Even with home prices rising in some areas, there is still a way to buy an affordable home. They’re called a pre-foreclosed home, and they can be quite attractive financially.
“These went out of vogue during the housing downturn, but they have come back,” says Darren Blomquist, senior vice president at Attom Data Solutions, parent company of RealtyTrac in Irvine, Calif. “There are fewer of them now. But since the housing market is on fire, people are looking for bargains.”
When a property is in pre-foreclosure, the owner still has a chance to ward off a foreclosure by getting enough money to pay the bank or sell the property to pay off the loan.
If they can do that, they can likely walk away with a little equity in the home and while avoiding a bad credit mark that comes with a foreclosure – a mark can last seven years.
“A buyer comes in and gets a home at a discount from the full market value without the house ever going on the market,” Blomquist adds. “It can be a win-win situation for everyone.”
How does a home enter into pre-foreclosure?
Unfortunate life circumstances can cause anyone to fall behind on mortgage payments, Blomquistsays.
“It’s different these days from when people just got bad loans and got in trouble during the mortgage crisis. Now, the common reasons are death, divorce, and loss of job. These can disrupt lives,” Blomquist explains. “These aren’t people who just forgot to pay the mortgage month after month.”
How long do people have before foreclosure looms?
After a certain number of months of not paying the mortgage, lenders can begin foreclosure procedures if no agreement can be made. That means that the first public notice will be in the form of a Notice of Default. This is a public record, and that’s how people find out about pre-foreclosure homes.
The timespan of how many days a homeowner has before the proceedings begin varies from bank to bank. But new laws after the housing collapse give people a standard of 120 days.
“During this whole time, hopefully, lenders are talking to the homeowners. They want to help them get on track again,” Blomquist says.
It varies from state to state after the notice of default of when the home will go up for public auction. Texas has the shortest time and can be as quick as one month. New York and New Jersey have the longest period of six months to a year.
“However, those are averages. Those auctions can be postponed many times,” he says.
How many pre-foreclosures are there?
When Blomquist started at RealtyTrac back in 2001, pre-foreclosures were very popular because housing prices were going up fast, and people wanted to invest in real estate. At the peak of foreclosure starts, there were a record 203,000 in April 2009.
Now, Blomquist sees 30,000 to 35,000 a month — about 1,000 a day.
“Foreclosures haven’t gone away. There are just less of them, which is good,” he says.
How can you find a pre-foreclosed house?
First of all, these are not properties advertised for sale, usually. Once the Notice of Default is written up, it is recorded at the county recorder’s office.
Notice of Defaults also can be issued for failure to pay property taxes or HOA’s (Homeowners Association), Blomquist says.
He says that you can go to a county recorder’s office to look for these notices of default. An easier way is to find the information online. His own company along with other local and nationwide businesses offer lists of pre-foreclosure properties for a subscription-based fee.
“We go and do that legwork for you. We are at county offices every day collecting these records,” he says.
What he is seeing in the industry are companies such as Open Door and Offer Pad being more proactive and allowing homeowners in the pre-foreclosure period to come to them to get a cash offer.
“You type in your address, and they will give you at least an all-cash offer within three days. Not everyone that goes to them will be in pre-foreclosure,” he says.
Who can buy a pre-foreclosed house?
Typically, buying pre-foreclosed homes has been the domain of investors, Blomquist states. But anyone is able to buy them with the right funding and patience.
Pre-foreclosures are not for the faint of heart either. It is a higher risk property. Sometimes, they can be in bad shape either from maliciousness on the homeowner’s part or just because they haven’t had any extra money to maintain the house.
How do you contact the homeowner?
You can talk to the homeowner before the auction and tell them you know they are in a tough situation. You can first either send a letter or postcard, or just knock on the door.
But Blomquist warns people that homeowners may not be so cordial, and you never know what situation you will encounter. But if the owner is willing, take a tour through the property. Make sure you take note in your head of how much repairs and renovation might take.
Having great tact and empathy can help. Remember that these homeowners are in distress.
What should you offer on a pre-foreclosure?
If the home is valued at $300,000, but the owners still owes $250,000 to the bank, they have to satisfy the bank.
Blomquist says that after doing your homework on the home’s valuation and what it might take to fix it up. You could offer $275,000. They walk away with some money in their pocket, and you get a home at a good price. But every scenario is different.
“I know of some regular home buyers who have scored great deals on pre-foreclosure homes,” he says.
How can you pay for a pre-foreclosed home?
Most investors pay cash, and that can make it a little tougher for the regular home buyer. If there is competition for the house, the cash buyer might get it first.
But Blomquist says that you can apply for a loan, but first get prequalified for a loan before ever making an offer. You’ll then know how much you can afford for the house and for any repairs.
“Banks are always happy to give loans on properties even if they aren’t listed for sale,” he explains.
If the home goes on auction before you could buy it as a pre-foreclosure, you will have to have cash for that purchase.