Pre-Foreclosure Investing

The advantage to buying a property at a foreclosure auction is that you can often pay far less than you would have under normal circumstances. Frequently you can invest in improvements and then sell the home for a much higher price than your cost.

The disadvantages and risks are more numerous. Simply to participate in the auction you must have sufficient funds available (either cash or a cashier's check) to cover 10% of the purchase price. You also must be able to arrange for financing within thirty days to complete the purchase or you risk losing your deposit. Next, you're buying the property as-is, without inspection. The condition of the interior of the home is usually a complete unknown. You'll have to be sure that the price you pay is low enough that you can still afford to make significant improvements or repairs.

Buying at pre-foreclosure has two main advantages over buying at a foreclosure auction. The homeowner may be desperate and may be willing to do almost anything to avoid actual foreclosure. In addition, you can enter the property to inspect it before purchasing, so you'll know exactly what you're purchasing. For those reasons, pre-foreclosure investing is a wave many real estate investors are now riding.

Let's look at the pre-foreclosure process. Pre-foreclosure purchases are in many ways similar to a normal real estate purchase: you negotiate with the homeowner, sign a contract, and proceed with the transaction. The main difference is that instead of the homeowner listing the house for sale (and thereby being willing to sell), you're finding potential homeowners to contact in order to try to buy their house, often when they're under duress.

You can easily find homeowners in the early stages of foreclosure by checking public notices. You can also go to the county clerk's office and read the postings. A public notice in the newspaper will list the bank's attorney. You can contact the lawyer for information.

You can also contact the bank that originally made the loan and speak to someone in the bank's delinquent mortgage department.

Or, if you choose to, you can also contact the homeowner directly to attempt to purchase the property. Keep in mind, though, that in all likelihood the homeowner has already been contacted by real estate agents and other investors. If you're interested in buying the home to live in, you may stand a better chance because homeowners in financial difficulty are likely to feel that investors and agents are out to "steal" their home.

With a little research, you may find a homeowner willing to sell their home at a bargain price. There are as many reasons for foreclosure as there are individuals, but people facing foreclosure fall into several broad categories. Let's take a look at a few of them so you'll understand the situations you can be dealing with.

o Absentee husband or wife: If one or the other party has left the relationship (and possibly the area), a transfer of property requiring both signatures simply will not happen. Banks facing situations like this know that the foreclosure process will take a long time, making them even more eager to sell the property if it ever does become bank-owned. If you choose to, you can keep in touch with the bank and monitor the progress of the foreclosure. Occasionally all formalities will take place, and a sale will take place … but not at the pre-foreclosure stage. Instead it will occur at the auction or bank-owned stage.

o Businessperson facing business collapse: If a business owner's once-promoting venture is failing, your offer to buy the property may be of interest. After all, you're offering the individual a way out that is more socially acceptable than foreclosure. Business owners typically are more realistic about cutting losses, selling assets, and making other rational business decisions, no matter how personally painful. You will not know, of course, whether you're dealing with this type of person until you call and they offer the reason why they're in foreclosure proceedings … and the average homeowner probably will not be forthcoming.

o Fiscally irresponsible homeowner: Easy credit has made many individuals ever-hungry consumers … as long as people will permit them to keep consuming. At some point the parties that extended easy credit want to be repaid, and the homeowners find themselves in financial trouble.

The main difficulty is identifying all the possible obstacles to purchasing the property. The homeowners can possibly have other judgments against them. They may not be honest and straightforward in their dealings with you – a great reason why you should always use an attorney to help you with any real estate transaction.

The upside, of course, can be huge. Buying pre-foreclosure properties can be a great way to obtain properties at bargain prices, and with a distinct advantage over buying auction properties: You can fully inspect pre-foreclosure properties. Remember, the largest unknown involved in buying auction property is the condition of the house – since you can not inspect it before purchase, you have no real idea what it looks like inside … and in some cases you'll be in for a nasty surprise after you've purchased the property.

When you buy a pre-foreclosure property you can inspect the house, and if necessary bringing a contractor in to provide an estimate, and create a detailed and accurate summary of the cost (and time) involved in refurbishing, rehabbing, or improving the property .

In effect investors purchasing real estate at the pre-foreclosure stage can make an educated assessment of the investment potential in each property – buying pre-foreclosures eliminates the guesswork.