You can find pre-foreclosure listings several ways. Here are six steps to help you understand how to buy homes in pre-foreclosure, including short sales.
Pre-foreclosure home listings may provide you the opportunity to find a new home or investment property at a great price. You can find pre-foreclosure listings yourself or you can get local pre-foreclosure listings through a real estate agent.
What is pre-foreclosure?
Before you hunt for pre-foreclosure listings, you need to understand them. Pre-foreclosure sales typically happen when a homeowner can no longer pay the mortgage and wants to avoid foreclosure. While each individual mortgage or home-buying contract will have specific terms governing these timelines, typically, when a homeowner falls behind on mortgage payments by 90 – 120 days, it will trigger the formal “pre-foreclosure” process. This process starts when the homeowner or mortgagee receives a formal, written Notice of Default (NOD), a Notice of Sale (NOS) or a Lis Pendens, (a Latin phrase meaning, suit pending.)
The homeowner in pre-foreclosure often may owe more on the mortgage than the home is worth. In the aftermath of the fairly recent housing market collapse, this is very common as real estate values dropped substantially in many regions. In this case, the home may be offered in what is referred to as a short sale, which is a type of pre-foreclosure sale in which the lender agrees to accept a payoff that is less than the current total mortgage balance. Many pre-foreclosure home listings exist because homeowners are taking proactive steps to rectify a difficult financial situation in advance of being forced into a process that can take years to untangle.
Six steps to buy a home in pre-foreclosure
1) Search public records and public notices
You don’t need a real estate agent to search for homes in pre-foreclosure. Pre-foreclosure listings may be found in public records at your county courthouse and in public notices in your local newspaper. When the lender sends a homeowner a NOD or NOS, it must also file the notice with the appropriate county and pay to have it printed it in the legal notices section of the newspaper for several consecutive weeks. (Each county will have variances in what newspaper or daily publication is suitable toy meet the public disclosure requirements of these notices, so you may want to ask your county assessor’s office which ones apply in your area.)
Go to the county clerk’s or county recorder's office and ask to view these records, free of charge. You can also make a habit of following the legal notices section of your daily newspaper. Remember that these notices indicate that the homeowner is struggling to pay the mortgage, not that he or she wants to sell. You or your real estate agent will need to ask the homeowner if he or she is interested in selling during pre-foreclosure. It’s advised that you send some form of written communication (a postcard, a letter, possibly even an email) inquiring about a sale rather than walking up to the property and knocking on the door.
If you'd rather look for homes that are already foreclosed, this guide explains how to find them and buy them.
Foreclosure laws in each state dictate how quickly a home can be foreclosed once a homeowner is technically in default. These rules will also spell out the processes available for relief in the pre-foreclosure stage. Go here to get specific information about the state in which you intend to buy.
2) Solicit the help of real estate agents
There are real estate agents who specialize in pre-foreclosure sales. These agents can help you identify good deals, homes that are in a state of disrepair, and potential home sales in which negotiations will be difficult. An agent can also be your intermediary and speak directly with any current homeowners on your behalf. This step could prove unpleasant if you aren’t sure if the homeowner wants to sell or not. In some cases, homeowners are scrambling to pay the late payments and forestall the foreclosure process. In these situations, the homeowners may not be very amenable to having strangers intruding into their lives in this way.
You can find real estate agents online, in printed directories or even from pre-foreclosure sale signs posted to solicit interest on properties. An agent representing a pre-foreclosure listing in a neighborhood where you want to buy will probably know of other properties in the area being sold in pre-foreclosure, and other not yet on the radar screen that may soon fall into default. Real estate agents also maintain business relationships with banks and other mortgage lenders, so they often have information about sales that have not yet been made public. Even if you find a pre-foreclosure sale through your own searches, you may need a real estate agent to help negotiate and close the sale (this is particularly true in the case of government short sales.)
3) Search websites with pre-foreclosure listings
The Internet is another resource for finding pre-foreclosure home listings. Banks, mortgage lenders, real estate agents and government agencies list pre-foreclosure sales, short sales and foreclosure sales online. There are several websites that compile these listings for you and may even send you email alerts. They often charge a fee, so you will need to weigh that cost with the convenience of the service.
One of the best sites to look for homes in pre-foreclosure is the U.S. Housing and Urban Development (HUD) website. There is no charge to use these services and in fact, you can find a wide range of free and useful advice at this site. Houses in the HUD Pre-Foreclosure Sales Program are all short sales. To buy a home through a HUD Pre-Foreclosure Sale, you must use a HUD-approved real estate agent and follow set guidelines:
Rules of a HUD Pre-Foreclosure Sale include:
- You cannot be related to the homeowner/mortgagee
- You must offer at least 88 percent of the home’s appraised value within the first 30 days of the sale
- You must offer at least 86 percent of the appraised value during the second 30-day period of the sale
- After the home has been for sale for 60 days, you must offer at least 84 percent of the appraised value
Interested in buying homes HUD owns? This free guide, "Homes HUD Sells: Types and the Financing Options," covers the insurance ratings of HUD homes, the bidding process and available financing.
4) Get pre-approved for financing
You want to get pre-approved for financing from the lender of your choice before you make offers on homes in pre-foreclosure. Pre-approval means a lender has examined your credit and finances, made determinations on other pertinent factors, and determined how much money it will be willing to lend you for a home purchase. This is a more formal step than getting pre-qualified. Pre-qualification is a less binding process and is often just the initial step in getting you to formal pre-approval. The pre-approval process is complete when a lender issues you a formal pre-approval letter stating what level of financing they are willing to offer you. A formal pre-approval letter shows sellers you are serious about the process and is often required when you are considering making an offer on a home in pre-foreclosure. (Of course, if you’re fortunate enough to have access to enough cash to buy a home in pre-foreclosure, this may be unnecessary.)
To learn more about budgeting for your new home and shopping from traditional real estate listings, go to this article. It provides a form to help you create a wish-list and a debt-to-income ratio calculator.
5) Arrange a home visit and inspection
Before you make an offer on a home, get as much information on its condition as possible. Homes in pre-foreclosure often sell for prices below market value, but you still need to make sure the price is a good deal and that you aren’t pursuing more problems with your efforts to purchase a home in pre-foreclosure.
A homeowner struggling to pay the mortgage probably doesn’t have money for repairs or even routine maintenance. A walk-through of the property will give you an idea of any immediately needed repairs and will give you a sense of the degree of any deferred maintenance. A professional home inspection exposes any issues with the property so you can find out how much it will cost to fix them. If your own walk-through or a formal inspection uncovers necessary fixes, it's strongly advised that you get three competitive bids from licensed contractors for what the repairs will cost. You can use those bid estimates to frame your offer and possibly even negotiate a lower price.
If you are working with a real estate agent (or the homeowner/mortgagee is working with an agent) you can arrange any and all visit and inspections through the agent(s). If you are attempting to do all of this on your own, remember that there are still (likely) people living in the home. Be respectful of this and sensitive to the stress they may be under.
6) Complete a title search on the property
You or your agent need to research the property’s title to make sure the home does not have a second mortgage or other liens or encumbrances attached to it. Judgment liens, tax liens, mechanic’s liens and other types of liens need to be cleared before you can transfer the title after you buy the property. Typically, the new owner of a property becomes responsible for any and all outstanding debts tied to the property. You need to know those figures before you negotiate a purchase price. This is another step in the process where a real estate agent experienced in pre-foreclosure and foreclosure sales can save you a lot of time, some headaches and some money. Real estate agents have longstanding relationships with title agencies and routinely request these reports as a part of doing business. On your own, you would have to find and negotiate with a title company for this service (or spend more hour poring over county records, which may still not uncover all of the encumbrances that could come with a homes in pre-foreclosure.)
Buying a home in pre-foreclosure requires some work, yet may be well worth the effort. A pre-foreclosure sale is beneficial to both you and the homeowner trying to avoid foreclosure. To start searching for pre-foreclosure listings today, get home listings in your area free of charge.
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