacles to purchasing the property. The homeowners can possibly have other judgments against them. They may not be honest and straightforward in their dealings with you. In fact, in this case your best bet is to deal exclusively with the attorney representing the homeowner. Any agreements, down payments, or other financial arrangements you make could be subject to an eventual bankruptcy on the part of the homeowner... in which case you may have no legal recourse.

Buying at pre-foreclosure does have two main advantages. The homeowner may be desperate and may be willing to do almost anything to avoid actual foreclosure.

In addition, you can enter the property to inspect it before purchasing, unlike when you purchase at auction. Buying at pre-foreclosure is another way to find great deals on houses you can flip or convert to rental properties.