In many ways, foreclosures and pre-foreclosures are similar. For a real estate investor's bottom line, though, the difference can be dramatic. Let's compare foreclosures and pre-foreclosures to see how each of them impacts investors.
What Are Foreclosure Properties?
Foreclosure properties have been reclaimed by the bank. The property owner did not fulfill the terms of their mortgage contract, so the bank took possession of the property. In most cases, foreclosures happen because the owner missed several mortgage payments in a row.
Once a bank forecloses on a property, it sells it as quickly as possible. Banks don’t want to own and manage properties — they need to keep money flowing. A bank wants to get its money back so it can loan it to someone else. That's why foreclosures can sell at such low prices, either on the open market or through a foreclosure auction.
What Are Pre-Foreclosure Properties?
Foreclosures don’t happen overnight.
First, the bank notifies an owner that they are not meeting the terms of their contract. Then owners have time to correct the problem before the bank forecloses. Typically, once owners miss several consecutive payments, the bank will issue a notice of default. At that point, the property will be in pre-foreclosure.
At this point, the owner has two options.
- They can correct the issue. If the owners can come up with the amount due and pay the mortgage going forward, they can avoid foreclosure.
- They can sell the house. At this point, the home still belongs to the owners, not the bank. They have the right to sell the house and use the proceeds to pay off the remaining mortgage balance. They might even have money left over to use as a down payment for a more affordable home.
Buying a Foreclosure vs. Buying a Pre-Foreclosure
Foreclosures and pre-foreclosures each come with benefits and downsides for real estate investors.
Pros and Cons of Buying Foreclosures
The main benefit of buying a foreclosure is the low price. Banks don’t want to be responsible for maintaining the property. So, they are willing to negotiate and sell for less than the market value just to get the property off their books. However, you’ll be competing with lots of other real estate investors for the property, so they might bid up the price.
Also, because the owner was forced to leave their home, the property may be in poor condition. They might not have had the cash to maintain and repair the home as needed. And they might have been angry enough to damage the property before leaving.
Pros and Cons of Buying Pre-Foreclosures
While foreclosures may be less expensive, pre-foreclosures might be in better condition. However, there may still be some deferred maintenance because the homeowner wasn't able to handle the upkeep.
Also, owners who want to sell their pre-foreclosure are highly motivated. They need to sell before the foreclosure hits their record and ruins their credit. Because of this, the homeowner may be more willing to negotiate and there may be less competition, allowing you to get the best deal.
The Secret to Getting a Deal on Pre-Foreclosures
As an investor, your best bet is to contact homeowners who are in pre-foreclosure but have not yet listed their homes for sale. Most active investors check the foreclosure listings and the multiple listing service (MLS) for new listings. Very few do the research to find pre-foreclosures that aren’t yet listed for sale. If you do, you'll likely face little to no competition with other buyers.
PropStream makes it easier than ever to find pre-foreclosures. We pull data from multiple sources, including county records and the MLS. You can generate a list of properties in your area that are in pre-foreclosure but not listed for sale.
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