How to Identify and Invest in Pre-Foreclosure Properties

Through the CARES Act, Congress put the Federal Foreclosure Moratorium into place to protect many American homeowners from eviction during the COVID-19 pandemic. Was officially set to expire on June 30, 2021 and is now extended one more month, until July.  It applies only to homeowners who have defaulted on federally backed mortgages, including mortgages insured by the Federal Housing Administration (FHA), mortgages backed by the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the U.S. Department of Housing and Urban Development (HUD).

Some distressed homeowners have also taken advantage of the CARES Act’s forbearance provision in which mortgage servicers or lenders allow the homeowner to pause or reduce their payments for a specific amount of time. Some of these groups are also providing extensions to enter these programs until September 30, 2021.   But ultimately, the homeowner is still responsible for making those missed or reduced payments in the future. 

The Effect on Multifamily Housing

However, the Federal Foreclosure Moratorium and the CARES Act’s forbearance provision don’t just apply to single-family dwellings. Owners of multifamily buildings have also been able to take advantage of both federal mandates. But these owners must also apply to the CDC Eviction Moratorium, which prevents landlords from evicting tenants because of nonpayment of rent.

If renters still can’t make rent payments or are simply evicted once the Eviction Moratorium expires, landlords benefiting from the Mortgage Moratorium will continue to struggle in repaying their lender, even with the benefit of forbearance. Some of these properties will likely go into foreclosure. Their lenders will repossess properties and resell them relatively cheaply and quickly to recoup the outstanding mortgage debt. These potential foreclosures can present opportunities for real estate investors.

A Surge in Foreclosures

A surge of foreclosed properties is expected to hit the market after the Mortgage Moratorium ends in late June. The actual process of foreclosure that lenders must abide by varies by state. There are 12 states that require lenders to take a judicial path known as lis pendens, which involves notices of sheriff’s sales or auctions. Both are time-consuming and expensive.

Other states do not have a judicial process. Instead, they require that the foreclosing party file a notice of default and notice of trustee, appointing a trustee to manage the process. In 16 of the states that do not require a judicial process, the first public notice of a foreclosure is a notice of trustee sale.

In other words, foreclosure information is posted in the public domain only when an auction is set and a sale date has already been scheduled. For investors seeking out foreclosure deals, the process is further complicated by the fact that lending institutions can take as much time as they choose to foreclose. Banks are only obligated to provide a minimum notice on foreclosure actions. Ultimately, each individual bank determines the timeframe and the process involved in a foreclosure.

Identifying Distressed Properties 

As long as the Mortgage Moratorium is in place, most foreclosures have yet to happen. Forbearance may also help to prevent future foreclosures. PropStream data enables investors to identify property owners who have defaulted on mortgage payments or have received a default or auction notice. These are owners who may still be in jeopardy of losing the property. If they are in financial distress, they could be amenable to selling. This would allow them to avoid a future foreclosure and possibly even turn a profit. Property owners in forbearance may especially consider selling now because equity in their properties has accumulated during the forbearance period.

PropStream data can also be searched by recent recording dates and auction dates. In fact, active auctions that are in the public record remain on PropStream for 60 days after the scheduled action. Auctions that have not yet been publicly recorded are not listed on PropStream. So investors will need to contact the trustee or attorney regarding those auction statuses.

Additionally, as long as the Federal Foreclosure Moratorium is in effect, there are fewer foreclosures and pre-foreclosure actions. But investors can still find distressed properties through PropStream data by searching for tax liens and vacant properties.