How to Buy a Property in Pre-foreclosure
97For a property investor, the benefit of buying a pre-foreclosure home is the opportunity to pay less than the property may be worth by offering a short sale to the current owner and therefore the chance to avoid foreclosure and possibly save some of the equity in the house.
There are several steps to go through and often a deal will not come to fruition, either because a satisfactory deal cannot be negotiated, the lender may not agree to a short sale (although as foreclosure rates rise, this is becoming less of a problem) or another buyer may beat you to the drop. Having said that, some 80% of short sale negotiations do not get completed. Selling your home through this process means taking a realistic view of the current market value also.
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Step One - Finding a suitable property
The first step in the foreclosure process is the lender filing a “Notice of Default.” This becomes a matter of public record, filed at the County Recorder’s Office in the county in which the property sits. There are numerous websites and companies offering listings of these properties, but the information is freely available if you look for it. See Foreclosure listing sites. The best ways to find properties are the County Recorder or a real estate bird dog. (Bird Dogs make a living finding properties for investors and taking a commission on the sale.) I do not believe it is possible to keep an up-to-date national list and companies who claim to have one should be avoided.
Step Two – Contacting the Owner
During the foreclosure process, the owner is still responsible for the property and may sell at any time up to the auction date. Be aware you will not be the only person contacting the owner. There are many companies, scam artists and con men making their living ripping off home owners facing foreclosure. These companies are well prepared, make a great presentation and in some cases are making unrealistic promises to the owner. You will have to convince them you are legitimate
Step Three – Valuing the Property
This is where most would-be investors fall down. The value of the property depends on a lot pf things. Particularly the state of the market. REO properties are on the rise, and at least one national listing site is claiming over a million properties on their books. Pay close attention to prices realized in local auctions and the amount of time properties are sitting on the sales block. Also be aware that many unscrupulous real estate agents are deliberately under pricing pre-foreclosures at prices no lender or owner will accept, to attract attention and interest.
Real Estate Agents
Here are a couple of real estate agents attempting to persuade you they are interested in something other than selling a house. It's rather funny, a little off topic, but show you really need to be carefull what you believe in the real estate market.
Step Four - Making an Offer
You must first come to an arrangement with the owner before approaching the lender. The amount you are prepared to pay must take into consideration the condition of the property and therefore the amount of money needed to be spent, taxes owed, and outstanding mortgage payments overdue. To be attractive to the owner, the offer must allow them to walk away either with equity, or at the very least, free of debt. To be attractive to the lender, the offer should allow them to sell the property to you at a price that means they would lose more money going through the foreclosure process. You must first convince the owner, then approach the lender.
Step Five – Pay for the Property
Another advantage of buying a home in pre-foreclosure rather than at auction is the possibility of raising financing. You may even be able to negotiate a loan from the current lender. Hard cash investors may be willing to invest as much as 70% of the purchase price. If you are unable to get an investor, it’s maybe not such a great deal.
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Things to be aware of
Laws vary from state to state and it is important to check the local laws regarding what you may, or may not offer an owner. Due to the massive increase in pre foreclosure and foreclosure scams, some states are introducing new laws to protect the home owner. Buying a home in pre-foreclosure is not as straightforward as many would have you believe. It is very important to do your homework, research the local laws, value the property correctly and avoid the major pitfalls. Donald Trump has made money doing this in the past and has an interesting CD collection. There are also numerous books on the subject for sale. Avoid paying lots of money for seminars and over priced education on the subject. You will learn far more by buying a property and going through the process yourself. Buy an inexpensive book, or Trump’s CDs and spend the money you were going to spend on a seminar on the property instead. There is a link here to the HUD website explaining the process of buying a pre-foreclosure home from them.
Some real estate resources
- Bank Properties — Bank Owned Properties & Foreclosures For Sale
Authority site dealing with foreclosures and repossessions. - HUD Pre-Foreclosure
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My pleasure Roger.
Enjoyed reading this, Mark. I was recently involved in an effort to purchase a house but the deal fell through when the seller, who was in foreclosure, couldn't complete the deal.
Thanks William. Most of them fall through for one reason or another.
Good explanation of forclosure for people like me that do not understand it.
Icould not do that because I would feel sorry for the person losing their house or home. Thanks for sharing that
My pleasure. But you could actually be doing them a service. It is better to short sell and get out free and clear than to go through foreclosure - they are going to lose their house anyway.
:) attaching to the upthumb so you know I've been through.
Hehe. You are crazier than I am :D
that would be a safe bet :p
thanks so much for the info! My family plans to relocate across the US and this will be a great help in finding the perfect new home. Keep up the good work.
I've bought numerous pre-foreclosure homes and provided hard money for several properties as well. You've given a very good overview of the pre-foreclosure buying process. Good job!
Good information here. Thank you. I assumed the information refer to US. Its bad to read how people make money at expense of citizens' home. The government should provide special and stable interest rates to home owners/buyers.
Mark -
This is a very good, informative overview and I'm glad you've written it!
Washington State has just passed a distressed property law to protect homeowners from the scam artists. Myself also being in the real estate industry, I and my clients are now subjected to revisions to contract froms and new addenda as a result of this law.
So far, I've completed one short sale transaction on behalf of a buyer and it went very smoothly. I'm currently representing another buyer and have submitted another contract on a short sale listing and man, do I feel sorry for the listing agent on this one! I feel he's already earned his commission and I hope it does result in a successful closing for him, whether it be w/ me and my client or someone else! The interesting part - contrasting both deals (this one not even being in escrow yet!) - the lien holder is WAMU and the experiences are night and day. My client offering the asking price I'm sure contributed to the difference with the first already successfully closed deal. This second one, we are $9,000 below what the appraisal came in at, so that's part of the reason for the hold up w/ this offer getting accepted. This property WAS scheduled to go to auction a couple weeks ago with a starting bid of aprox $50,000 under our offer. Seems pretty crazy!
I just read on your 'good bye hubpages' piece, you will be participating here less often since you have a new writing job, blogging on luxury homes. That's very cool and I wish you all the best! I figured I may as well leave my comment here since there are sooooo many already left on your other hub - what a popular guy you are! I like your writing style and can see why someone would want you on board! Even though I've only read a small fraction of what you've written, in addition to it being evident you are a popular guy, I can see you are also smart and funny.
I can see we'd have disagreements when it comes to spiritual perspectives, but that's ok. We all have things to offer one another and our differences contribute to making the world an interesting place.
Again, all the best!
And if you come across any investors who want to buy near the Seattle area, don't hesitate to let me know!
Thanks Christine _ I won't hold your religious beliefs against you :)
Drop me a line any time.
Mark
Great step by step plan ..I normally build new, rent it, keep and hold.. but have discovered the fortune hidding in the foreclosure market. You guys in America have maybe some more chances to grab a bargain but firesales coming up here ...otherone pain, our gain ...
Cheers Thomas
Check out my website:
You have some great information here. :) I'm glad to have found your site!
Nice info. Will check out the links too. I was wondering what do you think is the forecloseure/auction scenario houses in seattle, WA.
God HUB Mark,.. short sales are good deals too nowadays when they are marked down to current market value. But, there will be lots of competition even if you have 800 credit score and assets.
My kid likes the bird dogs and straw men better. It sounds like stuff right out of the wizard of oz.
Good article. I like the way you laid out the steps. This is the time to buy and the foreclosures are up everywhere.
In this market you can save someone's credit and get a great buy!
Ok maybe this question could also suggest I am not ready to proceed but I am curious. If a place has 500k debt on it- and they are trying to sell it for 250k in a pre foreclosure deal- what happens to the remaining debt? does the bank just let it go?
Lurker - Yes, this is crucial. You must negotiate with the bank and get them to agree to write off the difference.
Are there any rules on doing this from a foreign country?
Just ensure you are using a reputable agnt.
Can you really belive the websites that list local foreclosures and bank owned properties with prices as low as $1200? If these prices are for real (or not) would that be the money owed on the property?, taxes? and can you really buy that low?
Some of them are kosher = do your research - you may find that a property that will sell for 1200 bucks may be somewhere you do not want to live -
I put an offer on a house that is in Pre-Foreclosure. It was listed for 6 months at $289k and didn't sell. He then was summoned by the bank. He now owes $193k and it is probably worth $270. I offered $200k and he countered with $280k. The highest I'll pay is $238k. Any advice on what to counter? Thanks!
Hard to say - It depends where it is and the condition. If he only owes 193 and it is worth 270, you are not in a very strong position. I would wait until the market value goes down another 40% - which it will - and then make a lower offer.
Indeed buying a pre-foreclosure does allow people to pay less, something that should be on everyone's mind given the economic pinch we're all feeling. Concisely written guide you have here. I'm into real estate myself and I appreciate your perspective.
"But you could actually be doing them a service. It is better to short sell and get out free and clear than to go through foreclosure - they are going to lose their house anyway." Good point. As someone into property auctions, it pains me to sometimes have to know the financial sad times of the home owners. But these things do happen. Good hub.
Wow! Nice article Mark. You really know what you are talking about.
This article is pretty accurate. I have bought a couple of foreclosed homes and turned them into rentals. One of the homes I bought that was a bank owned foreclosure, I put about $5,000 into repairs and I was cash flow positive with the first tenant. I estimate that I saved about $50,000 off the price of the home when I bought it. I don't buy a foreclosure unless I am saving at least $30,000. Just make sure you do the math first and take into account repairs and property taxes and add on a few thousand for "surprises". Realtors aren't so bad. I have had realtors help me find foreclosed properties before and they have been very helpful. Don't let the other posters like "deathbymagoomba" and "rgwinn" scare you away. Who knows what their deal is.
Great Hub! Some great property tips!
Very informative. Fell in love with a house that went into short sale, but I'm still trying to sell my home. This sounds like I will not be able to get my hands on the house as it is going into foreclosure. If I understand you correctly I would have to have cash at this point.
Preforeclosures are often scams. Especially the multiple offer scam which gets people to bid against a ghost.
I didn'tknow about the HUD pre foreclosure program, I used your link and read about. It sounds like a great program that I'm going to research further.
Mark,
Great article. A few questions.
First regarding #2, contacting the owner. Is it legal to literally drive to the person's home and inform them of why you're there and politely ask to see the home? Obviously it's a touchy situation but is it allowed?
When it comes to making an offer (let's say on a house in a typically good to very good area), is there a general percentage of the intelligently valuation of the house that you offer. In other words, if you value it at 500K, do you generally offer 80% on homes, and in that case 400K?
Lastly, when going through the final step of paying for a home (let's say at the aforementioned 400K amount), is there generally a minimal amount the lenders want up front? Would 200K put down on the 400K home be enough? Also is that through the bank that the other homeowners were in pre-foreclosure with or do you settle with them (paying any missed mortgage and tax payments) and then put the remaining money from the 200K (say 185K) down on the house through a new lender/bank?
Sorry for all the questions but I am new at this and want to be wise.
This article Mark is very informative, giving me more understanding as to how it's done in the US. I do my real estate business here in the Philippines, and you're right, laws on real estate transactions differ from state to state, or from country to country.
It's a bit different here in the Philippines, and you might find this interesting. There is a law here called the 'Maceda Law' named after the senator who principally authored the bill (RA 6552), an Act to Provide Protection to Buyers of Real Estate on Installment.
The Law requires the Seller to refund to the defaulting Buyer 50% or more of all payments made to the Seller, provided that the Buyer has paid at least 24 monthly installments prior to the notice of cancellation of the account. There was no statutory refund required before this law came in. All payments were charged to principal and cost of money.
This law is a bit tricky but at the same time it offers me golden opportunities for real estate buyers under installment scheme who defaulted prior to the 2-year requirement. Those defaulting Buyers who paid only less than 24 monthly installments are not entitled for any refund because the law considers all payments as monthly rental and cost of repairs.
Those are my target accounts. I have made acquaintances with the Credit & Collection Group of the major developers here and represent myself as somebody who will help their company get rid of defaulting accounts, so they give me updated info of these potential accounts. Then from there I contact the Buyers by inserting my promotional leaflets into their mail box, "advertising" my offer for help to "distressed" Buyers. That's my guerilla marketing tactic, I should say.
I would offer them some form of financial consideration in exchange for giving me absolute right over the account via the Deed of Assignment With Assumption of Mortgage and to assume and continue their monthly payments. That's actually very favorable to them because if they talk to the Developer they won't receive anything.
Say for a 5M house ($113,636 in US currency), they have usually paid the required 20% equity during the first 12 months equivalent to 1M (%22,727), and say have paid 10 months of amortization or 506,700 ($11,515), leaving a balance on principal of 3,786,180 ($86,050).
But a 5M house 2 years ago will easily sell at around 6M ($136,363) today. So even if I offer them for a 30% refund on all payments made and spend around 250,000 ($5,681) on repair cost I will still make 1,511,810 ($34,360) or 34% of the deal.
But if I am able to re-sell the property in a month's time (which usually is the case here), then my total actual investment would only be 702,010 ($15,953) for the refund and the repairs. That means my real earnings would be 115%, and that's net of what I pay to the original Seller, the Developer.
If the new Buyer qualifies for Bank Financing (Bank Mortgage) the better for me because I can get my 115% return outright, meaning in 30-60 days after the deal is closed. And I reward myself with a hot pan pizza bite from Pizza Hut!
That's how different it is up here in the Philippines Mark. And I'm enjoying the fun! Sorry for some of the terms I used that may mean differently in the US real estate lingo.
Hello,
I am new also in the Pre Foreclosure business, Can someone give me the corect information in house just spend 20k to get an House. I have someone that can fix the entire house he has been doing for 20 years. Can I realistically only spend 20k in an House.
Thx
Lu
Nice and useful advice for those interested to invest in properties. you have explained all that in a very comprehensive manner step by step.
Thanks for the nice hub. It certainly helps those want to invest in properties and looking to make some money in real estate business.
I have a question. What if the homeowners have moved away, and don't want anything to do with the house and the bank has no auction date in site? Are there ways to get around this.
No - the banks are happy to let them rot rather than sell at a low price. Then they would have to accept that the hundreds of thousands of properties they own are not worth anything and therefore they have no assets and are broke.
I'm seeing pre-foreclosure notices in my area and they list the remaining sum owed the mortgage lender. Would it be poor form to offer $75,000 for a outstanding debt of $50,000 even if the home looks to be valued in the $3-400,000 range? Is this a fruitless effort as I will always get laughed-away?
rogerbeta 4 years ago
Mark,
I like your page very much, and reminded me of A. Ginsberg doing this type of business in a big way using eBay for it.
You just motivated me to write an article about Real Estate, thanks