In real estate it’s all about buying low and selling high – but finding those low-priced properties can be difficult. This is why real estate investors are always keeping a keen eye out for hidden gems known as pre foreclosures.
The best deals in real estate are those that are priced low, in good shape, and that no one else knows about. In most cases pre foreclosed properties check all of those boxes. But unlike foreclosed homes and regular homes, pre foreclosures are not listed for sale – their owners might not even be looking for a buyer at all. So how do you find these hidden gems when they are so cleverly hidden? How does one even buy a pre foreclosure at all?
Read on to learn more about what pre foreclosures are, the best ways to find them and contact their owners and the best way to secure the deal.
What Is A Pre Foreclosure?
The path to foreclosure is a long one that can take years to complete. When a homeowner falls on hard times and cannot make their mortgage payments the bank will usually move to get the foreclosure process started after a few months of missed payments. Usually once the bank notifies the homeowner that foreclosure proceedings will begin they have a set number of days, 120 or so in most cases, to try and come to an agreement to get back on track. During that time the home would be considered in “pre foreclosure.” The foreclosure has not yet begun but it is imminent.
In these cases the homeowner doesn’t have a ton of options since it is not likely that they will suddenly be able to make payments. During this time homeowners are usually worried about making payments and keeping their home, not putting the home on the market. In this scenario you would identify their situation and make a pitch to purchase their home, satisfying their debt to the bank before the foreclosure process can even begin.
Why Are They Desirable?
Pre foreclosure properties are desirable investments because usually a real estate investor can get them for cheap while not having to compete against many other buyers. Because pre foreclosures are not advertised for sale, if an investor finds one they will likely be the only one negotiating with the homeowner. And because of the dire situation the homeowner will likely sell for less if it means getting out from under a foreclosure and paying off their debt to the bank.
Pre foreclosures are also desirable because they are at the beginning of the foreclosure process and may not have fallen into serious disrepair yet. One of the biggest risks of purchasing a foreclosed home is that it is likely in disarray with expensive repairs needed before it can be inhabited again. Pre foreclosures are homes at the start of the process and may not be in as bad of shape.
What Are The Risks?
Purchasing a home at any stage of the foreclosure process will always come with associated risks. Even when buying a pre foreclosure you may bite off more that you can chew with hidden costs and costly repairs. Because the homeowners had trouble paying their mortgage they likely didn’t have the money to keep up with repairs and maintenance of the home for some time. This can mean that there are major issues that need to be addressed before the home can be flipped and sold again. These issues may not be obvious when looking through the home and if an investor did not do their due diligence it can sneak up on them after the sale has been completed.
An investor could also face damage to the home inflicted by the homeowner in retaliation to the bank. This kind of damage can usually be seen in homes that have completed the foreclosure process and have been given back to the bank but the risk is always there.
But unlike a foreclosed home that has been sitting vacant a pre foreclosed home will still be occupied by the homeowners so you don’t have to worry as much about squatters and vacancy related vandalism.
How To Find Pre Foreclosures
So how do you find a home that isn’t listed for sale? Finding pre foreclosures requires some expertise in what to look for. Unlike finding foreclosed homes, pre foreclosures are not a part of any real estate listings or MLS. This means that you have to use a combination of other tools to find them and make a connection with the homeowners.
To find pre foreclosures you should first look at local public records. In most cases when a bank is ready to begin the foreclosure proceedings they have to notify the homeowner with a Notice of Default, which is a public record. This notice tells the homeowner that they have a certain amount of time to get their loan current or the foreclosure proceedings begin. These notices can change depending on your state or municipality so make sure you look to see where you can find their posting to keep track of new pre foreclosures.
A Notice of Default is not always an indicator of a good pre foreclosure. Many homeowners faced with losing their home will do everything they can to keep it and may be able to make their debt right in that time and get out of foreclosure. Use these notices as a guide but getting to a homeowner before they are even served one of these may be your best bet at getting in before the competition.
Driving For Dollars
Generally homes that are falling into foreclosure are also falling into disrepair. If someone cannot make their mortgage payments they likely cannot afford to maintain their home. This is why driving for dollars can be a good strategy at finding homes that may be falling into foreclosure before they actually do. Drive around neighborhoods that you are interested in and note which homes seem to be headed in that direction. Then assemble a list of addresses, skip trace contacts, and begin to market your business to them.
Direct Mail Campaign
The best way to find pre foreclosures is for them to find you. Create a list of homes that look to be in some kind of distressed state and start them on a direct mail campaign. Direct mail is one of the most effective ways to market to homeowners. The homeowner may not have gotten to the point of foreclosure but they may be heading there and want to sell to get out of their situation.
If you are consistently sending them letters or postcards that directly address their needs you may be able to get them to sell to you before their bank begins the foreclosure proceedings. This is a great way to turn prospects into leads and nurture those leads into deals. Combine direct mail marketing with other forms of communication to make real connections that can lead to deals.
With your direct mail campaign or other marketing efforts make sure to utilize cold calling to make connections. After sending out a postcard or two follow up with potential leads with a call to introduce yourself and make your case. Making a personal connection may be a better way to get their attention and to see what they are thinking. This is a great way to secure deals as well as learn more about the homeowners in your area.
Be sure to be sympathetic and personable on your call. Coming off as a business person rather than a human being may not be a helpful strategy if you are looking to make a connection with a person who is in obvious financial distress.
Another way to find pre foreclosures before anyone else is to use your network of local professionals. Tap into any of your local resources and see if they know of any homeowners that are facing hard times. These professionals can be in any industry but pay special attention to any real estate agents with expertise in your area.
How To Buy
Once you find a pre foreclosure how do you purchase it? Pre foreclosures can be purchased just like any other home but you may need to waive contingencies and purchase it “as is” to make the deal go through. The good thing is that if the property you want is a true pre foreclosure you may not have to compete with another buyer to get the property, which can make the process smoother and cheaper.
Before you make any kind of offer you need to do your due diligence on the property and the neighborhood. How much does the homeowner have left on their loan? How much is the property worth? How much money will it take to repair the property? You need to be able to answer all of these questions to ensure that the property is worth pursuing.
In most cases cash is king when it comes to purchasing pre foreclosures. Above all the seller is looking to get out of debt with the bank before they are hit with a foreclosure. Cash is the most motivating way to get the sale going because it shows you have the means to go through with the deal and it removes any of the issues with financing that may arise.
If you plan to finance your purchase you must come into the negotiation with pre approval to show that you are serious about buying. If there is any competition on the property however, the investor who is willing to put up cash will likely win.
If you have the patience and drive to find and buy a pre foreclosed property you could make a bundle after renovations. But this process is not for the faint of heart – the process can be lengthy with many properties pursued but not purchased. But if you have the patience and expertise in the industry to be able to identify a good buy you can make a great business out of turning pre foreclosures into beautiful new homes.