How to Invest in Preforeclosures: The Basics

What is a preforeclosure? When a homeowner gets behind on his mortgage payments, the bank starts the foreclosure process in order to recap as much of its money as possible. The time from the notice of default up to the time of the foreclosure auction is known as preforeclosure. The preforeclosure period offers the best investment window of opportunity for you as an investor, because you can work with the homeowner directly, and usually buy the property at well below market value.

Why buy preforeclosures? Why not just wait until the auction?
Buying during the preforeclosure stage has a number of advantages, including the opportunity to inspect the property, as well as check out the area. Buying during preforeclosure also allows various ways to creatively finance your purchase.

At a foreclosure auction, you’re likely to be competing with a number of other motivated buyers, and often, you won’t have been given the chance to properly inspect the property.

With a preforeclosure home, as mentioned, you’ll be working directly with the homeowner who is likely to be very motivated to unload his property.

Where do I find preforeclosure homes?
Start looking for preforeclosures by searching the Public Notice section of the local newspaper for Notices of Sale. You can also find the public records of preforeclosures at your County Recorder’s office, filed with the Clerk of Courts; look for a Notice of Default (NOD), Lis Pendens, or a Notice of Sale. Subscribing to an online listing service is another great way to find preforeclosures; many of these services also provide additional information about preforeclosure properties, including loan amount and seller contact information.

What should I think about before I buy a preforeclosure home?
Before you invest in any preforeclosure property, be sure your investment will actually yield a profit when you re-sell. Inspect the property and make note of needed repairs. Be sure that repairs to the preforeclosure property won’t cost you too much in time or dollars. Take a look at the area surrounding the preforeclosure home; is it an area that future buyers will find attractive? Will you be able to re-sell the preforeclosure home at an attractive price and still make a profit? Remember, a preforeclosure is not a deal if it’s a money pit.

Isn’t buying a preforeclosure home taking advantage of someone when he’s down?
First, understand that you are not causing anyone to lose his home. By the time you find a homeowner whose home is in preforeclosure, he has already gotten behind on his payments, and is slated to lose his home through foreclosure. Your purchase of his property while it is in preforeclosure prevents the bank from foreclosing on the property, and causing great damage to his credit. Taking the property off the homeowner’s hands before this happens is a win-win situation: you get a deal, but the homeowner gets rid of a burden that has probably been the source of a great deal of stress.

What are some key points to keep in mind?
Here are some other things to remember when investing in preforeclosure property.

Perform a title search on a preforeclosure property. Usually, all liens and unpaid property taxes will become your responsibility.
Pay attention to location. Though you can buy cheap preforeclosures in “risky” neighborhoods, the best deals are in safe, pleasant neighborhoods that will appeal to potential buyers when you sell.
Stick to your budget. Don’t overpay. It can be easy to get caught up in the spirit of a preforeclosure deal. The owner of the preforeclosure may try to get the most out of the sale, or another potential buyer may try to initiate a bidding war, even before the foreclosure auction.

Focus on preforeclosures in just a few zip codes. Taking a blanket approach to preforeclosure investing can work against you. Be “the expert” on a specific area. You’ll learn what to offer when buying preforeclosures in those areas, how much you can expect to get from resale, and how much the preforeclosures are likely to be worth in the near future.

What are the basic steps for success?
Here’s the basic process to preforeclosure investment success:

Locate loans in preforeclosure
Evaluate and narrow down the preforeclosures you want to pursue
Inspect the property
Evaluate the property owner’s needs
Determine the market value of the preforeclosure property, as well as repair costs, potential sales price, and, of course, your profit
Close on the property, do the necessary repairs, and resell it quickly
Today’s real estate market is full of preforeclosure investment opportunities. To succeed, you don’t have to have real estate or investing experience, and you don’t even have to have a pile of money. But to ensure that you get the best preforeclosure deals, you do need to do your homework.

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