Buying a house in pre foreclosure can be a smart real estate investment, if you find the right one. That being said, this unconventional property type is often shrouded in uncertainty: first, many are unfamiliar with pre foreclosures and believe them to simply be the same as foreclosed homes. Second, they can be very difficult to find, given their unique circumstance. But by using this guide, you can figure out everything you need to know when buying a pre foreclosure.
What Is a Pre Foreclosure?
Pre foreclosures are properties that are currently at risk of foreclosing. A majority of individuals borrow money from banks or other financial institutions to make their purchases. At the time of signing, the financial institution will place conditions on the loan, specifying how much is to be repaid and in which timespan. Defaulting on monthly mortgage payments is in violation of the conditions placed by the bank, and would put the homeowner at risk of defaulting on the loan. When three consecutive mortgage payments are not met, the homeowner becomes at risk of foreclosure. It is at this stage that the property will be considered in pre foreclosure, and the date in which the property might be reclaimed by the bank would be approaching.
A few distinctions are important to make. A property is not considered a foreclosure until a formal notice is filed by the mortgage lender. As such, many pre foreclosures will not be visible in the public record.
However, utilizing the right resources, and depending on the issuing institution, notices of default may sometimes be listed in the public record. Buying a pre foreclosure, therefore, needs a specific toolset that is distinct from foreclosures.
Related: Pre Foreclosure vs Foreclosure: The Difference
It is also important to distinguish them from short sales. If a pre foreclosure is listed for sale by the homeowner, it will be considered a short sale. However, a property that is considered to be a pre foreclosure is not necessarily for sale. And finally, a short sale is still possible whether the home is up for foreclosure or not.
Are Pre Foreclosures a Good Investment?
Buying a pre foreclosure property should be considered from a handful of different aspects. Due to the unique nature of this real estate property, be sure you’re fully informed on everything you need to know if you intend to buy a house in pre foreclosure.
Price
Many people flock towards pre foreclosures because they can be purchased for better-than-average prices. Taking into account the fact that the seller is unable to keep up with their mortgage payments, there is a good chance that you will be able to score a good deal when buying a pre foreclosure. It is important to be sensitive to their condition, though, since distressed buyers are in a vulnerable position. Be sure to brush up on your negotiation skills to ensure that you find a price that is suitable for both parties. With that said, you can usually score a price below market value when buying a pre foreclosure.
Condition of the Investment Property
Pre foreclosures will usually be considered superior in quality to foreclosures because they will still be inhabited by their owners. Many people shy away from foreclosures for sale because of the on-average poor quality of uninhabited homes. Pre foreclosures, however, will usually be in top shape with regular maintenance by the homeowner. Therefore, buying a pre foreclosure house can be a fantastic idea since you won’t need much maintenance before you start renting it out. It can start generating cash flow very soon after purchase.
Negotiation
Buying a pre foreclosure home can be tricky because this investment property type isn’t always publicly listed, and not all homeowners intend to sell. Therefore, real estate investors often need to make personal contact with the homeowner to strike a deal. This can be both positive or negative, depending on your attitude towards negotiation. Since there is a heavy interpersonal component to acquiring this type of property, you may be able to get a number of concessions regarding price, closing cost, and others.
Related: 10 Best Real Estate Negotiation Tips for Buyers
How to Find Pre Foreclosures for Sale
Here comes the difficult part: pre foreclosure leads are notoriously hard to find, meaning they aren’t even on the radar of many investors. This fact alone accounts for why so many real estate investors aren’t in the business of buying pre foreclosures. But if you’re keen on reaping the rewards of this property type, it all comes down to using the right real estate investment tools.
One of the best innovations in this field is the Mashvisor Property Marketplace, which makes buying a pre foreclosure much easier. This advanced online tool provides investors, agents, property managers, and buyers the ability to find all sorts of distressed property. By aggregating information from a multitude of sources, this platform provides a centralized location for industry professionals to find what they’re looking for. If you’re looking for a real estate deal, this is the tool for you.
A major advantage of this tool over others is that it is built with real estate investors in mind. It will run an investment property analysis on all pre foreclosure listings. So you’ll know crucial information like the expected return on investment with only a handful of clicks. When buying a pre foreclosure, this tool is invaluable.
Another great way to find them is by attending a pre foreclosure auction, whether online or in person. A real estate auction will give you the opportunity to buy a pre foreclosure or other REO property at great prices.
Related: How to Buy REO Properties: 11-Step Guide
Bottom Line
Buying a pre foreclosure can be a highly rewarding real estate investment, if you’ve studied up on the right numbers. As with all property types, it is important that you’re using the right tools and doing the right math. Once you’ve found a pre foreclosure for sale, it is critical that you find out the anticipated return on investment, and study up on the different real estate investment strategies that can be utilized. If all looks good, you’re on track to a profitable investment.