Pre-foreclosure. That blue dot on Zillow is commonly associated with the property being below market value. However, that isn’t always the case. In fact, many times, a home that is in pre-foreclosure is not discounted at all. Before we discuss the pro’s and con’s of buying a home in pre-foreclosure, let’s discuss exactly what it means.
Pre-foreclosure is a first step in the foreclosure process. A homeowner has entered pre-foreclosure when they are behind on their payments and a notice of default (NOD) has been filed with the county. Once the NOD has been filed, the homeowner will have a period of time to negotiate with the bank. This negotiation could take the form of a short sale, re-structuring the loan, or extending the pre-foreclosure process allowing the homeowner to catch up on their payments. Bottom line, a home in pre-foreclosure is not officially for sale. If the owners can not come to a resolution with the bank the home will move to the next step of the foreclosure process.
Generally, the most negative aspect of a pre-foreclosure is the lack of information. Aside from the home’s location, there is very little accurate data to review. The best way to obtain reliable information is to contact a local Realtor. They will know of ways to research the property.
If you decide to move forward after researching the property the next step is having the Realtor contact the property owner. This hurdle is not for the faint of heart. The owners have probably undergone a life event (divorce, job loss, death in the family, etc) and are not interested in what a buyer has to say. Even if they are open to discussion, the majority of times the homeowners do not possess equity. If they did, the owner would have already listed with a Realtor and sold the home. However, there are rare times the sellers are willing to negotiate AND the home has equity.
The most positive aspect of a pre-foreclosure is the opportunity to help a homeowner. To succeed with pre-foreclosures, a deal should be constructed in which both parties benefit. It is important to recognize the distressed homeowner is very likely to be skeptical of the buyer. To move the transaction forward, the buyer should emphasize the benefits of selling before the foreclosure becomes final. For example, the seller may be comforted by no longer bearing the burden of home ownership, and saving their credit from damaged caused by foreclosure. The buyers gain when they purchase the home and help someone in the process.
If you are considering buying a home that is in pre-foreclosure recognize that it may be a lengthy process. However, if your Realtor is persistent and you are patient, buying from a person in pre-foreclosure can be an excellent way to become a homeowner.
John Jennings, III
BRE# 01982171
