What is Pre-foreclosure and Why You Should Consider it?
Real estate prices have skyrocketed in recent years, especially in busy, metropolitan cities. A recent study conducted by Harvard University found that over 38 million American households have difficulties affording housing, an increase of 146% in the last 16 years.
Unfortunately, there doesn’t seem to be an end in sight. Americans who dream of being homeowners may need to keep an eye out for other options in order to find affordable properties. In particular, it’s worth checking out homes that are in pre-foreclosure. Pre-foreclosure homes are often listed at bargain prices and interested buyers can usually snap up a home at a price that’s well below market value.
What Is a Pre-foreclosure?
A pre-foreclosure home is a property that is considered “distressed”. Often this means that the original homeowners have fallen behind on their monthly mortgage payments, but the lender has yet to repossess the home. This means that the homeowners still occupy and live in the pre-foreclosure home. It could also mean that a home could be in pre-foreclosure and still not be up for sale.
However, it would be worth keeping an eye out on homes in pre-foreclosure that you are interested in, as they could be put up for auction. At which point, they can be purchased.
Why Should I Buy Pre-Foreclosure Homes?
Pre-foreclosure homes are becoming more and more popular. The reason for this is that they are not typically listed on the ML, which means that you’ll get less competition from other buyers. This means that you’ll be less likely to get into a bidding war with other potential buyers, so you’re more likely to be able to buy a foreclosure home at a lower market price.
The process of buying a pre-foreclosure home is typically simple once you’ve got everything figured out.
How Do I Find Pre-Foreclosure Homes?
If you want to buy foreclosure homes below market value, you need to keep an eye out on the market. When a pre-foreclosure home is up for sale, it will be listed on real estate sites or be put up for auction. It can be difficult to find these homes at times, so you might want to ask your realtor to keep an eye out as well.
You can find out which homes are in pre-foreclosure by following up on public record notices. Some realtors do use these notices to approach homeowners who may be interested in selling their home. It’s usually not a good idea for most people to approach the homeowners themselves, as they might accidentally end up crossing the line into harassment. Various states will also have different laws regarding approaching owners of distressed properties.
What Should You Do Once You Find a Property?
Once you’ve found a pre-foreclosure home that seems to meet all of your expectations, you’ll want to do your due diligence. You need to be much more thorough with a pre-foreclosure home than with turnkey property. Some of the things that you should do include:
- Financial due diligence. This includes figuring how much the prior owners owed on the property, whether there are any liens on the property, and how much homeowners insurance might be. You also need to make sure that you have enough to cover not only the down payment but also the monthly mortgage payments as well.
- Physical due diligence. This includes a very thorough home inspection that looks at whether there are any structural issues with the property. In particular, it’s important to look for potential issues with the foundation.
- Legal due diligence. Last but not least, make sure that there are no other liens or judgments placed against the property. You might even want to consider getting a professional title company to research the title to make sure that it is free and clear.
At times, the auction house will have some of that information available for you. However, you should do your own research to avoid any surprises.
How Can I Buy Foreclosure House Below Market Value?
If you want to buy a pre-foreclosure home, the process is a bit different. You don’t necessarily make an offer and then place a down payment. Instead, you’ll be expected to cover the missing mortgage payments, any liens on the property, as well as homeowners insurance.
Your offer will be a lot more appealing if you place an offer in cash. If you don’t have liquid funds, you can also apply for government-sponsored programs like:
- 230(k) loan. This is one of the easiest government-sponsored loans to apply for. There are two versions: a streamlined version, which allows individuals to borrow up to $35,000 above the property’s sale price to cover minor repairs and renovations, and a traditional version, which can cover more extensive repairs and renovations.
- HomePath Ready Buyer that’s geared towards first-time buyers, and will give individuals up to 3% in closing cost assistance.
- A conventional mortgage. Unlike when placing an offer with traditional real estate options, you’ll want to get the mortgage pre-approved before you place an offer for a pre-foreclosure home.
There are a lot of other types of financing options available as well. Finding a way to finance a pre-foreclosure home is not too difficult.
Attend a Pre-Foreclosure Auction to Get a Better Idea of How They Work
Buying a pre-foreclosure home gives you an opportunity to nab a great property at a price that’s lower than market value. More importantly, you’ll likely face less competition and will be able to find a property that not a lot of other people are looking at.
Before placing an offer, make sure that you have a good grasp of the condition and state of the home that’s in pre-foreclosure. You should also weigh out the pros and cons to make an informed decision on what’s best for your needs and situation.
